Oily CW

Oil prices have been modestly falling over the last month or so. The conventional wisdom is that if the U.S. goes into recession, petroleum usage will decline causing less demand.

I don't agree.

First off, the U.S. is a service economy driven by consumer spending, not manufacturing. The energy use profiles of those two economies are very different. For example, it costs just as much to light up a Macy's whether it's busy or not, while if you need to manufacture fewer cars, you close plants.

But there's another more important reason that I think a U.S. recession won't matter much:

My view is that people underestimate the seriousness of the energy situation. We are only finding oil at a rate equivalent to replacing the oil production that erodes every year as a result of the existing wells getting tired. In addition to that, China and India are consuming less than two barrels of oil per person per year while we consume 26 barrels, Western Europe consumes 13 to 15 barrels, and Japan, Korea the same amount.

As China and India increase their consumption, even if the two and a half billion people there only increase their consumption by a quarter of a barrel of oil per year, there’s no way the world can meet that demand. So I think the price of oil is going a lot higher.