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Peak Oil and Worldwide Economic Recession Soften Oil Prices: Lull Before the Storm

Oil Price Plunges from a Zenith

In the first half of 2008 we saw oil climb to approach $150 a barrel amid the pundits’ warning of oil rocketing to $200 a barrel and way beyond due to the phenomenon of Peak Oil. In the wake of those heady days we have now witnessed the slumping of oil prices to well under $100 a barrel into October.

We have often heard that this is all within the context of declining oil supplies and escalating demand due to the rapid economic development taking hold in large regions and populations of earth, for example like in China and India, in addition to the maintenance of development in the more developed countries like the USA and Europe.

The graph below illustrated this rise and fall of oil prices, and particularly the fall in prices from an all time zenith of a few months ago (Williams, 2008).

Why the Oil Price Slump?

So what is happening to cause the retreat of oil prices? There are three possible reasons for the fall in prices and they are:

  1. An anxious market where supply and demand are converging causing erratic price gyrations largely due to queueing theory (for an explanation see Leigh, 2008a; 2008b)
  2. A retreat of speculators from investments in the oil market.
  3. Decreasing demand due to recession beginning to take hold worldwide.

And it is the third factor that will be dealt with here as we look at the possibility of recession. Larry Rulison (2008) makes the following suggestion:


    With the [world] economy in turmoil and a possible recession on the horizon, it is possible oil prices will continue to soften as demand for fuel drops in a general business slowdown, …. oil could drop to $70 or $80 a barrel from its current level near $100 a barrel.

A worldwide recession may be encroaching upon us. The IMF predicts that there is a chance for world recession. The GDP of the EU may be contracting, and in Q2 of 2008 did contract. Also “U.S. consumer spending flat-lined in August. In other words, no increase. And as goes U.S. spending, so goes the world.” (Condon, 2008).

However, Leeb (2008) believes that a retreat in oil prices will be short lived and predicts:


    [The prices] will [eventually] come back even stronger, … The [oil] resources are in very short supply. We do not have enough of it to accommodate the growth in the world.

With a potential drop in spending worldwide, there would be a lowering of the demand for all goods and services, thus the demand for oil could be gutted. A significant price slump in oil could be with us, but just for a while.

There is another danger that a drop in oil prices could introduce. A false sense of smug security could set in if prices drop and stay there, and some oil-exporting nations have already announced a slacking off of investments in the oil industry, if prices continue to be depressed. So eventually when the oil demand would pick up, we would have even less oil than now!

Vigilance Still Needed

We must continue to be vigilant in setting up contingencies for scarce oil, and not lulled to slumber in the still before the storm.

It could be that after the lull in oil price hikes – that is, after the recession when the economies pick up again – then the storm – that is, oil prices spiking to new highs as refreshed economic development rivals ever declining supplies of oil again.

Will we be prepared?

References

Condon, B. (2008) The Looming global Recession, Forbes, 30 September, http://www.forbes.com/2008/09/30/economy-trade-europe-biz-beltway-cz_bc_0930recession.html

Leeb, S. cited in Rulison, L. (2008) Explaining Peak Oil theory, Times Union, 1 October, http://timesunion.com/AspStories/story.asp?storyID=725439&category=BUSINESS

Leigh, J. (2008a) Rollercoaster of Oil Prices: Between a Rock and a Hard Place, Energy Bulletin, 16 August, http://www.energybulletin.net/node/46241

Leigh, J. (2008b) Crude Oil Price Retreat: Sunrise or a Lull Before the Storm? Energy Bulletin, 12 August, http://www.energybulletin.net/node/46199

Rulison, L. (2008) Explaining Peak Oil theory, Times Union, 1 October, http://timesunion.com/AspStories/story.asp?storyID=725439&category=BUSINESS

Williams, J. (20080 Crude Oil prices – NYMEX, Energy Economics Newsletter, WTRG, 29 September, http://www.wtrg.com/daily/crudeoilprice.html

James Leigh, PhD. CGeog. FRGS.
Assistant Professor Cultural Geography
University of Nicosia, Cyprus
Personal webpage: http://www.freewebs.com/jas4

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