Demand Destruction Through Recession?
Posted by Prof. Goose on July 14, 2005 - 6:19pm
Updated to add: this piece is related, if not on point (thanks CA!):
What is an inverted yield curve? Well, it's where short term bonds pay higher interest rates than long term bonds, which if you think about it, really makes no sense (getting paid more by a bank when you commit for a year than when you commit for 10?). When this has happened in the past, usually due to geopolitical or domestic political instability, it historically signals recession.
And, if the USA goes into recession, well, the world economy is dependent on us. We're the heartbeat, aren't we? I've seen it in the comments a few times that this will slow down demand quite a good little bit. Is this true?
Since this is all occuring at the margins because of the similarity of the supply and demand numbers (both at 84 mbpd), does a recession prior to peak oil destroy enough demand to give us more time until the impacts of a true gap between supply and demand are felt? How much of a recession has to occur for this to be the case? Or is there still a supply problem no matter what?
Anyone care to speculate or go into further depth on this?
Technorati Tags: peak oil, oil, inverted yield curve, economics
If the Federal Reserve can't get the price of oil up to $100 per barrel like they are planning, these dollars returning home will be much harder to hide. $100 oil will double the need to hold on to dollars and from this will allow the game to continue for some time into the future.Original post: With all of the talk recently about demand destruction, which I have advocated many times through tax increases and redistribution of resources to R&D&I for alternatives, there seems another piece of the puzzle that many are saying will take care of the problem: Economic slowdowns or a recession as evidenced by an inverted yield curve, which many seem to say is on the horizon:
NEW YORK (CNN/Money) - One of the world's largest Treasury bond brokers has predicted that the so-called yield curve could invert by as early as the next quarter, a move some economists fear could precede a recession.
What is an inverted yield curve? Well, it's where short term bonds pay higher interest rates than long term bonds, which if you think about it, really makes no sense (getting paid more by a bank when you commit for a year than when you commit for 10?). When this has happened in the past, usually due to geopolitical or domestic political instability, it historically signals recession.
And, if the USA goes into recession, well, the world economy is dependent on us. We're the heartbeat, aren't we? I've seen it in the comments a few times that this will slow down demand quite a good little bit. Is this true?
Since this is all occuring at the margins because of the similarity of the supply and demand numbers (both at 84 mbpd), does a recession prior to peak oil destroy enough demand to give us more time until the impacts of a true gap between supply and demand are felt? How much of a recession has to occur for this to be the case? Or is there still a supply problem no matter what?
Anyone care to speculate or go into further depth on this?
Technorati Tags: peak oil, oil, inverted yield curve, economics
“This order [i.e. capitalism] is now bound to the technical and economic conditions of machine production which today determine the lives of all the individuals who are born into this mechanism, not only those directly concerned with the economic acquisition, with irresistible force. Perhaps it will so determine them until the last ton of fossilized coal is burnt.”
—Max Weber, 1905
Contact
- Content: editors at theoildrum dot com
- Tech support: support at theoildrum dot com
License
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.
i don't understand what you mean when you ask if demand destruction would "make things okay"...unless this recession is accompanied with significant long term reduction in demand then it only has the effect of postponing the peak somewhat. or unless you are giving a bit of a new twist to the meaning of recession: instead of a temporary cyclical slowing of the economy, make it permanent and assume some level of population attrition...
neither of these outcomes would make anything "ok" in terms of current economic assumptions and would still mean terrifying shifts in the way economies work and terrifying responses to those changes at all levels of the equation.
fair. I'll restate..."give us more time until the impacts of a true gap between supply and demand are felt..."
I'll change the post to reflect that too.
I'd agree that demand in China could slow down if/as their growth slows down. But Wednesday's New York Times discussed how much of U.S. oil usage is due to urban sprawl -- people now have to drive whether they want to or not.
http://www.nytimes.com/2005/07/12/business/worldbusiness/12oil.ready.html
I realize this is Kunstler's thesis, but the Times didn't cite him.
I'd be interested if anyone has a breakdown between gasoline used for commuting and personal driving vs. gas used for transporting food and products or for other business uses.
This is a good example of the bizzare cognition cages that we put ourselves in when we frame the issues in terms of "markets" and "economics".
If World War III broke out, went thermonuclear, and there were only two people left on Earth (maybe a fertile man & woman), the oil depletion problem would be fully solved.
"Demand" would be way down and there will be more than enough supply for the consuming "markets". Eve can sell to Adam and Adam can sell back to Eve. Maybe they can establish an options market between the two of them.
Sick.
This phrase "demand destruction" seems to be specific to the Peak Oil community. It is not in common use elsewhere, based on my Googling. It's not a standard economic term. Economists would say "demand reduction". It's a more neutral and objective phrase for the same concept.
You just might want to be aware of it that when talking outside the community, to mainstream people, "demand destruction" has a bit of a tinfoil hat conspiracy sound. It makes you sound kind of nutty. Generally it's better to avoid the use of jargon when a more standard term is available.
But does not "reduction" in demand for the petro drug imply that the addicts are dying off --hence their "destruction"?
There are plenty of us who wish, in a way, for some level of demand destruction, i.e. slowdown and maybe even radical change downward. They include people who have grandchildren and hope (somewhat hopelessly) that they will inherit a world that has a decent culture (other the consumption meme, pun intended) and an environment that's livable. Sorry about the inevitable pain. But it seems inevitable whether we plunge into a recession now or later.
"Recession" is a macro-economic term indicating that the dollar valuation for system-recognized trades (exchanges) between individuals for all types of product or service (not just oil) is diminishing.
It is a crude measure that should not be confused with "standard of living" which is a micro-economic valuation of how good life is for a given average citizen.
I suspect that most followers of The Oil drum do not want to see either a recession or diminishment of their standards of living. Instead we want to see the world move on into a post-petroleum, sustainable living mode.
The outside world frames itself in terms of GDP growth or recession and market generated, bid and asked numbers. The numbers are not always reality. Just before the big crash of 1929, the market was bidding up the valuations of its stocks. What kind of reality was that? The mere fact that futures prices on oil are going up or down at the present moment proves nothing. The traders could be smoking some really hard stuff. How do we know? The real numbers are on those hidden flow gauges in the Saudian desert.
Well, if we are talking about petroleum, then any major decrease in demand is destructive to my industry. We are already spread extremely thin, and working as old guys without any apprentices in sight to speak of.
But Halfin is likely right - it is not demand that is destroyed, but rather reduced. And it is only temporary until the oil economy picks itself back up. Destruction will occur within my industry if this happens. Another big slow down back to anywhere near 1990 levels and an entire generation of engineers will likely throw their hats in and call it quits. We have struggled for 30 years to keep oil going at ridiculously low prices - we are short handed and very weary in many respects.
If the Fed wants to blame this recession on energy costs, I wouldn't be surprised. But the real reason is much more complicated - the crooked economic path that got us here is very convoluted. Oil just may be thr trigger to pull down this economic house of sticks.
If we do slip into a recession, then I would think it will be very long and extended, and definitely give us the time. I have stated my reasons for this numerous times.
But I think the focus will be on personal, corporate and government survival rather than trying to fix the problem. We would need someone as wise as Solomon to step in and make long term energy and infrastructure the "New New Deal" projects, and frankly I do not see any candidates on the horizon.
The yield curve, like the trade deficit, has been a topic of much debate over the past year. Greenspan has waded into both subjects on more than one occasion.
There's a bit of a "this time its different" air to some of the arguments that lean to the dont worry be happy side; myself anytime people set about to build a case for "this time its different" I start to worry just a little more.
At any rate, a recession will merely slow demand growth; you need a depression to reduce demand.
Closest thing we've seen to a depression in recent history is 1998 - demand growth slowed from 2.70% in 1997 to 0.61% and then rebounded in 1999 to 1.21%. In 2001 in part due to the tech bubble but in no small way due to 9/11, demand growth shrank to 0.66%.
Fun with numbers:
In the past 11 years, 4 have seen demand growth > 2%; 2 will have seen demand growth > 3% (including this year and last) and 4 saw demand growth > 1%.
The average growth over the time span including using this years EIA estimate is 1.73%.
If I arbitrarily take the two outlier years - 1998 and 2001 and replace them with either the median (2.2%) or an arbitrary number that fits low growth but not world shaking event (1.6%) I get an average annual growth during that time period of either 1.90 or 2.00%. Either way - using low, high or straight average growth numbers - by the end of 2007 demand will push consumption up to more than 87M bbl/d.
I recall one industry CEO I trust a little more than others stating that he felt this year we'd have problem enough meeting 84M bbl/d due to straight capacity problems and he wasn't talking about refining as near as I can tell.
To The Future
If I include the IEA estimate for 2006 (2.15% on top of this years est 3.77% growth) I get 85.6M bbl/d demand, which, thanks to the magic of compounding, by the end of next year 5M bbl/d of additional supply over 2004 numbers will be consumed, assuming they can produce the extra stuff. Sounds like a big increase.
Diane_a - thanks for that informative NY Times article "The Oil Uproar That Isn't".
As far as Jim Kuntsler goes, "I realize this is Kunstler's thesis, but the Times didn't cite him", he's a bit outside the normal information horizon for a mainstream media flagship like the Times.
I'm not sure anyone tracks the gasoline usage statistics you're looking for. But this from the article got my attention:
Imagine that.
Double checking growth numbers against other sources, the EIA, not to be confused with the IEA, 2003-2025 forecast for avg annual world demand growth is pegged at 1.9% for their reference forecast and drops only to 1.5% in their "high price" scenario.
Probably they have an "outrageous price cause we can't pump it fast enough" scenario that they don't publish ;-)
Kuntsler's thesis - can someone point me to links? I come to this PO discussion largely from the outside.
Never mind. http://www.kunstler.com/index.html
Even with demand distruction oil is going to remain high +$50 OPEC has complete controll of the down side and if Matt Simmons is even half right about the Saudi's oil production problems they will be itching to cut production to maintain their oil fields, Last month there production slipped 50,000 bpd its going to be interesting to see what happens here if the Saudis production starts comiong off. If it does a recession is going to make little difference. It will require a depression (permenent).
The only time global oil demand has fallen was during the 70's oil crisis apart from that its all been up. Its going to take a big event to stop this run away train. In the mean time if oil falls back much further it will create a good buying opportunity.
If, when, their production slips off noticably, it won't be very long before rocketing fuel prices slow economies around the world.
One hopes that before then governments have a plan but I'm not that optimistic.
Letting lose a global pandemic around that time would be one way of reducing demand. I say this not because I believe it but because there will be some that think it.
Crude just punched up 20 cents or so with the latest release of NOAA Emily discussion. Its headed a little more northerly than before. Its also picking up steam and is expected to continue to do so.
watch out.
Mike Watkins--Also read Kunstler's Rolling Stone article that's linked under "Primers". That was in the MSM, and got a lot of people freaked out for the first time.