This week has already seen quite a few news articles that seem to substantiate our longtime hypothesis that "the economy can't (and won't) really stabilize as long as we're dependent on oil."
Yesterday, Monday April 11th, the International Monetary Fund (IMF), released its periodic "World Economic Outlook Report" indicating it believes higher oil prices are dimming prospects for a U.S. and global economic recovery; as reported by Bloomberg:
"Oil fell from a 30-month high after the International Monetary Fund cut its growth forecasts for the U.S. and Japan, indicating high crude prices pose a risk to global economic expansion."
Note that only the prospect of economic downturn and the subsequent decline in demand seem to be able to thwart the price of oil. Green Alpha believes the $148 barrel was the primary cause of the 2008 recession, and that the recession, in turn, was the only reason oil fell back to the $40/barrel range, which allowed the current slow recovery. Now, with oil back above $110: "Crude tumbles 1.9% as IMF's Economic Outlook predicts higher oil prices will restrain the US economic recovery." Translation: "high oil prices hurt oil prices, crash economy." Not necessarily in that order.
"The most disconcerting part of the IMF analysis is its estimate of the potential impact of declining oil output on world GDP under different output scenarios. In the benchmark case, growth in oil output drops by one percentage point a year and real world GDP two decades from now is about 3 percentage points below where it otherwise would have been. In America, the drop is closer to 4 percentage points."
Translation: "High oil prices significantly thwart economic growth." In case you're not sure, a U.S. growth rate "4 percentage points" below where it would have been without oil's effects is 'significant.' Keep in mind that U.S. historical average annual GDP growth is 3.3 percent. As The Economist judges, "that's a serious risk to consider." Happily, though, and singularly among the news coverage I read, The Economist concludes that Next Economy technology and approaches can mitigate the situation: "The dynamics in this market are pretty straightforward: oil is mostly used for transportation, and the key to limiting the impact of increased scarcity is improving the extent to which consumers can substitute away from oil use."[italics added]
Today, Goldman Sachs, perhaps the most well-informed institution mentioned here, put a 'sell' recommendation on oil as a commodity. As reported by Fortune/CNN, Goldman analysts conclude that 'the market's focus on supply is misguided and that what people should be looking at is demand, which is already declining thanks to high U.S. gasoline prices. Accordingly, they say the risk of a further oil price spike "is increasingly balanced" by the risk of a sharp correction.' This is pretty much what the IMF said yesterday, but here I'll give a slightly different translation: "Expensive oil is crashing the economy, so expect oil to go down as the bad economy reduces demand."
Individually and in aggregate these pieces paint a very clear picture. Worldwide, oil supply is having a very difficult time keeping up with demand. As far as we know the only two ways to materially reduce demand are 1. economic recession and 2. stop using oil where viable alternatives exist, most significantly transportation and electricity generation. Fortunately, we know what those alternatives are, and profitable, growing companies providing those alternatives already exist.
Garvin Jabusch is the cofounder of Green Alpha Advisors, LLC and manages The Sierra Club Green Alpha Portfolio -- a unique blend of Green Alpha Advisors' Next Economy universe and the Sierra Club's proprietary green-investment guidelines.