Media outlets tend to make it sound as if all our economic problems are temporary problems, related to Russia’s invasion of Ukraine. In fact, world crude oil production has been falling behind needed levels since 2019. This problem, by itself, encourages the world economy to contract in unexpected ways, including in the form of economic lockdowns and aggression between countries.
This crude oil shortfall seems likely to become greater in the years ahead, pushing the world economy toward conflict and the elimination of inefficient players.
To me, crude oil production is of particular importance because this form of oil is especially useful. With refining, it can operate tractors used to cultivate crops, and it can operate trucks to bring food to stores to sell. With refining, it can be used to make jet fuel. It can also be refined to make fuel for earth moving equipment used in road building. In recent years, it has become common to publish “all liquids” amounts, which include liquid fuels such as ethanol and natural gas liquids. These fuels have uses when energy density is not important, but they do not operate the heavy machinery needed to maintain today’s economy.
In this post, I provide an overview of the crude oil situation as I see it. In my analysis, I utilize crude oil production data by the US Energy Information Agency (EIA) that has only recently become available for the full year of 2021. In some exhibits, I also make estimates for the first quarter of 2022 based on preliminary information for this period.
An analysis of price trends suggests that most of the recent spike in crude prices is due to the tightness of the crude oil supply, rather than the Ukraine conflict. The Brent oil price dropped to an average of $14.24 in the week ending April 24, 2020, not long after COVID restrictions were enacted. When the economy started to reopen, in the week ending July 2, 2021, the average price rose to $76.26. By the week ending January 28, 2022, the average price had risen to $90.22.
We are likely entering a period of conflict and confusion because of the way the world’s self-organizing economy behaves when there is an inadequate supply of crude oil.
The issue of how important crude oil is to the world economy has been left out of most textbooks for years.
Now we are running into a serious shortfall of crude oil. We can expect a new set of problems, including far more conflict. Wars are likely. Debt defaults are likely. Political parties will take increasingly divergent positions on how to work around current problems. News media will increasingly tell the narrative that their owners and advertisers want told, with little regard for the real situation.
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