• 2 hours PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 4 hours Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 6 hours Syrian Rebels Relinquish Control Of Major Gas Field
  • 7 hours Schlumberger Warns Of Moderating Investment In North America
  • 8 hours Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 9 hours Energy Regulators Look To Guard Grid From Cyberattacks
  • 11 hours Mexico Says OPEC Has Not Approached It For Deal Extension
  • 12 hours New Video Game Targets Oil Infrastructure
  • 14 hours Shell Restarts Bonny Light Exports
  • 15 hours Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 21 hours Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 1 day British Utility Companies Brace For Major Reforms
  • 1 day Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 1 day Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 1 day Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 1 day OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 1 day London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 2 days Rosneft Signs $400M Deal With Kurdistan
  • 2 days Kinder Morgan Warns About Trans Mountain Delays
  • 2 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 2 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 2 days Russia, Saudis Team Up To Boost Fracking Tech
  • 3 days Conflicting News Spurs Doubt On Aramco IPO
  • 3 days Exxon Starts Production At New Refinery In Texas
  • 3 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 3 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 3 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 3 days China To Take 5% Of Rosneft’s Output In New Deal
  • 3 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 3 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 3 days VW Fails To Secure Critical Commodity For EVs
  • 4 days Enbridge Pipeline Expansion Finally Approved
  • 4 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 4 days OPEC Oil Deal Compliance Falls To 86%
  • 4 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 4 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 4 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 4 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 5 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 5 days Aramco Says No Plans To Shelve IPO
Alt Text

Is The Aramco IPO On The Brink Of Collapse?

Conflicting news suggests that Saudi…

Alt Text

Europe Stands Divided On Gazprom’s Nord Stream 2 Pipeline

Gazprom’s Nord Stream 2 megaproject…

Alt Text

This Unexpected Move Could Derail Mexico’s Oil Boom

A possibly disastrous move from…

Peak Oil, Cheap Oil and Stagflation

Peak Oil, Cheap Oil and Stagflation

America is addicted to oil. We deem it a constitutional right to drive Hummers and have $4 a gallon gasoline. But there is an Achille’s heel to our lifestyle—oil is a finite resource, and one day we will run out of cheap oil.

The story of peak oil

Let’s say that you live in New York and you make $80,000 a year. Life is good, it isn’t great, but at least you are making $80k. So how is it that you make $80k? Is it because you are skilled and worth it? Sure, you are, but is there something supporting your salary? Indeed if you were worth $80k but there were no currency to pay you, you couldn’t collect your $80k. Are there aspects of the economy supporting your income?
Let’s examine your news stand that you visit every day.  Joe, the news stand owner, makes $40k a year. He makes an unlivable wage in New York, but he and his girl friend get by each having jobs. Joe drives 10 miles to work every day.

On your way to work you reminisce of the good times as you fuel up. “Geeze, I remember when gas was $4 a gallon.” 

You stop by the news stand and see Joe boarding it up. “Joe, what happened? You were doing great business here!”

“Yeah, I am. But fuel is too expensive, and the misses and I can’t make it in New York anymore. We are moving somewhere cheaper.”You, now at a loss of information, must also drive 2 additional miles to get your news. Dang, news has become less available, and more costly.

The economics of peak oil

The stagflation of the 1970’s was caused by a combination of a decrease in the aggregate supply curve and loose monetary policy. As policy makers tried to stimulate the economy, what they didn’t realize was that the oil embargo had shifted the aggregate supply curve to the left. The economic issue wasn’t a lack of demand; it was a lack of supply.

We are addicted to oil, and it is ubiquitous throughout the economy. And as we begin to run out, like in the 1970’s, the aggregate supply curve in the economy will begin to shift left. But unlike the 1970’s, it won’t be an episode of lack-of-oil, it will be a trend.

So how is it that the end of cheap oil will equate to stagflation? Well, cheap oil drives the aggregate supply curve. As supply decreases, price increases, and economic output decreases. Cheap oil equates to stagflation via fundamental arguments of economics.

The challenges of peak oil

We will get to a precipice where we realize “oh crap, we are at peak oil.”Car makers and industries in the economy will adapt and search for more fuel-efficient alternatives. But do you know what the challenge will be? Everyone will be demanding these alternatives, and the decrease in the supply of oil will lead to an increase in the demand in these alternatives. The lack of cheap oil leads to inflation even in these alternatives.

Things also will move “slower”. That hybrid you now drive, can’t go 0-60 in 5.8 seconds. It can’t go 0-60 ever; the speedometer only goes to 55! On the macro scale, “slower” equates to fewer jobs and a stagnate economy. The end of cheap oil has delivered you both higher prices and a stagnate economy. You are at jeopardy of losing your job because the economic activity experienced under cheap oil is now diminished and is not coming back for at least a decade until the economy adapts to the loss of cheap oil.

The fundamental questions of cheap oil

We will run out of cheap oil—we know that and it is a indefensible to take the contrary position. Instead the relevant questions are:

1) how quickly will we run out of cheap oil and
2)how quickly will we adapt to running out of cheap oil.

I am no expert on the matter, but to be frank, I think that no one is. I think that we will run out of oil quickly. We will get to an “oh shit” moment and realize that cheap oil is arrived; ie it won’t be a tenable, gradual occurrence. On the longer end, the how quickly we will adapt, I am a little more optimistic. I think that we will have a decade of stagflation, but only a decade of stagflation.

Conclusion

One day peak cheap oil will come. When that day comes, I think that stagflation will grip the economy because of a decrease in the aggregate supply curve. If that is the case, then we will have persistent, unsolvable, wrenching stagflation.

By. Zeke Phillips




Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News