Dynamics of Energy Usage is Changing The world of energy is undergoing dramatic change.

Throughout the 1990s, crude oil prices in the United States averaged $20 a barrel, with highs of $35 during the 1990-91 Persian Gulf War and lows of $11 after the 1998 emerging market crises, according to the Energy Information Administration. Since then, petroleum prices have skyrocketed.

"Oil, the Economy and the Stock Market," a white paper by Joseph H. Davis, Ph.D., and Roger Aliaga-Diaz, Ph.D., of The Vanguard Group, cites past oil price increases caused by oil supply disruptions centered in the Middle East. Notable oil supply shocks include the 1956 Suez Crises, 1973 Arab Israeli War, the beginning of the Iranian Revolution in 1978, onset of the Iran-Iraq War in 1980, and the Persian Gulf War.

Today, some analysts believe the dramatic rise in oil prices from $20 a barrel in 2001 to more than $140 in 2008 (before its recent dramatic drop back below $100) results primarily from the first global demand shock.

Throughout this decade, the global economy has expanded robustly and commodity demand has surged. China and India have more than doubled their combined share of oil consumption since 1990, and many experts anticipate that China's demand for oil will double again in the next two decades.

Economists have long observed that oil price shocks tend to precede U.S. recessions as consumer discretionary spending declines and further investment plans stall.

According to the study, the U.S. economy would have avoided five out of the past six recessions had oil prices remained unchanged.

Many emerging economies employ subsidies that keep domestic fuel prices far below the world price. As a result, these countries consume far more fuel than they would otherwise. By one estimate, countries with fuel subsidies accounted for virtually the entire increase in worldwide oil consumption last year. "Without this artificial demand stimulus, world oil prices would have been significantly lower," says economist Robert H. Frank at Cornell University’s Johnson School of Management. With a $2 per gallon subsidy in effect, gasoline sold in the world market at $4 would sell for $2. "The problem is that when the price of a good is below its cost, people use it wastefully. The external costs like dirtier air and increased congestion are hard to measure, but are nonetheless substantial," says Frank.

The good news is that the world, including poorer, rapidly developing countries, is taking more of an interest in renewable energy sources. A recent article in the Economist, titled "The Power and the Glory," reported that China has a large wind-generation capacity which is expected to grow by two-thirds this year, and that the country is the world's second largest manufacturer of solar panels. Brazil has the second largest bio-fuel industry, which already provides 40% of the fuel consumed by cars there. South Africa is leading the effort to develop a new class of safe and simple nuclear reactors.

The world of energy is changing.  5:04 PM •  0 Comments •