(This is Part 8 of a series. Go back to Part 7.)
But what about energy? Won't the emerging recession lower demand for energy and thus bring down energy prices?
No, I don't believe so. It seems to me that energy prices will continue in a long bull market over the coming decade at least, for two reasons:
1. The coming shortage of oil.
An extensive analysis of the world's energy situation is contained in
Song of Existence. A brief summary of that discussion might center around what's known as "Hubbert's Peak."
The geologist M. King Hubbert identified an interesting phenomenon—that oil production, whether in an oilfield or a nation, begins to decline
not when the supply of oil nears depletion but when supply passes the half-way point. Using this observation, Hubbert predicted that U.S. oil production would reach its peak around 1970 and decline thereafter, a prediction which was widely derided but which proved correct.
Using Hubbert's methods, researchers have predicted that current world oil production could begin to decline sometime around now. That is, the world has used up roughly one trillion barrels of oil so far and roughly one trillion barrels are left in the ground, so the world is somewhere around the half-way point of supply. And global discovery of new oil supplies has been declining for decades.
If the spike in oil prices over the last few years is any indication, that half-way point in oil supply may already have been reached. But even if it has not, that point will be reached in the next few years and world oil supply will then in all likelihood begin an inexorable decline.
2. The rise of the Chinese consumer.
Regardless of whether the world enters recession, depression, inflation or a combination of all three, one fact remains: There are 1.3 billion Chinese thirsting after owning their own automobile, and very few of them do at present. The number of cars and trucks on Chinese roads will increase dramatically in coming years, and that can only greatly increase demand for oil.
This exponential increase in Chinese oil consumption will more than offset any consumption decrease in Western countries brought about by recession or rising prices. Besides, the transportation systems of the U.S. and other Western countries absolutely cannot function at present without oil, and that is not going to change anytime soon, so demand can only fall so far in the immediate future.
Farther out, the emergence of alternative vehicles could make a great difference in the consumption of oil, but it will take decades to change over the 600 million motor vehicles that exist in the world today. It's not something that can be done overnight.
Currently, the margin between supply and demand of oil is only about 1%, very tight by historical standards. There is little margin for shocks to the system. With demand continuing to rise and supply continuing to fall, it's very difficult to see how the price of oil—and with it, gasoline and heating oil—can do anything but continue to rise. Of course, this rise can and will be very volatile, as recent price action shows, but the overall direction is, in my opinion, not in doubt.
(This is the end of Part 8. Go to Part 9.)
—jim sloman, 11.15.06
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