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| Sun May. 31, 2009 8:27 AM PDT

As I've mentioned before, one of the big problems with reaching peak oil isn't just that oil prices will go up, but that they're likely to spike up and down fairly violently. In 2006, for example, demand for oil pretty much bumped up against the total available supply, which meant that even a small amount of additional demand was enough to send oil prices spiraling up past $150 in little more than a year. The ensuing recession reduced demand by only a modest amount, but that was enough to cause oil prices to plummet to under $50 in the same timespan. And this isn't just a demand-side problem: a small glitch in supply could easily have caused the same kinds of violent price spikes.

As a general rule, the world can handle high oil prices. In fact, to the extent that high prices get us off our butts and looking for cleaner, more sustainable sources of energy, high oil prices are a good thing. But what the world economy can't handle is constant, huge gyrations in oil prices: nearly all of our recessions since 1973 have been jump started by a sudden spike in oil prices.

So what happens next? Via Ryan Avent, Paul Kedrosky points us to this projection from McKinsey, which shows that demand will once again bump up against supply very shortly: probably within a couple of years, but almost certainly within four years at the outside. And when that happens, prices will once again rise unpredictably. A strike in Venezuela could cause oil prices to double in less than a month. A rumor of new supergiant field or a small recession could cause a subsequent collapse. Price changes of 100% in short periods will become common.

You can probably already figure out where this post is going, can't you? Wild spikes in oil prices are very bad news for the global economy, and the only way to avoid them is to permanently reduce global demand for oil so that we once again have enough spare pumping capacity to keep prices relatively steady — high and rising, perhaps, but at least rising fairly predictably. That means we need higher mileage cars (global warming isn't the only reason for stronger CAFE standards), electrification of transportation, better conservation and efficiency measures, and more investment in solar, wind, and biofuels. And all this needs to be done fairly quickly if we want to avoid an economy permanently at the mercy of OPEC oil. Even 2013 isn't that far away.

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Kevin Drum is a political blogger for Mother Jones. For more of his stories, click here.

Comments

How do we know?

Submitted by jpalmer on Sun May. 31, 2009 10:03 AM PDT.

"As a general rule, the world can handle high oil prices." Really? How can we know that? At the 'atomic' level, Dollars (or any currency) are a product of time, ideas, earth and energy. When Oil reaches $100, it's a signal that the molecular formula of money itself has changed. Since world oil production is past peak -- 2005 or 2008, depending on the yardstick -- the energy component of dollars is now in decline, and that decline in the energy component also causes a decline the availability of raw materials (the 'earth' in the formula). Since modern economic theory is based on growth, and that growth was provided by the availability of cheap fossil energy, I simply cannot see how the world can handle high oil prices for any period of time. The average price in 2008 was $100/bl which was enough to topple the highly leveraged industries - Banking, Home Building, GM, and so on. I'm open to arguments to refute my over-simplified view of 'atomic-level' economics, but the only way to keep the pot boiling with the fossil fuel flame going down is to commit to renewable energy. We spent the first half of the oil building a civic infrastructure defendant on cheap, abundant oil energy. We must spend the second half to rebuild a renewable future.

Covered pretty well.

Submitted by BigTom (not verified) on Sun May. 31, 2009 1:17 PM PDT.

Kevin, and jpalmer seem to get it, we gotta start figuring out how to thrive in an economy with decreasing oil per capita. Longer term that will mean technological changes. But, if this thing is coming on as fast as most analysts think, only a small fraction of our transportation fleet will be converted by the time this starts hitting big time. We are going to have to start learning to drive less (and slower would help). Politically Obama should not be seen to be against drill-drill-drill, as claiming it is all because of liberal anti-drilling activties will be a key return to power strategy of the right. Open up a couple of highly visable off shore areas, just to create the appearence, of not causing the problem.

High oil prices are not the

Submitted by Luther on Sun May. 31, 2009 9:23 PM PDT.

High oil prices are not the big problem. People will pay virtually anything for oil. Shortages are a bigger problem. Maybe some of you youngsters don't remember the Arab oil embargo when shortages resulted in refiners abandoning some products altogether, such as many critical petrochemicals, in order to pursue only high profit lines, such as gasoline. Strangled industry, not that gas lines were much fun either.

High oil prices are not the big problem?!

Submitted by Trippp on Sun May. 31, 2009 10:31 PM PDT.

Tell that to the people who starved to death when the price of soybeans doubled and the price of corn tripled due to high oil prices and food diverted to biofuels. Sheesh Luther, there are a huge number of people who are not rich Americans. Some people pay 60% of their income to feed themselves. Some people get dysentery because they can't afford the fuel to boil water. People can't pay money they don't have. Tripp

Learning to live without growth

Submitted by DevilDog on Sun May. 31, 2009 11:59 PM PDT.

We're not going to replace oil with alternative sources that will allow us to continue doing the same things we've been doing, just doing them with substitute energy sources. We're simply going to have to change how we live. Jeff Rubin's book, Why Your World Is About to Get a Whole Lot Smaller, gives a pretty good overview of how a post-peak world will change a lot of activities and behaviors we've long taken for granted, such as air travel, globalized transportation of commodities and finished products, etc. A good review of the book on The Oil Drum by Robert Rapier is here.

higher mileage doesn't help

Submitted by njwilson on Mon Jun. 1, 2009 8:44 AM PDT.

We don’t need higher mileage cars. All that does is allow people to drive further using the same amount of gas. What we need is for people to drive less and reduce the demand for gas.. Higher prices will both reduce the demand for gas and slowly change the way we live to make it easier to live without using so much gas.

Higher fuel prices are the way to go

Submitted by Jynx (not verified) on Tue Jun. 2, 2009 11:02 AM PDT.

What njwilson said. Higher mileage cars will merely mean more driving around and more sprawl. What is needed is a steep tax on gasoline to reduce consumption and force us into different ways of doing things.