The Input Cost of Oil
Many raw materials in industry are derived from oil; much of the energy used in their manufacture comes from oil, much of the energy used to deliver finished goods comes from oil, and fuel and transportation costs contribute to everyone's daily living costs. So, the cost of many products is dependent not just on the oil-related raw material, but on the oil-related cost of delivering them to the customer, and the oil-related cost of energy used for production! A triple-whammy! And what is more, alternative energy sources (such as wind generators) are manufactured using materials and energy derived from oil!
Professor Andrew Oswald of Warwick University once stated:
"Historically, sharp rises in the price of energy are our best predictor of a slump to come. This happened in the mid Seventies, late Seventies and early Nineties. No doubt it will happen again. Energy is a key input. When inputs become more expensive, cost curves rise, and firms go out of business..."Please take a look at the following chart, to understand how the myriad consumers of oil and natural gas derivatives may be affected by the input cost of oil:
This chart was featured in Bill Fleckenstein's Contrarian Chronicles article on 13th September 2000:
"As I commented around the middle of last August,
energy is such a large component of so many items, inflationary
consequences will eventually start showing up all over the place.
The noise out of PPG is but one illustration of this phenomenon...
the attached chart... provides a graphic
example of how pervasive the energy component is in everyday life.
The inflationary ramifications are only starting to be
felt..."
Bill Fleckenstein
In "The New Oil Crisis and Fuel Economy Technologies - Preparing the Light Transportation Industry for the 1990s", (1988), Deborah Lynn Bleviss argued that the next oil crisis would blindside those in industry who lacked the foresight to develop fuel economy technologies during the time of low oil prices. She pointed out that European vehicle manufacturers, e.g. Volkswagen, Volvo, Renault, and Peugeot, were more advanced in fuel efficient vehicle design- perhaps because of higher fuel prices in Europe, where fuel is taxed much more heavily than in the US.
Recent per capita use of oil in the US has been lower than in 1973, when the Arab oil embargo disrupted world oil supply. However, this was offset by population growth, and a larger percentage of oil is now imported to the US- which, of course, is the economic powerhouse of the western world.
What would happen in the event of another Arab oil embargo?
In 1974, the Seattle Times said:
"a new oil crisis could cause the United States to change its policy. The United States will take military action, if necessary, to protect its "vital interests" and some strategists have suggested privately that another oil embargo would affect the nation's "vital interests." "The history of oil price increases suggests that any new oil shock will have a recessionary effect:
"In 1973 and 1979 a pair of sudden price increases rudely awakened the industrial world to its dependence on cheap crude oil. Prices first tripled in response to an Arab embargo and then nearly doubled again when Iran dethroned its Shah, sending the major economies sputtering into recession" The End of Cheap Oil- Colin J. Campbell and Jean H. Laherrère, Scientific American, March 1998Here is a web site with a lot of information about the world oil situation:
"Based on current data and new analytical techniques, recent studies by Dr. Colin J. Campbell and others conclude that world petroleum output will peak during the first decade of the 21st century and will decline rapidly thereafter" Hubbert Peak Home Page (see also related page The Coming Global Oil Crisis)Here is an interesting article about the oil price rise and reactions to it in June 2000:
"There is an impending energy crisis of enormous proportions that is heading towards us like an express train but no one seems to have noticed!
The US government and DOE are very much behaving in a way that says "Crisis, what crisis?". " Crisis, what crisis? [June 20 2000]
"One indication of our growing economic fragility is the recession of 1990. The accepted story is that the Iraqi invasion of Kuwait and the ensuing spike in oil prices gave a sudden shock to the confidence of American consumers, damping their spending and pushing the economy into recession. This recessionary shock was amplified by the large debts that American households and corporations had built up during the 1980s."A few other interesting quotes:
The Forces Making for an Economic Collapse,
The Atlantic Online, July 1996
- Oil production will peak as early as 2000 and decline to half the peak level by 2025 - Campbell and Laherre, Earth Island Journal, Spring 1997.
- No significant oil field discoveries in the 7 to 25 billion barrels range have been made for over a decade - The Futurist, Jan/Feb 1997
- Reuters, 18 Nov 1998: "A new oil price shock could occur early next century if a flood of new cheap Gulf oil puts marginal, high-cost fields elsewhere out of business, a senior European energy executive said..."
