The Silent Oil Crisis

Published on Sunday, August 28, 2005 by PowerSwitch

The Silent Oil Crisis
By James Howard

In this article we look at how just because developed economies are not suffering like they did during the 1970s that the oil crisis has not already begun. The final oil crisis has begun, silent to us, but dangerously there.

Adjusted to modern day prices, the historical record price for oil was $80 as a result of the second 1970's oil crisis --- a crisis brought about by political circumstances, not geological realities. The 25th August 2005 saw the price for a barrel of oil pass $68, just $12 from that high. Lessons from history suggest that high oil prices mean bad news for the economy, thus our jobs and way of life.

Yet analysts feared the worst when oil hit $30, then $40, then $50, and then $60. Somehow strong Western economies have shrugged these prices off and we are left asking whether anything has really changed for the major industrial economies so dependent on cheap oil? At present we do not seem to be in the same dire straits that the 1970's oil crises brought upon the world.

Not that bad in the Western World

Apart from an increase in the cost of raw materials and in filling up the automobile, resulting in stronger inflationary pressures, making us (the Western World) a little less well off, it isn't that bad. We can still get all the food we want from the other side of the world, flights are still historically cheap, it isn't so bad that car drivers are sharing their daily commute, and economic growth has not gone into reverse - at least, not yet. The Boston Globe wrote recently:

"So far, expensive energy has not had much impact on the economic expansion. The US economy grew at a healthy 3.4 percent in the second quarter and most forecasters expect even stronger growth for the rest of 2005."

In the same article, Richard DeKaser, chief economist at National City Corp., a bank based in Cleveland, said that every $10 increase in the price of oil shaves roughly a half a percentage point off the economy's growth rate, and that higher oil prices would slow but not derail the economy. It might not be until a $100 barrel of oil emerges that a recession will be triggered. And a recession equals demand destruction.

I am not an economist but I suspect that if demand dropped off at 2 to 3% a year in line with an economic recession, and oil supply dropped off at a similar rate, then oil will stay at around $100 if we assume we pass the global peak in the rate of oil production. It doesn’t take Chevron to tell us that the era of cheap oil is over (although they do with their website and campaign willyoujoinus.com). (NOTE: go to this site... some very interesting topics being discussed)

Beginning of "The Great Decline"

"So maybe everything is fine until that $100 barrel mark. People talk of an oil crisis, but surely, since we are waiting for the $100 barrel, there is nothing to worry about. Right? Wrong. Around the world, silent to us, the oil crisis has truly begun. They are at the beginning of what some are calling ‘The Great Decline’.

Just as rising sea levels threaten to flood low-lying lands unable to protect themselves, rising oil prices threaten countries with weak (low-lying) economies. Rising oil prices are a rising tide, and there are many examples to look at. The countries that will be first affected by rising oil prices are those with a more youthful oil-dependent economy or those that do not have the economic strength – either as a nation, or as individuals, to cope with it.


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