price of crude as a percentage of world GDP.
What happened? We hit "peak oil" – also called "Hubbert's peak," – a geological limitation to the oil supply in the ground. With no additional supplies, a bidding war began in 2005 over the remaining oil in the ground. This is not a news story that goes away after a month.
The news media are only partially addressing the story. Two different friends e-mailed me about Paul Krugman's op-ed column in the New York Times of May 12, 2008. Krugman's primary conclusion was that today's high current oil prices are not simply a speculative bubble. However, his preferred explanation came down to a single phrase, " . . . mainly the growing difficulty of finding oil." Krugman does not distinguish between repairable and un-repairable difficulties. Repairable causes would include shortages of terrain open for drilling, of deep-water drilling rigs, of roughnecks, of geophysicists. The huge un-repairable shortage is undiscovered oil.
How big is the problem? Multiplying production (barrels per year) times the oil price (dollars per barrel) gives a total cost in dollars per year. It's an enormous number; tens of trillions of dollars per year. To put a scale on it, the three thin curves on the graph show the oil cost in contrast to the total world domestic product; the annual value the goods and services added up for all the world's countries. The three curves show the oil cost at one percent, two and a half percent, and five percent of the total world economic output. At $130 this morning, we are at six and a half percent.
If we see oil at $300 per barrel, we will be looking out over the smoldering ruins of the world's economy.
Oil production obviously cannot consume 100 percent of the world's income. My intuitive, uninformed guess is that it cannot go above 15 percent. If we see oil at $300 per barrel, we will be looking out over the smoldering ruins of the world's economy.
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