Ten out of the last eleven recessions – including the great crash of 2008 – were preceded by a spike in oil prices. Now, after several years of not-really-that-cheap oil prices, the Paris-based International Energy Agency (IEA) is predicting a serious global oil shortage by 2020.
According to the IEA’s Oil 2017 report, growth in demand for oil will continue as a result of increased industrial development in Asia and South America, taking global demand above 100 million barrels per day in 2019. The IEA anticipates demand eventually reaching 104mb/d by 2022. However, the Agency sees economic trouble ahead because of the lack of investment in the oil industry since prices fell below $50 per barrel in 2014:
“It is not clear that upstream projects will be completed in time given the unprecedented two-year fall in investment in 2015 and 2016 although major reductions in costs will help. There is a risk of prices rising more sharply by 2022 if the spare production cushion is eroded.”
Investment advisors are much more pessimistic than the IEA. For example, in an interview with CNBC, John Hess, CEO of Hess Corp points out that far too much attention has been given to relatively small boost to US shale oil production even as global investment has plummeted:
“While the spotlights have been on shale, the lights are off on offshore. We need to spend in excess of $600 billion just to keep oil and gas recovery flat. In 2016 companies spent $380 billion. That’s going to start to show itself in three to five years from now.”
As noted previously, the world economy is no longer replacing the oil it consumes. And with both the number and size of new discoveries at their lowest since the 1950s (prior to the big discovery peak in the 1960s) the global economy is facing a major shock in the very near future.
Given the lethargy of the global economy since 2008 and the ongoing failure of politicians, economists and central bankers to remove the structural faults within the banking and finance industry, it is perhaps understandable that few have their eye on the potential shock that will result from oil shortages a few years down the line. After all, the same people firmly believed that the massive drop in oil prices in 2014 was going to result in an economic boom as consumer spending power increased… how did that work out for you? With the world seemingly awash with oil (especially “oil equivalents”) most of our leaders prefer to firefight what they see as more immediate problems.
Remember, however, that when we deal with oil we are dealing with big numbers. We are currently burning our way through nearly 36 billion barrels of oil every year. And each day that we replace less oil than we use, the difference has to be made up from oil in storage. Couple the coming struggle to maintain production growth with the continuing rise in demand in developing economies, and we will see a surplus turn into a deficit in a matter of months. In a global free market whose life-blood is oil, that can mean only one thing – a massive bank-destroying spike in prices of the kind that nearly wrecked the economy in 2008. It is no longer a question of if… just when.