The World's Real Oil Problem

| Mon Dec. 27, 2010 1:39 AM EST

Paul Krugman writes about the rising global price of commodities:

Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months.

....Today, as in 2007-2008, the primary driving force behind rising commodity prices isn’t demand from the United States. It’s demand from China and other emerging economies. As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies.

And those supplies aren’t keeping pace. Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived. True, alternative sources, like oil from Canada’s tar sands, have continued to grow. But these alternative sources come at relatively high cost, both monetary and environmental.

Oil plays a role in the world economy that's far more important than any other commodity, so when I'm in a mood to worry I worry about oil prices. I don't know if we've hit peak oil, but we have reached the point at which the growth of supply has reached the point where it can barely keep up with growing demand in a normal economy. (More here about that.) This means that whenever the economy is growing at a decent pace (and driving up demand for oil with it), the price of oil will inevitably rise sharply and slow down the global economy (at best) or throw us into another recession (at worst). In other words, oil has become a permanent limit to world economic growth.

Or maybe not. Like I said, it's just something to worry about when I'm in a worrying mood. Feel free to ignore this if you have other things to worry about.

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