The Crash Course - Chris Martenson [79]
Oil and GDP
Let’s take another look at the relationship between global GDP growth and oil consumption. Since oil that’s produced is rapidly consumed (approximately 50 days worth of global consumption is above ground at any one time), we can use oil production as our measure of oil demand. Fortunately, we have access to very good data for oil production, which we can compare against global GDP growth, as in Figure 16.6.
Figure 16.6 Global GDP Growth and Oil Production
Sources: Global GDP: Central Intelligence Agency World Factbook5 & Global Oil Production: Energy Information Administration.6
Between 1985 and 2003, growth in both oil consumption and GDP enjoyed a stable relationship, marked as “Stage 1.” However, something extraordinary happened to the global economy between 2003 and 2007, where GDP growth accelerated sharply. I’ve marked this as “Stage 2.” This period is characterized by a startling divergence between the rates of growth in oil consumption and GDP.
One explanation for this departure rests with the explosive growth in debt (a.k.a. “credit”), which created a false appearance of growth in world GDP. I call it false because credit-fueled expansions aren’t sustainable, and they inevitably must be retraced, as our island nation example illustrated in Chapter 10 (Debt). Building off this debt, much of the GDP growth recorded during the 2003 to 2007 period included an enormous amount of purely paper-based growth that wasn’t a function of what we might consider to be real production. For example, Lehman Brothers grew strongly during that period, but its paper shell-games collapsed, revealing its additions to “growth” to be largely illusory. Ditto for AIG and quite a number of other financial firms; their “growth” was a mirage.
Figure 16.7 compares the yearly growth in oil demand to growth in GDP, displaying both the yearly growth rates for each for various time periods and then the ratio of GDP growth to oil-demand growth:
Figure 16.7 Yearly Rate of Growth in Global Oil Demand and GDP, and as a Ratio of GDP/Oil
Using the 1985 to 2003 period as our reference case (because it factors out the late stage of the credit bubble), we can see that every 5.3 percent expansion in global GDP was associated with a 1.5 percent expansion in oil consumption. This works out to a ratio of 0.27, meaning that for every 1 percent expansion in GDP, we should assume a 0.27 percent expansion in oil production (or consumption, if you prefer to look at it that way).
We might also note that the period from 2003 to 2007 was marked by an astonishing rate of global growth at slightly more than 10 percent. This is an astounding rate that would lead to a full doubling of total global GDP in less than seven years if it were to continue. Recalling what we learned about doubling in Chapter 5 (Dangerous Exponentials), this implies that the global GDP would produce and consume more goods and services in that same seven-year stretch as in all of history combined. Given what we have already learned about Peak Oil, and knowing the strong link between oil use and economic growth, you might want to ask yourself how likely this seems.
Because a 10-plus percent rate of growth is clearly unsustainable, we might instead suspect that our monetary and fiscal authorities would settle for a more modest rate of growth, let’s say 5 percent, in order to keep the Great Credit Bubble expanding and to match the rate of growth between 1985 and 2003. Unfortunately for their plans, it seems that the oil required to support that growth won’t be there.
Oil Demand
As further confirmation