[Graeme]

The End of Petrotyranny

As oil prices remain high, we once again see murmurs of anticipated doom from various quarters. Such fears are grossly miscalculated, as I have described in my 2007-08 articles about how oil at $120/barrel creates desirable chain reactions, as well as my rebuttal to the poorly considered beliefs of peak oil alarmists, who seem capable of being sold not one, but two bridges in Brooklyn. Today, however, I am going to combine the concepts in both of those articles with some new analysis I have done to enable us to predict when oil will lose the economic power it currently holds. You are about to see that not only are peak oil alarmists wrong, but they are just about as wrong as those predicting in 1988 that the Soviet Union would soon dominate the world, and will soon be equally worthy of ridicule.


The following chart from Calculated Risk (click to enlarge) shows the US trade deficit split between oil and non-oil imports. This chart is not indexed as a percentage of GDP, but if it were, we would see that oil imports at $100/barrel today are not much higher of a percentage of GDP than in 1998, when oil was just $20/barrel. In fact, the US produces much more economic output per barrel of oil compared to 1998. We can thus see that unlike in 1974 when the US economy has much less demand elasticity for oil, today the ability of the economy to adjust oil consumption more quickly in reaction to higher prices makes the bar to experience an 'oil shock' much harder to clear. US oil imports will never again attain the same percentage of GDP as was briefly seen in 2008.

Of even more importance is the amazingly consistent per capita consumption of oil since 1982, which has remained at exactly 4.6 barrels/person despite a tripling real GDP per capita during the same period (chart by Morgan Downey). This immediately deflates the claim that the looming economic growth of China and India will greatly increase oil consumption, since the massive growth from 1982 to 2011 did not manage to do this. At this point, annual oil consumption, currently at around 32 billion barrels, only rises at the rate of population growth - about 1% a year.

This leads me to make a declaration. 32 billion barrels at around $100/barrel is $3.2 Trillion in annual consumption. This is currently less than 5% of nominal world GDP. I hereby declare that :

Oil consumption worldwide will never exceed $4 Trillion/year, no matter how much inflation, political turmoil, or economic growth there is.

This would mean that oil would gradually shrink as a percentage of world GDP, just as it has shrunk as a percentage of US GDP since 1982. Even when world GDP is $150 Trillion, oil consumption will still be under $4 Trillion a year, and thus a very small percentage of the economy. Mark my words, and proceed further to read about how I can predict this with confidence.

singularity2050

[Cid_Yama]

It's obvious that was written by an economist that does not recognize the importance of oil's physical properties distinct from it's economic ones. Physical properties that make it irreplacable. Sure, other revenue sources can gain dominance, except for the effect of the lack of actual oil on the actual production of those revenue sources.

Oil is a necessity because of it's physics, because of it's actual physical properties, that are necessary in the opperation of nearly everything in the modern world. For which there is no substitute.

Not to mention it's use a a base chemical in the production of nearly everything.

[prajeshbhat]

Here is an article that says that the US economy has not become as energy efficient as it is advertised:-

http://gregor.us/coal/phantom-efficiencies-us-economy-still-running-very-slow/

Plus most of what we call GDP growth in the past decade has come through massive debt accumulation. Exponentially growing debt that has to be paid back. How can debt be paid back if we have diminishing net energy (watch Chris Martenson's crash course). That means we are losing the ability to do physical work. Of course that is not noticed by most economists. As Bernanke said , "we have a technology, the printing press".

[peripato]

In fact, the US produces much more economic output per barrel of oil compared to 1998.

When your whole economy and way of life is leveraged off a finite resource, what does it matter the efficiency of output, or what percentage of GDP it currently commands? This just demonstrates how hopelessly exposed the US (& the ROW) is to peak oil disaster, as there is more people, infrastructure and debt being carried than back then.

Stupid man.

[dissident]

Another trick with the GDP is that it counts offshore corporate activity as domestic. If you want to measure the size of the US economy that matters to its citizens then you really should use GNP. In principle it is possible to have a positive GDP with zero domestic consumption. The GNP/GDP ratio is about 1.1/1.4, but there is some shenanigans with this ratio (see the absurd wikipedia claim that the GNP > GDP for the USA, link) as transfer price schemes can hide the source of corporate revenues. There is lots of incentive to cheat since foreign revenues are likely to be taxed higher than domestic ones especially when you locate the transfer price racket to an economically distressed US state.