Oil prices rise as the economy falls
The price of oil still rising but the economy of the world is slowing down. This at first sight seems like a paradox. If the world’s economy slows down you would expect less energy to be used and therefore the price of oil should fall. Today oil stands at around $120 a barrel – it has never been higher, but businesses face fewer sales, lower profits or greater losses and people’s employment will be threatened as businesses reduce staffing levels.
We are told that this is the result of the sub prime lending foolishness which the world’s banks embraced to the extent of buying worthless securities; having done so they became afraid to lend each other money and are still so afraid. The rate at which UK banks lend to each other is known as LIBOR – the London Interbank Offered Rate, and banks in turn fixed loans they made by reference to LIBOR, giving themselves a small margin over it when lending to commerce.
It is worth noting that none of the recent three Bank of England interest cuts has had the normal knock on effect of reducing the LIBOR. The margin is now historically very high, reflecting the risks that banks feel they take if they lend to each other.
Also it is by no means clear to me that the banks actually have the money to lend. The Royal Bank of Scotland is short £12 billion and will seek to raise this money from a rights issue to their shareholders who must pay up or have the value of their shares diluted. In addition the banks are benefiting from a £50 billion loan being made by all of the taxpaying citizens in the UK.
So the economy is not healthy and at the same time oil price rises inexorably. It has always been thus. In his excellent book, “the Last Oil Shock” David Strahan points out that some analysts have found that movements in oil prices since 1954 have been closely mimicked by US unemployment figures after a time lag of around eighteen months. http://www.amazon.co.uk/Last-Oil-Shock-Extinction-Petroleum/dp/0719564239
Mr Strahan suggests that while oil consumption as a proportion of gross domestic product is falling, because we are increasing our population and driving more, flying more and living more comfortable lives oil consumption per person is increasing. We find more things to “spend” our energy on.
There is a relationship between the availability of energy and economic growth but somehow governments overlook this basic fact. Our present Energy Minister, Mr Malcolm Wicks, is a junior minister and he does not have cabinet rank. He also does not have complete jurisdiction over energy; his boss gets in on the act from time to time as do the people at DEFRA; the Treasury set the policies for energy taxation which further limits Mr Wicks’ brief. No-one it seems to me, is bothering to look at the whole picture and this is worsened by the fact that Energy Ministers in the past ten years have tended to come and go like the newspapers.
This means that we get a muddled energy policy; one day photovoltaics are in vogue, the next day wind turbines. Biomass then becomes fashionable and now nuclear is proffered as a solution. The Government is not joining the various energy dots together and even worse is not linking the energy picture to the economic picture.
The government’s main energy policy is to cause us to invest in insulation – first for lofts and then for cavity walls. This makes energy use more efficient but efficiency is often outweighed, as I explained in another post, by those with good insulation turning the thermostat up to enjoy a more comfortable home wearing lighter clothes. The efficiency gains end up with more economic growth in the sense that we spend the efficiency gains and more on other energy consuming practices.
Now an economic downturn may be caused by a high oil price, as businesses dependent on oil collapse. The oil price would then fall, reviving the economy but in the nature of the beast as the economy grows so the oil price would rise all over again. I am not an economist but it seems to me that a rising and falling and re-rising oil price (and coal prices and gas prices) would lead us through a series of sharp boom and bust cycles, with the bust cycle lasting longer each time until the energy finally runs out.
That, I think, is the fundamental problem that Governments have to solve. The solution must be to use whatever resources we can muster to produce benign energy ourselves. The Government needs to require us to invest in microgeneration and pay attention to the details– not throw money at grandiose schemes dependent upon depleting resources.
That means higher building standards, solar water and space heating for virtually everyone, more offshore turbines, taxation on fossil fuel energy to reduce demand and make people more careful about the energy they use, penal taxation on large-engined inefficient vehicles, as well as what they are doing now.
There will come a time when energy will be at the very top of the political agenda; the fuel duty strikes almost brought down the new labour government in 2000. The future position could be far worse than political inconvenience and far harder to solve.
Filed under: Coal, John Hutton, PV, biofuels, biomass, carbon emissions, climate change, electricity, energy, gas, global warming, heat, malcolm wicks, microgeneration, natural gas, oil, renewables, solar, solar energy, solar panels, tax, transport, wind turbines | Tagged: bank liquidity, Bank of England, David Strahan, Defra, energy ministers, LIBOR, oil consumption, oil price cycle, oil prices, rights issue, Royal Bank of Scotland, sub prime, the last oil shock, the Treasury
[...] Original post by robertkyriakides [...]
Rob, it is now my first daily task to read you blog in the morning.
“save energy NOT equal to generate energy”.
Improve insulation to save energy is a passive way to reduce our dependency on fossil fuel. no matter how good the insulation is, one day fossil fuel gone, our house still cold!
Seeking alternative way to generate energy is the proactive way.
Sun gives us so much energy everyday. It costs nothing. Of course we have to pay a bit of initial cost for the equipment but it will last forever. However, getting people to understand it is hard, especially those non-engineering background politicians.
We have to sell the concept before we can sell the product!
Robert
[...] Roughtheory.org wrote an interesting post today on Oil prices rise as the economy fallsHere’s a quick excerptI am not an economist but it seems to me that a rising and falling and re-rising oil price (and coal prices and gas prices) would lead us… [...]
It was interesting to see the split decision of the monetary committe and the fact the one member voted for a 0.5% reduction in interest rates.
…which would have depressed the pound further sending real energy prices higher!
I think that insulation is sensible, because it stops heat escaping from a building, no matter how you input energy into a building be it Fosil fuel, Solar thermal or whatever energy will be better used and the ability of a solar panel for instance to heat an insulated building will be better than it would be to heat an un-insulated building. If we make an analogy of energy as water in a bucket, and we do not want to lose the water, if the bucket is leaking we could find a better way to put more water in the bucket or just fix the hole.
If you disagree with that statement you may I sugest that you remove any draught excluder from your front door, remove the insulation from your loft etc, and upgrade the heating capacity of your home by install twice as many solar panels than you have today! The increasing price of fuel will help to educate the people who think it is a good idea to walk around in their house wearing just a T-shirt whilst the thermostat is set to a higher than necessary temperature in the mid-winter.
Solar thermal is a good investment, it reduces Carbon emissions and does save lots of fuel costs, however that does not mean that any measure to conserve heat within a building is not a good investment.
“Solar thermal is a good investment, it reduces Carbon emissions and does save lots of fuel costs”
That is what we want to hear.
“however that does not mean that any measure to conserve heat within a building is not a good investment.”
I do NOT think anyone will disagree with this. However, we should NOT tie all these together.
Now government did NOT give grant for better insulation because it is not a way of renewalbe energy.
Although government gives grant for renewable energy installation but applicant has to do every other things all together, e.g. insulation, double glazing, to be qualified. Did u check the bill of full house insulation which cost thousands and thousands. that put off people go further for renewable energy. that causes, no insulation and no renewable energy.
reiterate.
“saving energy NOT equal to generating energy”.
Peter, just forgot to give another basic example in macro perspective.
The whole earth has limited amount of fossil fuel, no matter how much you can save, one day it is going to be used up.
Sun energy is truely unlimited in the life time of human. Now it is up to the capability of human on how much they can capture and convert it efficiently. Compare to “plant” in nature which combines sun daylight energy and CO2 to give out O2, irresponsible human is far behind of doing that!!!!
People just seems to forget all the basics.
Saving energy just a very re-active way in micro and narrow perspective. of course, we do NOT disagree with it, and we must do it.
There is lots of energy on the surface of the earth we can use if we want to continue using primitive carbon fuels, there is plenty of cellulose (virtually anything that grows from the soil) that can be converted to ethanol. So carbon fuel is not just fossil fuel.
Please remember that energy conservation is very important in the methods of capturing heat energy from the sun, Genersys sytems have lots of insulation to conserve heat inside the system. so once that energy is used for space heating that conservation of heat needs to be maintained in the building, stop as much heat leaving the building as possible, because even you had an array of solar thermal panels 100 square metres it would not be effective to heat a building with just a roof supported by four posts, so the walls are acting as an insulator, every method that is used to insulate a building increases the effectiveness of an array of solar panels, when you get to the level of producing an ultra-insulated building (which fro ICFs is much quicker and cheaper to build) then a reasonable number of solar panels would be more than adequate to maintain the temperature of a building at a comfortable level. Please remember that the human body gives off quite a significant kilojoules of energy per day, so that it has an effect in enclosed exibition halls foor example. sometimes they have to open all the doors even during the winter to cool such a building when there is a lot of human activity.!
saving energy is important but not if we make up the savings by behavioural changes - a kind of rebound effect.
If the oil price fell to $10 a barrel what kind of cars would most people choose?
Robert
[...] Oil prices rise as the economy falls The rate at which UK banks lend to each other is known as LIBOR – the London Interbank Offered Rate, and banks in turn fixed loans they made by reference to LIBOR, giving themselves a small margin over it when lending to commerce. … [...]