Oil Matters Less than Wall Street Thinks
$50 oil is certainly bad for producers and their supply base. It is at the same time good for transportation businesses and energy intensive manufacturers. Consumers will probably spend a bit more too. The net effect on our economy in the short term is basically a wash, but in the long term oil can go a lot lower. Forbes’ Christopher Helman is right, and the demand side trends all point lower.
Oil is Fading into History
Listening to the talking heads on TV can be confusing with so many pundits offering contradictory arguments about where oil will go next: back over $100/bbl or down further to $20/bbl. Speculators will no doubt pocket some big bucks guessing right on the frothy sentiments driving this market, but business planning for everyone else should stay the course.
The LA Times reported an interesting factoid attributed to Howard Silverblatt of S&P Dow Jones Indices. It seems energy stocks currently make up 8.9% of the total market value of the S&P 500. Back in 1980 the corresponding figure 28.8%. Oil was pretty much king in the 20th century, but today not so much.
Relax and Dematerialize
Using 1980 as a reference point we collected data from the World Bank and the US Energy Information Administration to see how much things have changed in the past 35 years. Using constant dollars the data shows a nearly five-fold increase in output per barrel of oil consumed worldwide.
This dematerialization of the global supply chain is decoupling economic growth from energy consumption. For supply chains able to deliver information value, rather than just material value, oil is irrelevant. Apple AAPL +3.82%, for instance books $2200 in revenue per kilo of product it delivers. Compare this to about eight cents per kilo for iron ore and the long run direction is clear.
We also took a look at population trends against oil consumption and found another reason to relax. Starting in 1980 with consumption of 5.2 barrels of oil per person per year we see a dramatic drop of nearly 13% by 1985 followed by a fairly steady run of around 4.6 barrels per person per year continuing to the present day. The jump in world population during this time took us from 4.4 billion to 7.2 billion people with nearly all this growth coming in developing markets.
Worries that bringing China, India and the rest up to western living standards will destroy the planet may be overstating the case since it seems emerging markets growth is not necessarily dirtier than growth in Europe or North America.
These two megatrends point happily to a future that is cleaner, more inclusive, and more sustainable than many had feared. For supply chain leaders the takeaway is simply that oil matters less today than yesterday and will matter even less in years to come.
forbes