11 April, 2005

Evaluating the downward spiral

For a while I've been pining for a good economic analysis of the descending curve of peak oil. I've finally got something like it, courtesy of the IMF - an analysis of what impact high oil prices (over $80/bbl) would have on economic growth worldwide.

Now that I've got it, I realize that I don't actually know enough about economics to evaluate it. Crumb. Anyway, I can see well enough what assumptions the IMF is making: they don't seem to believe in peak oil. Their projections are based on a spike above $80 in 2005 and a subsequent decline until 2009 as production increases and demand fades. Both of these are pretty stupid assumptions. Everyone in the world agrees that demand is going to go up, and how. It's possible that we'll see wild production increases coming out of Iraq, which presumably ought to be able to match the 9-11 Mbd that the U.S. and Saudi Arabia produce. But not soon, and probably not apace with rising demand.

The result? Well, apparently not much. Average GDP hit for rich countries: 0.6%. Average GDP hit for "developing" countries: 1.5%. Considering China is supposed to see 8% GDP growth rates in coming years, this oil problem maybe doesn't seem like a show-stopper.

I don't put too much stock in this report, given the shaky assumptions. But there's some interesting stuff to glean: for example, the United States does worse than other industrialized nations (taking a 0.8% GDP hit) because of its comparatively higher oil intensity. Read: our cars are bigger and boozier than theirs are. It's been said a billion times, but I'll say it again: fuel economy, fuel economy, location. Err, I mean, fuel economy.

Postscript: Incidentally, while I'm commenting on things I don't understand very well: it's always irked me that economists point to increasing efficiency as a sign that oil shocks now won't be as bad as they were in the 1970s. Oil intensity is measured in consumption per unit of GDP - but this seems to ignore the possibility that not all oil consumption is going to be equally productive. E.g. driving my car to the beach to surf is obviously not as useful as driving my tractor across an acre of farmland. So similar reductions in oil intensity could have drastically different effects depending on which sectors see the most dramatic conservation. In an extreme case, the most critical productive sectors may be increasing their intensity while the country as a whole sees conservation. I'm not saying this is necessarily what's HAPPENED, merely that I think existing analyses are too crude to consider this possibility, and I'm not confident this hasn't taken place.

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