Why are gas prices so high? The quick and dirty answer is that a potential Iranian conflict is ratcheting up prices, as speculators and suppliers prepare for possible interruptions to Hormuz shipping lanes. That's one reason, but we can't blame Iran for the cost of crude more than doubling from its recessionary lows. I explored other possibilities last year, pointing to the increasing difficulty of getting oil out of the ground, and the inability of new discoveries to meet rising demand.
But neither answer on its own really tells you why prices are so high, nor can they explain why we're unlikely to see any long-term declines. Oil lubricates the wheels of prosperity. The link between oil consumption and economic growth is so clear that it's likely to be a defining economic factor in the coming decades. Since the evidence weighs against the world's long-term ability to match demand with new supplies, the global path to prosperity may not be as clear as once believed.
Petroleum and prosperity
China's voracious thirst for oil is just as important a global trend as America's shifting oil balance. To see why that's important, all you have to do is look at the clear correlation between oil use and GDP on a per-capita basis.
Source: CIA World Factbook.
In 2010 the United States used just over one and a half times the oil per day as China and India combined. That number's been rapidly approaching parity in recent years. In 2000, we used nearly three times as much oil as both countries put together. In 1990 we used nearly five times as much.
Source: CIA World Factbook.
Hand in hand
The United States, China, and India use very similar amounts of oil when measured against per-capita GDP. But since American GDP per capita is seven times as high as that of China and India combined, we wind up using far more in the aggregate.
The discrepancy between the United States and other industrialized countries can be explained in part by regulatory restrictions. Fuel efficiency standards are stricter in many other industrialized countries -- the EU and Japan each mandate vehicles get more than 40 miles per gallon, and the EU's average vehicle fuel efficiency is about twice what it is in the United States.
The link between petroleum and prosperity is hardly limited to the countries listed. An International Energy Agency report released in 2009 highlighted close relationships between global oil demand growth and GDP growth worldwide. The connection is so tight that the growth and decline in global oil demand run parallel to recoveries and recessions as far back as data are readily available. And oil demand per capita is a clear indicator of economic prosperity as well. Africa and Asia, the world's least prosperous regions, make use of the least oil per person by far.
Rise of the rest
We've heard plenty of punditry on the imminent rise of the BRICs, with special focus on China and India. Eventually these two countries will surpass American GDP as long as they don't economically implode. How are they going to get there without oil? We can talk about renewables, but no alternative is close to easing the addiction of the world's richest countries. For the time being, oil is it.
And just how much oil are these two countries using? Since 1980, China and India have increased their combined oil use from about 2.5 million barrels per day to 12.5 million barrels per day.
Source: U.S. Energy Information Administration.
Both countries now use 150% more oil than they did in 1980. Meanwhile, use in the United States has only increased by 13%, despite the addition of 90 million new people. The United States has even seen a slight decline in oil use over the last decade, but that's been more than offset by average annual demand growth of 6% from China and 4% from India.
If all three countries continue on a course like the one they've charted since 2001, China and India will combine to exceed America's oil use by 2018. By 2023, they'll need more than 25 million barrels of oil per day. By 2030, combined demand from China and India will be just over 39 million barrels of oil per day.
If we really want to go to extremes, China and India would together demand almost as much oil as the entire world currently uses, if each country demands just half the oil per capita as the United States does today and both countries don't endure further population growth. That's not a sustainable trajectory and it's probably not going to happen. But even the "reasonable" trajectory I outlined adds 27 million barrels of oil per day to already stretched global demands, and that may not be sustainable either. The IEA's report anticipates a decline in non-OPEC production until 2014. By then China and India could be fiending for 3 million more barrels of oil per day. That's a lot of slack to pick up.
Assessing the implications
Super-investor Jeremy Grantham came to similar conclusions in a wide-ranging report on the cause of rising commodity prices. Global oil production has been bumping up against a ceiling of about 85 million barrels per day for much of the past decade. The size of new oil discoveries has been trending steadily downward since the 1970s. How can the world enable its poorest nations to grow without stretching oil supplies and prices to their breaking points?
Natural gas conversions are one possibility. The trucks-and-truck-stops tandem of Westport Innovations
A serious and sustained push for alternative energy is another possibility. Although the United States subsidizes alternative options quite heavily per unit of energy produced, there's no focused policy to seriously develop and optimize our energy options. Most countries are similarly haphazard in their efforts. Lacking such vision, it's hard to see private companies making enough progress to offset growing oil demand. The current political climate is hardly conducive to visionaries, which is a tragedy to say the least.
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