What do Triple Digit Oil Prices Mean for Growth?

Posted by Jeff Rubin on January 3rd, 2012 under SmallerWorldTags: , ,  • 10 Comments

Can we still expect to see sustained economic recoveries when oil, the world’s principal source of energy, is trading in triple digit range?

As I argued several years ago in my book, Why Your World Is About To Get A Whole Lot Smaller, triple digit oil prices will redefine our notion of an economic recovery because as soon as the global economy picks up, oil prices will quickly soar to levels that challenge growth.

Last year was a case in point. In the second full year of recovery from as deep a trough as any seen in the post-war period, oil prices once again rose swiftly to levels that, in the past, torpedoed economic growth.

Brent Crude, the world oil benchmark, averaged $111 per barrel. This cracked the previous record of an annual average high of $100 in 2008 – a peak subsequently followed by a huge global recession.

The North American benchmark, West Texas Intermediate (WTI), rose even more, increasing by 20% from its 2010 average price of $79. Even with the hefty discount that it traded to world oil prices throughout most of last year (at times over $20 per barrel), WTI still averaged just a shade under triple digit levels at $95/barrel last year.

Of course, there are always special factors to explain these price levels: the Libyan revolution, Iran’s threat to close the Strait of Hormuz, or an increasingly destabilized Iraq.

While all these events certainly pose credible threats to world oil production, they are, at the same time, background noise even if they dominate the front page.

The real story behind triple digit oil prices is not the threat of supply shocks, but the sheer, unrelenting rise in world oil demand.  Already closing in on 90 million barrels a day, the quick rebound in world oil consumption to new record highs demonstrates the global economy can’t grow without burning greater amounts of oil.

No matter how many rabbits the oil industry can pull out of its hat, be it tar sands from Alberta or shale oil from the Bakkens, supply just can’t seem to keep pace – at least not at the prices most consumers can afford to pay. That is the message that triple digit prices keeps telling us.

If the global economic expansion, troubled as it may be, continues, we will see even higher oil prices in 2012. But what does that say about the sustainability of growth?

And even if there is growth, what is the pace?

  • Guest

    I have mentioned your book here http://www.facebook.com/DeathByChina?sk=wall

    Jeff, you really should read “Death By China”. I took the audible.com audiobook. Is there any chance your book will be released as audiobook as well?

    The above story is of course great news for people who want independence from China and get their jobs back in the West.

  • Bobi

    Jeff – this is a very interesting story.  I am currently looking for a speaker for a client of mine in April and i think you would be a great fit. Can you email me so i can send you more details on this speaking opportunity – bobi@eqspeakers.com

  • Renewojcik

    Having spent my whole career in the oil business I have become more and more pessimistic with our ability to fight the ever declining wedge of oil production. In one field I worked we had production up to over 10,000 barrels a day in the early 1990′s. Not a large field but significant to the working interest owners. After 20 years production was down to 4,500 barrels per day. The only reason that field is profitable is because the oil price is close to triple digits. And to make matters worse is the per well production is near 3 barrels per day. That, Jeff, is the tipping point. When daily costs exceed income we will see many wells abandoned unless oil prices continue to go up. This has been the trend for the past several years.

  • Denny

    While many analysts have downplayed the possibility of Iran attempting to close the Strait of Hormuz with the reasoning that such action would not be Iran’s “best interests” it seems that it is also not in Iran’s best interests to have its currency destroyed and income reduced by an oil embargo. With Israel stating that Iran is capable of producing a nuclear weapon by year end something has to give. Either Iran will allow inspectors complete access to its nuclear facilities (unlikely) or there will be a military attack by Israel, NATO, or the United States. An attack will be immediately followed by a coordinated release of oil reserves. What next? Where does the world turn to fill the spare capacity gap? Saudi Arabia with its aged oil fields and increased defense and social spending that cuts into funds available for increasing production? Iraq, with its daily bombings and dysfunctional government that is in a payment dispute with Exxon? How about Libya with its growing violence between different tribes? Nigeria’s light sweet crude is valuable but why did the government choose now, when civil war is a distinct possibility, to reduce gasoline subsidies? Meanwhile there are environmental issues with every source of oil: deep sea (Gulf of Mexico spill), oil sands (carbon emissions and water usage), shale (water, earthquakes, etc.). Where is the easy to find oil? While the clock ticks on Iran, it also ticks on scalable transportation alternative fuels. With none on the horizon and economic growth still extremely dependent on oil, the clock is ticking for all of us. 

  • Anonymous


    Thanks for your excellent insights regarding the future of energy! As I recovered from my heart stopping as my forehead was being sutured following a car accident in Kenya in 1980, my designers mind went to how we would be able to provide ourselves and all the generations that follow us with the food, energy, fertilizers, pesticides, transportation, plastics, pharmaceuticals and cosmetics that petroleum provides, when there is no more. If the last 2012 years are only 20 times the 5 generations, grandparents to grandchildren including ourselves, that we will meet in our own families back to the Year Zero (20 x 5 generations x 20 years/generation = 2000 years), what will all the children do in the Years 4000 and 1,000,000 if we are to run out of petroleum in the next 20 – 60 years?

    Please view the conclusions that I reached as I staggered, walked and jogged more than 330 miles back to a nearly complete recovery in 1981 – 2 at http://www.greenmillennium.eu

    And, thank you very much for what you are doing!

    Kim Gyr
    Director, Green Millennium

  • Anonymous


    Followed you from the start, strong believer in the smaller will be better (after serious adjustment)  camp.

    What happens if KeystoneXL/Gateway are built for incredibly expensive oil?  Do the full tankers just sit off the coast waiting for the highest bidder? Can I interest you in a Clydesdale dealership?

  • Propensity6

    Dec 2010 Jeff predicted $125 oil…Of course, he was predicting $200 oil before that. Economists are only correct if they understand the correct data. I think a good suggestion for all readers is that we pay for some geological and engineering eduction for Jeff. Anyone been to North Dakota lately….there is another 2MM BBLS/Day coming pretty quickly to North America…

  • AbitibiDoug

    Much attention has been given to the Bakken lately, and with good reason as there appears to be plentiful oil reserves there. Is it really that big, and with reserves that are not only plentiful but economic to extract or has it been exaggerated by companies looking for investors? At least one analyst thinks it’s not all it’s made up to be, see http://www.theoildrum.com/node/8697#more for details.  Will the Bakken make the United States self sufficient for oil, and if so, for how long? Any ideas or comments?

  • Rojelio


    your comment falls into the category that you do not understand EROI (energy return on investment). It’s not about the quantity, it’s about the quality. Educate yourself.

  • Boston

    Do you think a Manhattan project for energy is needed?