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ANOTHER OIL SPIKE COMING & ITS IMPACT

McKinsey is out with another great piece of research covering the global oil market and the potential of another spike in prices over the coming decade.   They say:

In the long term, our research suggests continued rapid growth in overall demand for energy, further boosting the importance of efficiency efforts.   From 2010 to 2020, assuming a moderate GDP downturn scenario, demand for energy will grow by 2.3 percent a year, nearly a full percentage point more than projections for 2006 to 2010.

More than 90 percent of this demand expansion will come from developing regions, with China, India, and the Middle East leading the way. Five sectors within China—residential and commercial buildings, steel, petrochemicals, and light vehicles—will account for more than 25 percent of global energy demand growth. India’s light-vehicle, residential-buildings, and steel sectors and the Middle East’s light-vehicle and petrochemicals sectors will be other notable contributors to the growing demand for energy.

Lower oil prices and overall demand for energy because of the economic downturn are a temporary blessing that should not lull policy makers and businesses into a false sense of complacency.  Given our projections, it is essential that they step up their efforts now to secure that energy is used in more efficient ways.

Peak oil is no big secret by now.  The world is confronted with a staggering energy issue.  Odds are that oil prices in 10 years will be much higher than they are today, but how does a spike in oil impact the economy in the here and now?  Researchers from UC San Diego estimate that a $1 increase in gas prices is a $140 billion annual hit to the economy.  That doesn’t sound like a lot of money in a $12 trillion economy, but it is.  James Hamilton, an economist at the University of California, San Diego, estimates that gasoline costs now equal 6% of the average American’s budget.   Despite the recent surge in savings, Americans are still heavily in debt and poorly prepared for retirement.  A 6% alteration to the personal budget is sizable.

Even worse than the potential negatives from the rise in oil and gas prices is the cause: the government itself.  The irony is unbelievable.  While they bailout bankers and rescue every corporation, the root cause of the issue (consumers) are neglected.  And the one thing they try to do to help (print money) is actually having a negative impact on consumer balance sheets.

Some people cheer Bernanke for his actions (Cramer says he saved us even though he said he “knows nothing” just 18 months ago), but it’s far too early to judge him.  Like Greenspan’s constant praise in the 90’s it’s likely that we won’t have a verdict on Mr. Bernanke for 10 years. I fear the concoction he is brewing will prove to more problematic than many think.

Source: McKinsey Quarterly, Centredaily.com

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