Spare capacity of oil is quite small versus the global demand. I expect to see the price reflect this crunch within 12 months. OPEC’s spare capacity is being impacted by Libya’s internal conflict. The market will respond this coming winter unless the global economy falters. Either way, the economics will not bode well for the U.S. and its deficit. High oil prices will send money out of the U.S. whereas a faltering economy will reduce demand but also will reduce tax receipts thus keeping the deficit at record rates.
We must change the way we operate and factor in the cost of energy. Each purchase must consider the energy cost of acquisition. For instance, going to a restaurant 15 miles away costs $5 more in travel than the local restaurant. Is it worth it? Trip consolidation will become a way of life soon. Modification of behavior will create a reduction of Gross Domestic Product of the U.S. This will result in continued high unemployment and a weak economy.
Cheap oil is gone. $25 oil ended in 2005. The cost of exploration assures us of this and technology will not be the silver bullet everyone is hoping for. Expect the price of oil to be between $100 and $150 soon. Shale gas will help but the scale of the energy industry is so large that the depletion of existing production outstrips the increase in production in these areas.
Retirees will be hit hardest. Fixed incomes in the midst of rising energy costs will cause an increase in belt tightening. The government will continue to find ways to limit transfer payments such as social security. They will rework inflation and interest rates to minimize cost of living increases to the recipients. Expect family consolidations to occur. Independent living will only be a dream for many. In increasing numbers, grown children will resent the fact that they must provide for their parents. It will take a big dose of “Love” to overcome the hardships coming to many who have been able to coast through life in relative terms.