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Car Country and Global Oil Depletion

June 2nd, 2009 · 2 Comments

The punchline is hidden deep in this article…

Car Country and Global Oil Depletion

Gregor MacDonald

The unemployment rate in Riverside County California now approaches 13%. In the State of Indiana, unemployment approaches 10% and in Michigan it’s above 12% – though in many cities within these states, unemployment is higher, above 15%. The Central Valley of California is particularly hard hit.

It’s fascinating that the United States has just gone through its second (or even third) major oil shock with the attendant bust of the US auto industry, and yet we seem not to have noticed the theme: if you are heavily reliant on cars for either transport or jobs, this recession has packed an extra special punch, just for you.

The last pair of oil shocks followed pretty closely in the aftermath of peak US oil production in 1971. Spare capacity then shifted to OPEC. Therefore, even though global demand was still well below available supply, OPEC assumed control of price in both directions. Of course, they squandered their new found power on the intemperate embargo – and as a result, pretty much wrecked the global supply-demand balance for a couple of years. OPEC was young then, and was unable to navigate their new role as the central bank of oil.

Question: Why is oil near $70 now, in the midst of the deepest recession since WW2? Is it because OPEC has cut nearly 2 Mb/day from global production? Shouldn’t oil be closer to $20 as it was during the last recession, which was much milder? By the way, OPEC was cutting then too. And the largest non-OPEC producer, Russia, was also cutting. As this was only 7-8 years ago, could that much have changed in global oil supply since the last recession?

The world produced and consumed 135 billion barrels of oil in the 5 year span from 2004 through 2008. Price rose each one of those years starting at $30 and rising to $150. But supply did not. Now that we’ve come down off the July 2008 production high of 74.823 Mb/day, the entire 5 year run looks like a long plateau, in which price was unable to bring forth any net, new supply. As an aside, I would mention that total primary energy demand globally, especially in emerging markets, flourished during that period. In other words, behind the orderly rise of oil over the past five years, total global demand for energy was rapacious and had to find a cheaper BTU in coal and natural gas.

My question, which, on the day General Motors has declared bankruptcy seems quite fair: Why does the country believe the jury’s still out on global oil depletion? The US economy and the US auto industry have cratered at least two distinct times now since we were last a giant of oil, in our own right. Cleveland, Modesto, Gary, Detroit, GM, Chrysler, Riverside… what other signal does one need?

Further Reading:

James Hamilton: Causes and Consequences of the Oil Shock of 2007-2008 (.pdf)

Jeff Rubin: The recession: First, there was expensive oil

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How about cars driving on natural gas? The US has plenty of that, and we have selected a company who does all the leg work recently

Tags: Oil

2 responses so far ↓

  • 1 E.K. // Jun 2, 2009 at 6:20 pm

    About how it came so far we can produce many theories about greed, politics etc. How ever every depression has it good side, and it is good that we are generally now more aware about how we are going to use our energy recources for production – living – transportation in the future. Just to reconstruct our thinking and till new ideas will come into serious action will be a lot of jobs lost. I hope the GM goes through chapter 11 very fast and be an excample to get this new responsibility for how to use energy and produce energy in creating lots of new jobs.
    Yes we can!!

  • 2 admin // Jun 2, 2009 at 6:31 pm

    Thanks. We have exposed a few ideas here about how to power transportation, E.K… 🙂