Global Energy Outlook: Getting Worse Before It Gets Better

Markets in the US ended yesterday’s session in the red. The Dow was off by 100 points, or around 1%. The broader S&P 500 fell a bit harder, down 1.3% at the close. Gold slipped, too. The yellow metal sunk below the $1,100 mark and now trades for about $1,095 per ounce. Oil gained a smidge, to just shy of $80 a barrel.

What do these single day data points tell us? On their own, probably not much. Put together…still not much. Stick your nose close enough to the computer screen and pretty soon the daily numbers begin to lose their meaning. Journalists report only after the facts, making up their reasons for this and that move as they go.

“Investors shrug off concerns about XYZ, display confidence in recovery,” one paper might read after the Dow jumps half a point.

“Investors remain sidelined as concerns over XYZ dampen recovery hopes,” another might read on the same day.

On a daily basis it is simply impossible to know what goes on in the hundreds of thousands of minds operating hundreds of billions of dollars in the global markets. Maybe some hedge fund manager’s wife just left him…causing him to lose focus for a moment and to liquidate his position in XYZ instead of ABC. Maybe he got some inside information, which then turned out to be false. In that case he might be back in the office first thing tomorrow morning to buy the stock back. In reality, there are so many variables, so many separate and distinct inputs, that it is virtually impossible to draw a straight line between cause “A” and effect “B” in such a short timeframe.

With neither the patience nor the inclination to study such micro-term trends, we turn our attention today to those on a somewhat longer timeframe. One thing we can know with a reasonable amount of certainty is that we cannot consume a finite resource indefinitely. This applies to natural resources, like oil, just as it does to things like the patience of foreign creditors.

Much ink has been spilled on the subject of Peak Oil over the past few years. Although the issue has been more recently shelved in favor of global financial crisis headlines, the situation is hardly less serious than it was back when crude hit $147 per barrel a couple of years ago. In fact, despite the temporary downturn in global energy demand, the outlook may be bleaker now than it was then.

Last year the International Energy Agency reported that worldwide decline rates were roughly twice what they had forecast just one year earlier. (The previous figure of 3.4% was revised to 6.7%.) New, comprehensive research led the IEA’s chief economist, Fatih Birol, to estimate that supplies of conventional oil could begin to plateau as early as 2020…and that’s, he said, “assuming that OPEC will invest in a timely manner.”

The Daily Reckoning