by pup55 » Mon 30 Aug 2004, 13:31:42
A recalculation of the “economic value” of a barrel of oil from the Forbes article gave a lower value than mine from the blackout, approximately $1000 per barrel of oil, based on 5.93 thousand BTU’s per dollar of output. This is actually a lot less than the blackout value (my bad) but still can be used for another interesting estimate of the economic effects of oil depletion on per capita GDP. We take the current oil consumption, and assume various depletion amounts (percent per year), multiply by the GDP leverage effect, and you get the amount of GDP we do not make because we could not get the oil to do it. Subtract that from the current GDP, divide by the population, and end up with an estimate of per-capita GDP effects of oil depletion. I assumed a 1.5% per year population increase, and the current estimates of GDP and US oil consumption, and plugged in various depletion rates to see what was happening. The OADC had a nice article the other day to the effect that the current global “depletion rate” is 1 million barrels per day. Take 25% of that, the US share, and multiply by 365 you get about 9 million barrels for the US per year, which is a little more than 1%. Based on $1000 GDP generated per barrel of oil (the least efficient of the two estimates) and 1% depletion, you get the following spreadsheet.
GDP Oil Barrels/Yr Dollar effect GDP less Pop GDP Per
Yr Cons Depleted of depleted oil Depletion Capita
0 1.16E+13 7.30E+09 2.75E+08 $ 42,360
1 1.16E+13 7.23E+09 7.30E+07 7.30E+10 1.16E+13 2.79E+08 $ 41,472
2 1.16E+13 7.15E+09 7.23E+07 7.23E+10 1.15E+13 2.83E+08 $ 40,604
3 1.15E+13 7.08E+09 7.15E+07 7.15E+10 1.14E+13 2.88E+08 $ 39,756
4 1.14E+13 7.01E+09 7.08E+07 7.08E+10 1.14E+13 2.92E+08 $ 38,925
5 1.14E+13 6.94E+09 7.01E+07 7.01E+10 1.13E+13 2.96E+08 $ 38,113
6 1.13E+13 6.87E+09 6.94E+07 6.94E+10 1.12E+13 3.01E+08 $ 37,319
7 1.12E+13 6.80E+09 6.87E+07 6.87E+10 1.12E+13 3.05E+08 $ 36,543
8 1.12E+13 6.74E+09 6.80E+07 6.80E+10 1.11E+13 3.10E+08 $ 35,783
9 1.11E+13 6.67E+09 6.74E+07 6.74E+10 1.10E+13 3.14E+08 $ 35,040
Note first of all with the rate of population growth of 1.5%, you have to increase GDP by that much just to break even per-capita. So with a growth of 0, even with a depletion rate of 0, the per-capita GDP falls.
We remember from the Argentina example the other day that a 10% decrease in GDP was the “riot point”, the point at which there was enough financial pain suffered by the public to cause riots in the streets. If you are willing to accept that, the “riot point” at 1% depletion takes place within about 4 years. Of course, the Argentines might be more or less willing than we are to take to the streets, and also, this might depend a lot on how suddenly the problem hits, but nice to pick some point for comparison.
So here is the last column presented for various depletion rates:
USA Per Capita GDP at various Oil Depletion Rates
Rate of Net Oil Depletion
Year 0 -0.01 -0.03 -0.05 -0.07
0 $ 42,360 $ 42,360 $ 42,360 $ 42,360 $ 42,360
1 $ 41,734 $ 41,472 $ 40,949 $ 40,426 $ 39,903
2 $ 41,117 $ 40,604 $ 39,594 $ 38,605 $ 37,636
3 $ 40,510 $ 39,756 $ 38,293 $ 36,889 $ 35,543
4 $ 39,911 $ 38,925 $ 37,042 $ 35,272 $ 33,610
5 $ 39,321 $ 38,113 $ 35,840 $ 33,747 $ 31,823
6 $ 38,740 $ 37,319 $ 34,685 $ 32,309 $ 30,170
7 $ 38,167 $ 36,543 $ 33,575 $ 30,952 $ 28,641
8 $ 37,603 $ 35,783 $ 32,507 $ 29,672 $ 27,225
9 $ 37,048 $ 35,040 $ 31,481 $ 28,463 $ 25,913
As you can see, it makes an enormous difference what the rate of decline is. At 7% depletion, the “riot point” is reached in about 18 months. Naturally, if you use a higher estimate of the GDP/dollar leverage effect, the results are much more severe. I will spare you the spread sheet, but suffice it to say that at a GDP leverage effect of $7000 and a depletion rate of 1%, the “riot point” is reached in about a year.
So, knowing this, if you are one of the peoples’ employees running the show, what to do to minimize the effects of depletion on the per-capita GDP so as to keep from being strung up from one of the flagpoles on the front of the NYSE?
You could borrow money and distribute it to the economy, thus propping up the GDP. We are currently doing this right now, by borrowing from foreigners, domestic fat cats, and the future generations. It is tempting to allow the currency to inflate, and pay back with inflated dollars, but the foreigners and fat cats hate it when we do that, because it costs them wealth, so they will only let us do it for so long before they put up a stink, and quit loaning us the money. When/If the bond market collapses, you will know that this has happened.
We could use our military and make sure the “depletion” is not evenly distributed. In other words, we keep our supply, or even let it grow, and somebody else has to conserve. This will only last for so long. We will at some point run out of teenagers willing to do this.
We could use less oil voluntarily, but no one will have the stomach to propose it politically, after what happened to Jimmy Carter. Conservation, by the way, is just a redistribution or “non distribution” of wealth between us and the Saudis. The pie is still getting smaller, unless we actually figure out how to extract more dollars of GDP per barrel. Also, note that the more we conserve, that is the more dollars of economic value we extract from each barrel, the more sensitive we are to the effects of further depletion, per the above example.
An interesting approach would be to change the income distribution. This would redistribute the “pain” of reduced per-capita GDP by artificially pumping up the lower classes so they will not riot. Currently, we are doing exactly the opposite, by fattening up the upper classes and letting the lower sink or swim, in the theory that this is good somehow. This will also not last for long.
Alternately, you could delay the problem by slowing down the rate of population increase. In my opinion, doing this by reducing birth rate by edict in the USA cannot be done without reaching the riot point immediately. We have the option of closing our southern border, and deporting the part of the labor force that is in the country illegally, but that will also cause an immediate riot so will not happen until the per capita GDP of Mexico is sufficently high to encourage people to go the other way.
Of course, if there is no depletion, or there is actually oil supply growth, the Russians are right and there is infinite oil available, we do not have to worry about any of this.
On the other hand, if you are the Iranian Oil minister, or Chavez in Venezuela, or Putin, or even Osama, and you know the above, and you want to cause some mischief even faster, pretty easy to see what to do.
Maybe we are at the riot point now, per yesterday’s demostrations in NY. We will see.