New Oil Shock Poised to Strike as Economy Recovers

Originally posted at the Breakthrough Institute

Even with all that has intervened since the summer of 2008, including an historic election and the onset of the worst global recession in decades, the memory of the oil price shocks of the past year are not far from our minds. We'd better keep that memory fresh, because a recent McKinsey report warns that a second major oil shock looms just over the horizon, ready to hit the global economy hard as soon as it begins to recover.

McKinsey's analysts look at a variety of economic scenarios and warn that the global oil supply-demand balance will tighten as soon as the global economy begins to recover, as soon as 2010-2013 (depending on degree of global downturn). At that point, the global supply-demand situation will closely resemble the situation found in 2007 and the first half of 2008, when prices soared to over $140 a barrel, hitting pocketbooks and the global economy hard.

McKinsey predicts that a second oil price shock could cost the global economy $1.5 trillion or more, hitting us hard just as we're trying to stand back up again.

McKinsey recommends a suite of near-term demand abatement opportunities that can help forestall a potential oil shock, including removing subsidies encouraging oil consumption (common in oil producing nations in the Middle East), increasing overall energy productivity, particularly light vehicle fuel economy, switching oil for other fuels in boilers, and encouraging flex-fuel (and I would add, plug-in hybrid) vehicles that can turn to alternative fuel choices when oil price rise.

Interestingly enough though, McKinsey points to "aggressive" investments in clean energy innovation as the key to gaining the upper hand over oil price volatility and its devastating impacts on the economies of the United States and other oil importing nations in the long-term.

McKinsey recommends "continued investment" in "technologies that are currently in the research phase or are nascent [and] will become available in the longer term. ... If pursued with sufficient aggression, and combined with other levers listed above," they say, "such investments could lead to [global oil] demand peaking beyond 2020. The key areas for investment are to support research into [electric vehicles], [next generation] biofuels, and public-transportation infrastructure, the latter particularly in developing countries..." (Executive Summary, pages 14-15).

As with global warming, to ultimately get a handle on oil prices and free our nation from the volatility of global oil markets, we must prioritize energy innovation and the development and deployment of a whole new generation of technologies. And we simply lack the time to wait until the global economy recovers to begin making these investments. If we wait until then, it'll be too late, and the recovering economy will return us to the days of $100+ per barrel oil before we know it.