Reply to an email on recessions

Question:
I have been looking the BP figures. Am I right in assuming that the early eighties downturn in total production was due to economic recession? How would one know that a downturn now was not caused by similar factors? Another thing: When will the BP figures for 2007 be available? What is your sense of what is happening now with the economic down turn?

Answer:
The major drops in oil production in the 1970s and early 1980s were due to the OPEC embargo and the Iraq/Iran wars. This helped contribute to the economic recession which, as you say, reduced demand, thereby keeping production low.

It is true that recession now (and high oil prices) would reduce demand and we would expect this as a series of "hills" and "valleys" on the downslope of the Hubbert Curve. Economic theory would suggest that, as unemployment and inflation rose, demand for oil would drop, therefore decreasing the oil price and, as a result, production. Then people would start using the cheap oil resulting in higher oil prices and increased production.

But if we are really at the Hubbert plateau, then when the recession ends in a few years time, production might not be able to be increased. That will probably be the real proof that we are on the downslope. Production decreases now may be just due to recession. As with so much of the Hubbert Theory, we will not know it for sure until some time after the event.

The BP figures are usually published around June or July of the following year.

I'm not an economist but it seems that the present recession in the USA is due to many things, not just the price of oil (although that is contributing). There is the famous credit crunch which is due to excessive borrowing over the years. When anybody - person, company or country - borrows beyond its means, there will come a time when it has to face the consequences. The USA has had a massive debt for many years. Factors such as the massive military spending and the rise of China and India are all contributing.

My view is that, if the Hubbert Peak/Plateau was still decades away, then this recession would be like the ones of the past, eventually being succeeded by recovery. But this one is more complicated. I don't think China and India will be so affected by the recession so the demand for oil will not drop dramatically (unless a war creates a shortage such as a US attack on Iran). This means that, when the West reaches the point where it tries to climb out of recession, oil production will not be able to keep pace with increased demand and we may not be able to.

Other people with more economic knowledge than me think this recession could be worse than the Great Depression of the 1930s. I wouldn't disagree.