Oil
Consumption is Crucial for Economic Growth
Ignoring
the rest of the world, the U.S., China and India are expected to increase
their daily consumption of oil by almost 10 million barrels per day by 2025.
Economic advancement over the last 150 years has been highly correlated with
the consumption of oil and other fossil fuels and without this increase in
consumption of oil at low prices the world will experience no growth. With
such large populations and leverage to energy consumption, however, it is
unclear if China and India can live up to their high hopes of leading the
world out of the current global economic slump.
What An Increase in Oil Price Means For Global GDP
A
$100 increase in the price of oil would cost an additional $3 trillion in
direct consumption expenses globally effectively reducing global GDP by 5.1
percent. While some of this wealth might be transferred to oil exporting
nations, this is not a zero sum game. If oil shale or deep water drilling
were used to replace current low cost supplies than oil producers would be
spending nearly $100 in additional productions costs and realizing none of
the financial gains to offset the losses from consuming nations.
Most
developing nations that are driving global economic growth are highly
dependent on energy consumption. Although the U.S., EU, and Japan consume
large amounts of energy, these nations have less leverage to the price of oil
in relation to their GDP. If the price of oil were to rise by $100, China
would suffer from a direct 6 percent hit to their economy, India would suffer
from an 8 percent hit to their economy and Japan, as probably the most
economically vulnerable nation in the world, would be even more adversely
affected.
What Oil Dependency Means
Another
important consideration for countries is their foreign dependency on oil.
While Russia has a high level of leverage in oil consumption, it is also a
net exporter. As a result, Russian oil supplies are relatively secure. The
two most vulnerable nations in the world to an oil shock are Japan and South
Korea as they import more than 97 and 98 percent of their oil respectively.
Both nations are also highly urbanized with very little arable land. These
nations would not survive a halt in global oil trade. The EU, China and India
are also highly dependent on oil imports.
Why Extent of Unused Arable Land is Important
South
and Central American nations including Brazil and Argentina may have the best
chances of coming out ahead as they are energy independent, have lower
populations than Asia, and the most unused arable land.
Capacity
of arable land is a strong indicator of potential for economic prosperity if
energy prices spike because the arable land supports farming and food
production.
Conclusion:
Now
that the U.S. and Europe are also financially insolvent energy consumers the
world is turning to nations such as India and China to drive global growth
but their large population and leverage to the price of energy create a
situation of great risk.
If peak oil is realized within the next five years then growth prospects
in India and China will be reduced drastically and the result will be
negative global GDP growth and a reduced standard of living for virtually all nations.
Chris
Mack
Chris Mack is President of Trade
Placer (tradeplacer.com) which brings the “Power of Wallstreet on Mainstreet” to
its readers. He can be contacted at info@tradeplacer.com.
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