Cambridge Energy's Yergin: What is now unfolding is an oil shock

Posted May 29th 2008 3:45PM by Joseph Lazzaro
Filed under: International Markets, Politics, Commodities, Oil, Recession

The world has endured (survived?) two of them.

They led to transformations in energy use and economic activity twice in the modern era, in 1973-74 and 1979-1980.

They are oil shocks, and right now Daniel Yergin, chairman of Cambridge Energy Research Associates, argues in a Financial Times column that what is unfolding before us is the world's third oil shock. (Oil traded Thursday at $128.60 per barrel.)

Further, Yergin argues that those who say the world could take $80 per barrel oil in stride amid strong economic growth should not feel emboldened about the world's ability to continue to grow with an oil price that's $60 higher in the near future. The contraction ripples have started. In the airline sector. In the auto sector. Note the lighter traffic at your local mall. And did you notice that last food bill for the same shopping cart of items you bought?

Bad news, good news

Yergin's bad news? (And short-term, it is bad news.) Supply, short-term, will not be able to prevent the shock, in other words, lower prices to levels that would maintain (restore?) adequate global economic growth. Engineering skills and oil equipment are in short supply, drilling costs are rising, and equally damaging, selected governments are restricting access or postponing decisions that would bring more oil to the market in the shortest possible time.

Yergin's good news? Demand is already responding to record-high oil (and in the U.S., gasoline) prices, except in those countries where prices are controlled or subsidized. The oil shock is propelling changes (finally) in public policy, corporate/consumer behavior, along with technological development and implementation. Hybrid cars/vehicles, once fringe, are now in demand. The U.S. Congress increased automobile fuel efficiency requirements for the first time in 32 years. And billions of dollars have been added to speed the development of battery technology.

The third oil shock's consequences? Yergin argues that the biggest change will be an end to oil's almost total domination in ground transport. Oil for cars and trucks is not going to disappear, but it will now share the transport market with other sources as never before, he says, due to the new push for increased fuel efficiency.

Oil Analysis: One critiques Daniel Yergin's insights and conclusions regarding oil only at one's analytical peril. This space will simply add that if the industrialized nations, and in specific the United States, can endure the third oil shock without a major recession, they can consider themselves relatively unscathed, particularly given the numerous lapses, mistakes, and oversights regarding energy policy over the past generation.

Tags: alternate energy sources, autos, Cambridge Energy Research Associates, cars, Daniel Yergin, diesel prices, electric cars, energy crisis, gasoline prices, inthenews, mpg, oil, oil prices, oil shock, OPEC, SUVs, Yergin

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Reader Comments (Page 1 of 1)

5-29-2008 @ 4:32PM

william lindblad said...

?? This is a very good piece, however I can't figure out where Mr. Yergin has been for the last 3 months. It also fails to take into account the ripple effect that any major economic change creates. In our present case it is not dominoes, it is more akin to the expression of a snowball rolling downhill. A snowball starts small, but because snow sticks to snow it increases in mass. Speculation does the same and it now moves from one sector to the next. This is simply a chain of unfortunate events where one feeds upon the other. For sure, oil would have increased in price, but not to the extent that it has. A good portion of the price is speculation and the dollar disparity, all brought about by the housing and credit mess. In the coming months just about everything of a consumer nature is going to experience price increases which stress purchasing. We can already see this in the high visibility sectors such as autos. It is also in the gocery stores, but much more than the obvious shelf price increases. Less obvious can be found in the frozen food section. There are many 2 for 1 sales lately and this indicates that the makers are clearing their storage facilities. These warehouses use industrial chillers and can be sectioned. Close half a building and your energy bill does the same. When that happens they also reduce the labor force. As I have stated in many other previous posts - tell me how good it is in mid August.

5-30-2008 @ 7:41AM

Michael Schneider said...

This oil shock has been different than those of the 1970s and certainly has driven oil up much more than the others did. Partly, people have recognized the rising prices of course but it has taken a long time for people to see this as a serious shock as we have not had supply shortages, long lines at gas stations or political changes such as lowering the speed limit to 55. There have been only very limited calls for conservation- usually in self-help styled articles rather than political editorials. It has also taken a very long time for demand to start dropping in the US-- people are all excited about the recent drops of around 5-6% in demand in the US and it is a lot but not that much in light of the huge move up in oil prices. Most people think the recent demand drops are great but there is some question as to how long lasting they will be since people are still buying and paying up big for new SUVs (see latest item in Speaking of Autos section at http://www.Barrelomoney.com) even as the are having trouble getting rid of used SUVs. When the economy comes back to strong growth, much of the oil demand will pick up again. In the 1970s it seemed the gas guzzlers were all becoming dinosaurs pretty fast and there was more collective will to cut demand as part of a solution.