CIBC World Markets has just released a stunning yet detailed economic analysis of near-term oil prices and impacts. The PDF has some excellent figures I will convert to JPEGs.
The two key pieces are “Getting off the Road — Adjusting to $7 per Gallon Gas in America” (PDF) and “Oil and Growth — That 70s show Re-Run” (PDF). Main points:
- “That additional 200,000 barrels per day pledged from Saudi Arabia is a pittance compared to the four million barrels per day this year that depletion will hive off world production. What little increase in production Saudi is capable of will probably all be gobbled up by that country’s own voracious appetite for energy.”
- China’s recent oil subsidy drop? Another yawner: “Most North Americans would gladly line up at the pumps for China’s now $3.25 a gallon gas.”
- “The only supply response to date has been yet another round of cost overruns and lengthy project delays running the gamut from Canadian oil sands to deepwater Gulf of Mexico wells.”
- “With the basic laws of supply and demand no longer operative in crude oil markets,” CIBC is “compelled to once again raise our target prices for oil” to “an average price of $200 per barrel by 2010.” That “should translate into a near — $7 per gallon pump price within two years, a 70 percent increase from today’s already record levels.”
- “Higher oil prices spell stagflation for the US economy next year” and beyond. The report has a good analysis of why “The US economy has managed to avoid feeling the full brunt of oil prices over the last few years, but 2009 will be the year that its luck runs out.”
The analysis seems very solid and suggests the only thing that can “save” us from near — $7 gas by 2010 is a major global recession, but even that would only be a temporary respite. The implications for Detroit are staggering:
- “Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America’s highways in history. By 2012, there should be some 10 million fewer vehicles on American roadways than there are today — a decline that dwarfs all previous adjustments including those during the two OPEC oil shocks.” The report has a very interesting analysis of vehicle scrappage trends versus new vehicle sales that I hadn’t seen before. This is going to be a double whammy on Detroit — lower overall vehicle sales and plummeting SUV and light-truck sales.
It looks like plug-in hybrids will be introduced not a moment too soon. And certainly not soon enough to avoid a steady decline in vehicles miles, according to CIBC:
CIBC says we’re going to become like (shudder) Europeans and Canadians! (Although this particular production should probably be taken with a grain of salt, since the CIBC analysts are, after all, Canadians.)
This will ultimately require a major investment in public transit, an area that this country lags enormously behind Europe:
I do believe this country is going to be dramatically changed by our failure to plan ahead for the inevitable. As CIBC notes, this will be different from most previous oil shocks in that the duration of the price shock is likely to be much longer:
The longest running continuous oil spike in U.S. history lasted seven quarters, while we expect oil prices, at least on a trend basis, to be headed higher right through 2012.
CIBC also points out another reason this oil shock will be different:
Moreover, one of the earlier arguments for why oil might matter less these days is rapidly disappearing. Until recently, it was commonplace to dismiss the oil shock by pointing to the fact that the US economy, with its shift into services, had become signifi cantly less energy intensive than it was in the 1970s, when oil shocks did so much damage. But although US crude oil expenditures currently make up only 4 percent of GDP, this share will grow to 9.5 percent over the next three years as crude prices hit an average of $200/bbl in 2010. In terms of oil’s share of spending, we’re right back where we started from.
I would also add that this is different from previous oil shocks in that in the 1970s many different sectors of the economy relied on oil, including industry and the power sector. Now it is primarily one sector of the economy, transportation, that is an oil monoculture — and that sector as had a much more difficult time transitioning to alternative fuels than other sectors.
One last note: The other industry that is going to be devastated by high oil prices are the airlines. I will blog on the likely changes in air travel later.