December 10, 2013
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Amidst the clamor of fossil fuel divestment and the prospects for alternative energy, investors would do well to examine the underlying cause for oil’s pricing in recent years. High-quality crude oil has hovered around $100/barrel, sparking a discussion of whether waning global supply will eventually push prices to challenge the historic $140/barrel mark of 2008.
The reality, however, is that the U.S. – and indeed, the world as a whole – is approaching the threshold of peak oil demand, rather than peak supply. Prices will fall in the coming years, regardless of fluctuations in supply.
I’ve noted this peak before, based on the parallels between the seemingly untethered prices in 2008 and the high prices of 30 years ago, which reflected a similar global reduction in demand of stunning proportions.
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Looking back at 1979 provides historical guidance for how the world economy may react to this current period of high energy prices. Staggering under an energy shock throughout the 1970s, the global economy entered a period of stagflation. The resulting decline in oil consumption reached amazing levels:
- The world’s consumption of oil peaked in 1979 and did not surpass that level until 10 years later, in 1989.
- U.S. consumption did not surpass the 1979 level until 18 years later, in 1997.
- Canadian consumption did not surpass the 1979 level until 20 years later, in 1999.
- European consumption still remains 5% below the 1979 level.
- Germany’s consumption still remains 26% below that level.
- France’s consumption still remains 21% below that level.
Bringing the debate to modern times, high oil prices in the last five years have had the same impact on the economy that they did in the late 1970s. Many people still argue that our demand for energy never goes down, but it does, in fact, respond fairly predictably to changing prices.
Benchmark Crude Oil Prices