An America self-sufficient in oil? Don't bet on it.
A new forecast that the US will surpass Saudi Arabia in oil production is unrealistically optimistic. Oil prices would have to rise far too much for unconventional oil to meet forecast levels.
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(b) The treatment in the model of diminishing returns should be adjusted. It is my understanding that this is currently handled assuming a 2% annual increase in real costs of production. The model could be adjusted to reflect a more realistic (higher) annual cost in oil production, and indirectly, required selling price.
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Gail Tverberg, an actuary with a background in math, analyzes energy and financial matters from a perspective that the world has limited resources. For more of Gail's posts, click here.
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Graphic: Figure 3. Author’s illustration of impacts of declining resource quality.
(Gail Tverberg)
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(c) The authors of the IMF report suggest building a more resource-based model, and I would agree that this would be helpful. There are many interlinkages that the current model cannot adequately capture. A more resource-driven model, especially one that considers balance sheets of world governments, would appear to be better.
My View of What is Happening Now
As noted above, world crude oil production seems to have hit a plateau, starting about 2005. This is working its way through the economy with varying effects over time. The major effect at this point of time seems to be on the finances of governments that import oil, although it started earlier, with different aspects more apparent.
In general, what happens as we reach a situation of diminishing returns, and thus rising real oil prices, seems to be as follows:
As the price of oil rises, the price of food and commuting tend to rise. Both of these are considered essential by most consumers, so consumers cut back in discretionary spending, to have sufficient funds for the essentials. This leads to layoffs in discretionary industries, such as vacation travel and restaurant eating. The rise in laid off workers leads to an increase in debt defaults, and problems for banks. Housing and commercial real estate prices tend to fall, because of reduced demand, further adding to debt default problems.
Governments of oil importers get drawn into this in many ways: (1) Their revenues are reduced, because they receive less tax revenue from people who are laid off from work and from businesses with fewer sales. (2) They are asked to prop up failing banks, and to stimulate the economy. (3) They are also asked to pay workers who have been laid off from work. The net of all of this is that the governments of many oil importers find themselves with huge budget deficits, and declining ability to fix these deficits. This pattern is precisely what we are seeing today in many of Eurozone countries, the United States, Japan.
The statements about rising oil production in the US are just a distraction. Diminishing returns mean that US oil production will never increase very much. Oil costs will remain high, and this will be the real issue disturbing economies around the world.
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