The economic impact of high oil prices

As the developed-world economy tries to gain momentum, it faces a persistent headwind. The oil price remains stubbornly over $100 a barrel, acting like a tax on Western consumers. Some blame the high price on evil speculators—Barack Obama unveiled plans to increase penalties for market manipulation on April 17th. But there is a simpler explanation: that supply is inadequate to keep up with rising demand.

The concept of peak oil—the idea that global crude production may be at, or close to, its limit—is far from universally accepted. One leading asset manager talked recently of the world being “awash with energy” because of the exploitation of American shale gas. Nevertheless, oil is still the main fuel for cars and trucks. And crude output (as opposed to alternatives such as biofuels and liquids made from gas) has been flat since 2005.

A number of countries (including Britain, Egypt and Indonesia) have turned from net oil exporters into importers in recent years. And although rich countries have curbed their energy-guzzling a little, demand continues to surge in emerging markets.

This has left the oil market very vulnerable to temporary supply disruptions, such as the war in Libya. Speaking at a conference in Dublin this week, organised by the Institute of International and European Affairs and the Association for the Study of Peak Oil and Gas, Chris Skrebowski, a consulting editor of Petroleum Review, argued that spare capacity in the oil market could be eroded by 2015.

The peak-oil concept was devised by the late M. King Hubbert, who correctly predicted in 1956 that oil output in the lower 48 states of America would peak by around 1970. At the conference Michael Kumhof, an economist at the International Monetary Fund, presented the findings of a forthcoming working paper which showed that adding the idea of a “Hubbert peak” to energy production greatly improved the ability of a model to forecast oil prices. Based on an expected 0.9% annual increase in production over the next decade, the model predicts that real oil prices will nearly double over the same period.

The economic damage caused by such a rise is predicted to be modest, perhaps 0.2% of global GDP a year. In the past changes in oil prices have had a limited long-term impact, since any losses to oil importers are matched by gains by oil exporters. To the extent that high oil prices played a role in the recessions of the early 1980s and 2008-09, the main reason is that oil-producing countries tend to have a lower marginal propensity to consume their income, denting global demand.

Nevertheless, Mr Kumhof worries that if oil prices are high enough, the economic impact might increase substantially. On the most extreme assumptions, it could be 2% a year.

Even if the world can find more oil—in the Arctic or tar sands, say—the longer-term question is whether the era of “cheap energy” is over and how the world can adjust if it is. Developed economies are built on easy access to cheap energy, importing goods that are transported from around the world, with consumers driving many miles to work in air-conditioned offices and then flying off to sunny climes for their annual holidays. Persistently high oil prices would clearly lead to substitution (electric cars, natural-gas-powered trucks) but the transition costs could be significant.

Furthermore some potential substitutes for, or new sources of, oil (such as biofuels and tar sands) are a lot less efficient, in the sense that they require significant amounts of energy simply to produce. To the extent that this equation (energy return on energy invested, or EROI) is deteriorating, that must surely have an effect on economic growth.

“What is the minimum EROI that a modern industrial society must have for its energy system for that society to survive?” ask Carey King and Charles Hall in a recent paper*. The academics’ answer: “Complex societies need a high EROI built on a large primary energy base.”

This issue is not much considered by mainstream economists, who are too busy focusing on monetary policy, the impact of fiscal austerity or the need for labour-market reforms. But just as the industrial revolution was built on coal, the post-second-world-war economy was built on cheap oil. There will surely be a significant impact if it has gone for good.

This blog was taken from The Economist magazine.

At the 2011 Transition Network Gathering – Part 1

Last Friday 8th July, Dai and myself caught the train to Liverpool to attend the 2011 Transition Network Conference, which this year was held in the impressively tranquil grounds of Liverpool Hope University. This event provides an opportunity to catch up with recent developments from Transition Initiatives across the Transition Network, and is always well attended.

Friday evening was a chance to catch up with old friends and familiar faces. For me, one of the joys of being a transitioner (or transitionista as they say in Barcelona) is being able to pick the brains of people who are pioneering the new approaches to social change that will be needed in a future dominated by climate change and peak oil. Even though Friday was meant to be a relaxing way to break the ice and ease into the weekend, simply having a beer at the bar got me involved in a lively group discussion that managed to take in most of the hot topics that had been making noises in the network recently. One of which being the link between Transition and activism… but more on that later.

Having made sure to check the list of workshops in the program and sign up to the ones that looked most interesting, Saturday started the conference proper. A group session in the spacious University chapel started the day, with attendees treated to fine words from Peter Lipman, Rob Hopkins, and others intimately involved in the Transition Network. Lucy Neal of Transition Town Tooting told the first part of the story of the conference. Then on to the obligatory mapping exercise, which involved some tricky manoeuvring around the chairs as we tried to work out where everyone hailed from. This year, as well as the usual turnout from groups around the UK, the representation of international Transition Initiatives was notable, with visitors from as far afield as the USA, Brazil, and Hong Kong.

The first of the workshops I attended was an update on Local Currencies, with contributions from Transition Totnes, Transition Lewes and Transition Brixton, which have been leading the way with their attempts to establish local alternative currencies in their respective areas. Just the fact that the idea of a local currency could be accepted to the point where a run of banknotes could be printed and issued was impressive enough, but we heard from each speaker about the ambitious plans they were still hoping to put into practice in the near future.

Next up was the Transition and Activism ‘Hot Topic’. Both Dai and myself attended this session, since whenever this topic is discussed, Transition Heathrow is inevitably brought up as an example of a Transition Initiative that’s managed to successfully blend the usual Transition approach to social change with a strong undercurrent of confrontational direct action. At our Regional Gathering a few weeks previously we had addressed the topic in detail, so I felt that we could contribute a lot to the discussion. It turned out to be an extremely productive session where we explored what it meant to be an activist. There was input from veteran activists from the anti-roads movement, and we heard from people involved in Transition groups in Spain who had been an integral part of the recent #spanishrevolution.

http://www.youtube.com/watch?v=sXBjfsECy7k

Saturday ended with a fascinating talk by Jay Griffiths who explained the links between wildness and kindness, trees and truth. Later we returned to the bar, where Moving Sounds were making music that got the audience dancing until closing time, at which point the crowd spilled out onto the grass outside to continue the party. Like Harry Potter, I’m going to leave you hanging for Part 2, which will include more from the second half of the Conference, along with some general reflections from the weekend.

The first of many film showings

On a dark, cold and wet February evening underneath the roaring sound of planes taking off from Heathrow airport, about 25 residents huddled around a big screen in Harmondsworth Community centre, Harmondsworth being one of the villages directly threatened by the proposed 3^rd runway at Heathrow.

The film showing was organised by campaign group Transition Heathrow who have moved into the village of Harlington to implement plans that look at creating a more sustainable Heathrow that will be equipped to deal with the imminent harsh impacts of climate change and peak oil.

The evening commenced with a short 10 minute animation called Wake Up Freak Out by Plane Stupid’s Leo Murray which delved into the science behind climate change and what a future in 10/20 years time could look like.

After a short break involving lots of cake and tea the audience were shown the film The End Of Surburbia. This film looks at the dwindling supplies of oil and starts to address the concept of peak oil, this concept is very simple – it refers to the idea that the world has a finite reserve of oil and that it is running out. Some believe that global oil production will reach its peak during this decade and then fall forever into a state of decline. Although fairly long and involving lots of interviews, what most engaged everyone in the room was the last 10 minutes of the film which starts to to look at how local communities will be affected and ways in which to tackle these massive issues, at a local level.

Once the film was over everyone gathered in a big group to voice there concerns and ideas for the future. Everyone was keen to discuss these issues and will be looking to facilitate these exciting ideas and plans through Transition Heathrow and other local groups.

Transition Heathrow will be holding a massive ‘open space’ meeting probably on Saturday the 13^th March and everyone from the film showing will hopefully be attending along with many more local people. The open space meeting is for anyone that may be interested in looking into and implementing local transition plans on anything from transport and food growing to education, direct action and transition justice.