John Hemming's Web Log John's Reference Website
Monday, August 27, 2012
  Its Energy Prices Stupid!
The normal phrase is "its the economy stupid". However, unless a country is an energy exporter in a large way in fact "its energy prices stupid".

I have obtained figures from the Library to calculate the marginal rate at which an increase in the price of energy reduces economic activity. I did speak about this in the house earlier this year. However, I haven't yet found the time to do the analysis.

It remains, however, that as energy prices (and particularly oil prices as that is the marginal source of energy) go up then economic activity is held back. We make the mistake thinking of growth rather than activity.

Obviously some forms of economic activity use less energy than other forms. In a world with a constrained energy supply those forms of economic activity need to be encouraged.

You will see on the right of my blog a couple of charts. It is possible to see the effect on oil prices in the USA of Shale Gas (it has knocked about USD 20 off a barrel of WTI as opposed to Brent). Shale Gas and associated activities do extend the peak of hydrocarbons. It is, however, to be noted that the rate of Gas depletion is about 20%, but Shale Gas falls into the 40-50% rate of annual depletion. What I don't know about Shale Gas is the EROEI (Energy Returned on Energy Invested).

So if oil prices go up, aggregate energy costs go up, economic activity goes down and we face greater cuts (see Callaghan's speech).

Addendum: I have noticed that Barcap agree with me on the supply crunch. 2.4mbd is more than I would expect, but I am not really studying the minutae on this.

 
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better brent chart

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Published, promoted, and printed (well not really printed I suppose, more like typed) by John Hemming, 1772 Coventry Road, Birmingham B26 1PB. Hosted by blogspot.com part of Google.com 1600 Amphitheatre Parkway Mountain View, CA 94043, United States of America. This blog is posted by John Hemming in his personal capacity as an individual.

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