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February 14th, 2011

This has been a déjà vu week for me.

The Wikileaks messages suggest that the U.S. Embassy in Saudi Arabia now suspects that the Saudi oil reserves are overstated. In 1977, Colin Campbell published that opinion and the evidence for it. Also, the Embassy thinks that the Saudis do not have substantial unused production capacity. Matt Simmons published a whole book about the Saudi capacity in 2005.

And now, the International Energy Agency (IEA) has become worried that oil prices have again become a substantial percentage of the Gross Domestic Product (GDP). I said essentially the same thing on pages 40-41 of When Oil Peaked. What follows is the relevant passage from the AFP news agency in Paris.

PARIS (AFP) - The global recovery will drive oil prices dangerously higher this year, possibly to the level where they could push the economy into a marked slowdown, the IEA warned Thursday.

The prospect of rising inflation, driven by oil and other higher commodity prices, coupled with political instability in the Middle East is an added concern, it said.

The IEA, the energy policy and monitoring arm of the Organization for Economic Cooperation and Development, said the global oil bill was likely equal to 4.1 percent of total output in 2010 and would rise to 4.7 percent this year.

"Under current assumptions for global GDP, oil price and oil demand, the global oil burden could rise to 4.7 percent in 2011, getting close to levels that have coincided in the past with a marked economic slowdown," the International Energy Agency said in its latest monthly Oil Market Report.

"Indeed, the combination of higher prices . . . emerging inflationary pressures and instability in the Middle East is not a healthy one," it added.

The forecast was based on oil at $90 a barrel but Brent crude has rocketed over $100 recently as unrest in Egypt stokes concerns of possible disruption to supplies via the Suez Canal and wider fears over the Middle East.

For contrast, here is the illustration from page 40 of When Oil Peaked, along with its caption:

"Monthly U.S. expenditures for crude oil as a percentage of Gross Domestic Product. Expressing the oil cost as a percentage of GDP avoids correcting for inflation. The 2008 oil cost spike is no higher than the 1981 spike, but the 2008 spike acted on a more fragile economy. The low price around 1998 brought us the SUV."

I'm not accusing the IEA of plagiarism, but politeness would require that they acknowledge a previous publication of the idea.

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