Why peak oil demand is already a major problem
Oil demand has to do with how much oil we can afford, Tverberg writes, and many of the developed nations are not able to outbid the developing nations when it comes to the world’s limited oil supply.
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Substituting natural gas for oil still leaves the US (as well as Europe and Japan) very high priced, compared to the rest of the world, that doesn’t use much energy.Skip to next paragraph
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Living in the US, Europe or Japan, it is hard to get an idea of the cost structure of the rest of the world. We are so far above the cost structure of the rest of the world that substituting natural gas for oil would do little to fix the situation.
We can also debate how much substitution of natural gas will actually do, and in what timeframe. In the US, natural gas is temporarily very cheap. But it costs more to extract shale gas than the market currently pays, in many areas. Also, a recently University of Texas study showed that Barnett Shale was past peak production, if prices do not rise.
There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers, until they reach a different limit of some sort.
When a country is not competitive, it is not just oil consumption that drops, but consumption of other energy products as well. If we look at the per capita energy consumption of the US, EU-27, and Japan combined, we see that non-oil energy consumption per capita reached its peak in 2004, and is now declining (Figure 10, below). If consumers are too poor to buy oil products, they are also too poor to buy products made with other types of energy.
The Rest of the World followed a very different pattern of energy consumption. Non-oil consumption soared, on a per capita basis. Oil consumption also increased on a per capita basis.
More detailed data shows that the big increase in non-oil consumption was a huge rise in coal consumption, after China was admitted to the World Trade Organization in December 2001.
How does peak oil demand work out in the end?
I would argue that lack of competitiveness in world markets is a limit that the US, EU-27 and Japan are hitting right now, but at slightly different rates. EU-27 now seems to be ahead in the race to the bottom, partly because its combined currency. I wrote a post in March 2012 called Why High Oil Prices Are Now Affecting Europe More Than the US, explaining the situation.
It seems to me, though, that a big piece of the problem with lack of competitiveness gets transferred to the governments of the affected countries. This happens because collection of tax revenue lags, because not enough people are working, and those who are working are earning lower wages. At the same time increased payouts are needed to stimulate the economy, and to provide benefits to the many without jobs.
Governments increase their debt to meet the revenue shortfall. They reduce interest rates to record-low levels, to stimulate the economy. They also use Quantitative Easing, or “printing money” to try to lower long-term interest rates, and to try to make their exports more competitive. Unfortunately, these actions do not solve the basic structural problem of high and rising world oil prices, and the fact that these rising prices make their economies increasingly less competitive in the world marketplace.