You won't see this happening overnight, but the driving forces are in place. Expect any global shock (event, situation, or even threat of any potential shock) to send demand and prices spiraling south.
- Daniel Yergin, chairman of Cambridge Energy Research Associates, told the Joint Economic Committee that oil prices are being driven by "new fundamentals'' involving the merging of oil and financial markets. He added that the price of oil has hit a "break point'' where the U.S. will begin to seek alternatives and that 2007 may well have been the peak year in terms of U.S. gasoline demand. (6/26/2008)
- The US fishing industry is reeling from high food prices. All along the US coasts fisherman are remaining in ports (i.e not using gas) as they cannot readily pass on the high fuel costs to their customers. (6/28/2008)
- [Due to high oil prices:] "Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America's highways in history." Jeffrey Rubin, CIBC Markets
- On Monday, U.S. crude hit an all-time high of $143.67 a barrel in intra-day trade, but later eased, with traders citing evidence high prices were eroding demand, especially in the United States.
- Nine out of 10 previous postwar recessions began shortly after a big spike in the price of oil. Yet those recessions always slashed oil prices dramatically. People who have been predicting both a nasty US recession and $200 to $300(or more) oil prices are contradicting themselves.
- Two-thirds of petroleum in the United States is used for transportation - but half of the transportation sector's fuel flows into commercial trucks, trains, buses, airplanes and ships. As a result, only 44 percent of each barrel of oil is used to produce gasoline in this country, and some of that gasoline fuels business - delivery vans, landscapers' trucks, fishing boats, industrial and farm machinery, etc. (so as business activity drops so does oil demand)
- Most crude oil is used to produce diesel fuel for trucks, ships and trains, heavy fuel oil for industry, aviation fuel, asphalt, home heating oil, propane, wax, and innumerable petrochemical products ranging from detergents and drugs to synthetic fabrics and plastic. (recent double 25% price increases by Dow will squeeze demand and shift focus on alternatives biofuel feedstocks from non oil sources)
- In short, a huge share of crude oil is used to produce and distribute industrial products. That explains why the price of oil is extremely cyclical - that is, it tends to rise during economic booms and fall during contractions. In the USA, it dropped 44 percent in the last recession (from November 2000 to November 2001), 48 percent from October 1990 to January 1992 - and 71 percent from July 1980 to July 1986
- IEA SLASHES 2012 OIL DEMAND FORECAST ON RECORD PRICES By Grant Smith July 1 (Bloomberg) -- The International Energy Agency cut more than 3 million barrels a day from its 2012 global demand forecast because record prices and slower economic growth will curb fuel purchases. A drop in OPEC spare capacity to a ``negligible'' 1 million barrels a day by 2013 will keep the market `tight,'' the agency said in its Medium-Term Oil Market Report today. Oil above $140 is dampening consumption of motor fuels in the 27 nations advised by the Paris-based IEA, which cut demand estimates for each year between 2009 and 2012 by about 3 percent. "With oil prices hitting $140 we are clearly in the third oil shock, with prices affecting economic growth,'' IEA Executive Director Nobuo Tanaka said at the World Petroleum Congress in Madrid today. "Truck drivers are going on strike. Airlines are closing down.''
- Firms that can't raise prices will find profit margins squeezed - and will have to cut back on production and jobs. Even if some producers of energy-intensive products can raise prices enough to cover higher energy costs, they'll nonetheless sell fewer of their products because of those higher prices. So they too will have to cut back on production and jobs.
- Get Ready for the Oil-Price Drop by Alan Reynolds, who is a senior fellow with the Cato Institute ;
Alan Reynolds concludes his arguement with the following:
"Recent news reports have expressed surprise that the US (..and Canadian) economy appears much stronger than the famously gloomy predictions at the start of the year. Indeed, the surprising endurance of US (..and Canadian) manufacturing and exports is one reason oil prices rose as long as they did.
But note that a US recession isn't required to bring down the price of oil. All that's needed is industrial stagnation or decline in many other countries.
In the United States and Britain, industrial production is nearly flat - only 0.2 percent higher than it was a year ago. In many other countries, however, industrial production has dropped over the past 12 months. It's down by 0.7 percent in Japan, 1.1 percent in Austria, 2.5 percent in Italy and Denmark, 2.9 percent in Canada, 5.4 percent in Greece, 5.7 percent in Singapore and 13.3 percent in Spain.
China's Guangdong
In April, industrial production also fell in India and China. For example, "in the first five months of 2008, 2,331 shoemakers closed in
Shrinking industry around the world shrinks demand for energy in general - and for oil in particular."
See one of many examples: Shrinking profits force hundreds of Chinese shoe makers to quit and China's Export Machine Threatened by Rising Costs and China's Manufacturing Growth Slows, PMI Survey Shows (Update3)
This scenario also means that the era of globalisation is over and that record hight energy prices (even if they drop from record levels) means that the world is poised for the re-emergence of regional economies based on locally produced goods and services. We are already seeing that shift in business attitudes, mindsets and perceptions.
Source: Peak Oil News, Peak Oil Review, WSJ, wire news sources, CATO Institute
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