The Next Oil Shock?
by Clint Smith
Fri, 22 Oct 2010
The US Department of Energy (DoE) calls oil “the lifeblood of modern civilisation”.1 Around 86 million barrels (13.7 billion litres) are consumed each day. Oil supplies 37 percent of the world’s energy demand,2 including 40 percent of New Zealand’s energy demand.3 It powers nearly all of the world’s transportation, without which production and trade would grind to a halt. Studies have shown that GDP growth is very strongly related to increased use of oil.4
When the price of oil increases, the cost of nearly all economic activity rises. This often induces recessions. High oil prices have been associated with three major periods of economic recession in the past 40 years, including the lead-up to the recent global economic crisis.5
The world’s oil production capacity may not be sufficient to match growing demand in coming years. The potential for short-falls arises from geological, infrastructure, and political/economic constraints limiting the ability of world oil production capacity to grow while demand continues to rise. If oil supply cannot meet demand a price spike may be triggered, with major detrimental effects on economies, especially those heavily dependent on oil imports like New Zealand.