Economic Impact Of High Oil Prices Less Than In Past
As crude oil prices approach all-time highs even on an inflation-adjusted basis, analysts do not expect the impact on the world economy to be as severe as during the oil shocks of the 1970s and 1980s.
Crude prices need to reach about $100-$110 per barrel to be equal in real terms to the 1979 level. Even then the impact would be less due to rising purchasing power.
Adam Sieminski, chief energy economist at Deutsche Bank in Washington, said in the Financial Times that the current price increase, driven by demand, was different from the 1979 crisis. “That crisis was driven by a supply shortage and turmoil in the Middle East. That has wider implications on business and consumers’ psychology.”
G7 per capita income is now sufficient to buy 456 barrels of crude oil, well above the 320 to 350 barrels between 1980 and 1982. To bring G7 purchasing power down to this level would require oil prices rising to between $120-$130 a barrel.
Commonwealth Bank agrees in a free analysis of real oil prices, saying “the real bite on consumers is still short of the peak impact of the second oil shock in 1980.” Commonwealth declined to provide a figure for a comparable “real” oil price today. “While that calculation can be done, we’re skeptical that’s a good benchmark as the context is so different.”
The second oil shock was a garotte on supply contrived by producers just as central banks were about to put the boot into inflation. Now producers are still influential but the market is having a hard time keeping up with demand in strong global growth environment.
Econbrowser provides links to several papers dealing with the topic, mostly supporting the view that the economy’s increased flexibility and improvements in energy efficiency have reduced the potential impact of higher oil prices.
Meanwhile, speaking at a symposium on the “Economics and Geopolitics of Russian Energy” CERA’s Daniel Yergin advised that geopolitics and the financial markets were behind recent oil price hikes, not simply supply and demand, adding:.
Although publics and governments around the world are focused on prices, one of the most important factors in the world oil industry is the rapid rise in costs owing to shortages of people, equipment, and skills. The increased costs are leading to delays and postponements of oil and gas projects, which is affecting the timing of future supply.
On a more pessimistic note, the German Energy Watch Group claims that world oil production peaked in 2006 and is destined to decline sharply in the future.
The projection is at odds with the International Energy Agency “World Energy Outlook” forecast that shows production increasing significantly for many years. Energy Watch says the IEA forecast is based on assuming market forces and “business as usual” will boost production from estimated reserves to meet projected higher demand.
Energy Watch says its analysis “is based primarily on production data which can be observed more easily and are also more reliable. Historical discovery and production patterns allow to project future discoveries and – where peak production has already been reached – future production patterns.”
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