October 28th, 2010
05:19 AM GMT
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(CNN) – Earlier this week, HSBC economist Frederic Neumann sent out a research report noting the similarities between what is happening in the world economy now, and what was happening in late 2007:

“The Fed is about to engage in another round of easing, the dollar is weakening, soft commodity prices are rising, growth in emerging Asia is rising and equity markets are on a roll.

What’s missing, so far, is a more convincing push-up in oil prices. Still, the parallels are striking. Will it all end in another bust?

“What’s the upshot here? Watch oil. Plain and simple. If it heads to $100 per barrel, or higher still, you’ll know that it’s back to 2008 and another bust.”

The price of petroleum pervades nearly all aspects of the economy – not just energy, but clothing, fertilizers, pharmaceuticals and the cost of food, says Jeremy Rifkin, president of the Foundation on Economic Trends. At a speech he gave in Ottawa, Canada, last May, he made the case that it was high oil prices that triggered the credit crisis: As oil approached $150 a barrel, it revealed the real state of the economy and disrobed the false economy built on U.S. credit spending and debt.

“When oil went over $100 a barrel, prices went up. When it hit $147 there were food riots in 40 countries … the purchasing power of the entire civilization stopped,” Rifkin said. “The industrial machine, after two centuries, turned off in July of 2008: That was the earthquake. The collapse of the financial markets 60 days later was the aftershock.”

Rifkin believes that every time the price of oil per barrel approaches $150, a similar short-circuit of the global economy will occur.

That’s a pretty bleak assessment. But as the Economist explains, the cost of extracting energy from the ground is rising. Drilling in the 1970s “delivered around 30 units of energy for every unit invested.” Now it stands somewhere between 16-to1 and 20-to-1. The return on tar sands and ethanol are even worse, according to the Economist.

The cost of crude oil dropped below $82 a barrel on Wednesday – so far, so good. But is a climb inevitable?  And, if so, how will the world economy handle it?



soundoff (16 Responses)
  1. blaze

    OK so why is natural gas hitting historical lows?

    October 28, 2010 at 7:11 am |
  2. Eugene

    But shouldn't the lost profits caused by smaller oil output be compensated by well-developed drilling tech which I guess is more efficient and therefore cheaper than back then when output was 30-to-1?

    October 28, 2010 at 7:45 am |
  3. Oil Phreak

    So we did not learn any lessons we still aren't learning from both past and recent mistakes....makes me glad I am not in the US right now....seriously you guys should be thinking about reinvesting in building America's infrastructure.....
    1. We need to begin mining Rare Earth Again...
    2. We need to build more next gen nuclear reactors...(stop with the scare tactics...it is safe and clean...just look at France...the are doing it so is China)
    3. Start more R&D programs in developing more effecient batteries or other means for storing and capturing energy (before BYD and China leave everyone else behind)
    4. ______________(insert ideas)

    October 28, 2010 at 8:17 am |
  4. Dirk

    I think a climb is inevitable, and no I don't think the world can handle it.

    Look at the market; how it handles scarcity or what it perceives as scarcity. It can't, it acts with "panic" and the price go "booom" and players go speculate like there is no tomorrow – "because now its a very good time to earn big".

    The marketsolution to this problem is actually not a very good one so with other words; the taxpayers have to pay up IN ADVANCE for other solutions BEFORE the market can go in and run the show.

    We have already seen the alternative – market-collapse and yes it will repeat itself.

    And on top of that the U.S. is out-competed by cheap-a** well-educated workers from China.

    Good luck, have fun!

    October 28, 2010 at 12:54 pm |
  5. Bastiaan Sjardin

    Oil prices draining peoples spending power is both a strong and an original argument but:
    - How can oil prices influence the financial markets in the form of sub-prime mortgages and credits?
    The fact that rapid increment of oil prices 4 months before the outbreak of the economic crisis, does not imply causality per-se.
    I'm afraid that commodity prices are related to exponential population growth and the emerging middle class consumption demand in Asia and Brazil. In this way, commodity and oil prices is just another variable amongst the polluted housing market, currency war and overall credit crisis.

    October 28, 2010 at 1:08 pm |
  6. Harry

    Im extremely dissapointed with CNN that my comment is not posted here.
    I want 10 minutes of my life back. This sucks

    October 28, 2010 at 2:10 pm |
  7. GEORGE ARGIRIOU

    IT IS NOT THE BEST BLOCK BUT I COULD NOT FIND 1 ABOUT THE WORLD ECONOMY.HI I AM AN ENGINEER STUDENT IN GREECE.I HAVE A THEORY ABOUT THE WORLD ECONOMY.LETS SAY THAT WE CONSTRUCT AN OUTFIT LIKE THE IMF WICH INSTEAD OF LOANING MONEY 2 COUNTRYS IT WILL CREATE MONEY FROM NOTHING AND ADMINISTREIT IT 2 EACH PEOPLE ANALOGICALY WITH HIS COUNTRY AND HIS MONEY STATUS.4 EXAMPLE LETS SAY I TAKE 1000 EUROS A MONTH.IF THIS OUTFIT GIVE ME 2000 EUROS WILL I STOP WORKING?NO.I WILL KNOW THAT IN TIME IT WILL GIVE ME ANOTHER AMMOUNT OF MONEY.SO THE 2000 EUROS I WILL GIVE 4 PRODACTS THAT RPLEANTY IN THE MARKET.OFCOURSE THE PRICES WILL FALL AND THE MARKETS WILL MOVE 100%.EVEN THE VERY RICH PEOPLE WILL GET BIG MONEY AND THEY WILL B REACHER.EVERYONE WILL GET MONEY THE MARKETS WILL MOVE AND EVERY1 IS HAPPY.CAN ANY1 SHOW ME WHERE I'VE GOT IT WRONG COUSE IT SEEMS RIGHT 2 ME.,

    October 28, 2010 at 2:31 pm |
  8. DanUK

    I think it's pretty simple. Whoever controls oil, sets it's prices. Set them too high and boom, no-one can do anything. Set them too low, and their not making enough profits. So the people controlling the oil need to ask themselves: Do we want to be greedy, and cause a crisis? Or shall we be happy with what we earn, and keep things going?
    "Who is truly happy? He who takes pleasure in whatever he has" – Ethics of our Fathers.

    October 28, 2010 at 2:49 pm |
  9. GEORGE ARGIRIOU

    JUST A THEORY.

    October 28, 2010 at 7:32 pm |
  10. Shota

    Is the current relative ease in economic slowdown long-term or short-term? Are we going to see the economy growing and jobs created in the next 1-2 years or will the recession continue to exist?

    Since many investors have lost TRUST in investing in U.S. stocks what has to be done to regain their trust and confidence so that they can once more invest in American companies and workers?

    Shota
    http://www.ranxem.com

    October 28, 2010 at 8:06 pm |
  11. waynebernard

    China's growing demand for oil is the key to the price of of the commodity. Should their per capita demand reach 50% of the per capita demand of the United States, they will require approximately 25% of the world's daily supply as discussed here:

    http://viableopposition.blogspot.com/2010/08/china-now-number-1-and-number-2-part.html

    October 29, 2010 at 10:23 am |
  12. Digby Green

    There are several things to consider here.

    1 The cost of producing oil is obviously going up and also so is demand. But they are going up slowly and steadily ! Not in leaps and bounds like they did in 2007 and 2008!

    2 When oil was going though the rough we all asked who is causing it?
    Increased demand ? The oil producers?, the oil companies ? or speculators. They all denied it was them, and no senior economist or media has come out and said who it was.

    I believe it was speculators. But the oil companies and the oil producers went along with it as it increased their profits. This is why the Arabs own half of London now.

    I am sick of the man in the street being ripped off by fact cats, and being made to pay for and suffer from these booms and busts.

    October 31, 2010 at 4:26 am |
  13. Mike

    GEORGE ARGIRIOU – Find the caps lock key will ya?

    November 1, 2010 at 9:53 am |
  14. Bastiaan Sjardin

    @Shota
    Oil prices will rise with increasing industry demands. So increasing oil prices is also a precursor of economic growth. We need to really implement alternative sources of energy.

    November 2, 2010 at 4:05 am |
  15. SHARETIPSINFO

    Hi,
    Lot of global tensions is going on at this time. Japan is expected to pull out its money from the global market as they want to revamp their country now. In current scenario anything can happen in the Share market Investors are advised not to panic and stay invested only safe traders and investors should exit their long positions on every high and one can use every decline as an opportunity to enter market again.
    Regards
    SHARETIPSINFO TEAM

    May 7, 2011 at 8:38 am |
  16. free walmart gift card wii

    Do you have a Facebook page or Twitter? Would love to follow you there, I'm on my iPhone and love reading your stuff!

    May 16, 2011 at 7:19 pm |

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