As oil hovers in the $80 per barrel range and the faltering global economy struggles to recover from the current decline, the need to invest in alternative energy and identify viable alternatives to oil as an energy supply becomes even more pressing. Why? In the past, when the cost of oil reached a certain percentage of GDP, an economic downturn ensures. In today’s economy that figure is about $80 per barrel. If this is accurate, that would mean the global economy may be teetering on the verge of another down leg, if not a financial collapses, should oil increase in price appreciably higher than $80 per barrel.
If we are in a recession, why is oil trading at about $80 per barrel anyway? Is the world running out? No, the world is not running out of oil, however there are other challenges such as the price to bring oil to market.
Case in point: For oil producers to clear a profit on their oil production, the price of oil needs to be in the $60 to $70 a barrel. If it drops below some $60, drilling and research experience a substantial drop with a corresponding drop in output, putting future demand at risk.
Many people believe that offshore oil from countries like Brazil that have major untapped reserves is the answer. What is not fully appreciated is that the break even amount to get the oil from these sources that are up to 7 miles below the oceans surface is about $80 per barrel. And then we ask have to ask ourselves: Is deep sea oil even practical after the BP oil spill debacle?
Let’s review the initial stage of the current recession which started about first quarter of 2008. Note that at that time, oil went over $100 per barrel and remained there for about the next 2 quarters. Initially, the economic effect was obvious to the majority of observers. The government denied we were in a downturn, but the general public was attentive enough to know that the economy was in less than healthy condition.
Then, the recession that was not a recession, was eventually confirmed to be one a few weeks after the bankruptcy of Lehman Brothers in September of 2008. From there the recession morphed into the most severe economic downturn since the Great Depression. Now the recession that wasn’t a recession is going through a recovery that is not really a recovery as evidenced by high unemployment and real estate foreclosure levels.
So what would it take to cause a spike in energy to over the $100 range, placing the economy at risk? How about a geopolitical event in the Middle East? Or a terrorist attack on a major oil producers facilities? How about an attack on commercial vessels in the Straits of Hormuz where 40% of the global oil is shipped daily? If you believe that one of those scenarios is improbable, simply turn on the news and listen to the current events in the Middle East. It would appear we are on the brink of a major conflict.
A geopolitical event or terrorist attack notwithstanding, increased oil demand from the expansion of emerging economies could easily drive oil prices well past $100 per barrel inside of the next 12 to 24 months. The higher oil prices go, the more pressing a sound alternative energy arrangement on a domestic and global scale would be required.
Anyone can surf the web and read about developments in offshore wind power, solar power and hydrogen fuel cell technology. The recent advancements in electric / hybrid autos are impressive as well. While noteworthy progress is taking place in these areas, it is not anywhere near satisfactory to ease concerns of the current rate of rising oil costs.
The bottom lines is this: If an substitute fuel supply, minimally on a back up level, is not developed ASAP, then the increase in oil costs which are on their way could take this recovery which isn’t a recovery and turn it into a depression that IS a depression. Which will come first?