Oil producing countries are praying that the recently inked OPEC deal that sets production limits is going to see prices rise, swelling their coffers with filthy lucre.
Oh, if that were only true.
Oil prices, to be sure, spiked in wake of the deal, but notice that they have not risen above $54US a barrel.
There’s a reason why, of course. The world economy is tapped out. It simply cannot absorb increased energy prices and demand naturally falls, dragging oil prices down.
Energy, after all, underpins everything we do. It is the foundation of any economy. Energy – actually oil – is used in the production of food, in the vast majority of consumer products and in transportation. In fact, you would be hard pressed to find any aspect of modern society that is not dependent on energy. Even renewable energy needs oil in every stage of its production.
That is why every recession we have suffered through started with high oil prices.
Ironically, it was OPEC that put the forces in the motion that are threatening to bring down the global economy today when it slapped an embargo on oil shipping to pro-Israel countries in 1973. Oil prices jumped and we’ve been dealing with the consequences of high energy prices ever since.
It’s how we’ve dealt with energy prices that is the real problem, of course. Oh we’ve tried to be more efficient in our use of oil, but when energy prices form a major component of everything else consumed, efficiency can only go so far. So every single country has basically borrowed money to artificially keep their economies growing.
Today, total global debt is around $230 trillion dollars. It’s a staggering sum of money.
In the United States alone total debt is close to $60 trillion.
China’s debt is a staggering 250 per cent of GDP.
Here in Alberta, it’s no different. The NDP government has borrowed close to $11 billion this year and will likely borrow even more next year.
An economy can only grow on debt for so long no matter how much money you print or how low you keep interest rates. Eventually the debt has to be repaid.
In effect, the global economy is tapped out. Countries are close to hitting the wall where they won’t find anyone willing to lend them money. Bankruptcy is looming for a number of European countries and a number of American states.
All of which explains why we are not going to see oil prices jumping to $90, $80, $70 or even $60 a barrel. The global economy can’t handle it.
It’s same reason the world can’t handle any carbon taxes or subsidies for renewable energy. Raise energy prices and you raise prices for everything we eat and use – EVERYTHING.
It reduces discretionary spending, in other words, and in so doing puts a lid on the GDP.
So how do we get out of this vicious circle?
Cut taxes, keep energy prices low, forget about renewable energy and, above all, get productivity growing again.