Energy Counterpunch - Supply Crunch will finish off the banks [or not?]

Bank: Hmmm, I will exercise caution here... I don’t believe that the demand for energy is static or inelastic, which is what is proposed by this statement. Especially not in current conditions.
This hypothesis naturally assumes that the portion spent on energy remains constant, which it never does when demand dries up and capacity utilisation falls. Your demand for gasoline is certainly a function of your income growth. Job cuts as severe as in the US, will undoubtedly affect aggregate demand for energy …

SHOOT: It may not be completely static or inelastic but it is nevertheless crucial to everyday commerce that one could say there is a minimal static level and a minimal inelastic level. Consider for example your daily energy requirements. They may deviate some, but they don't deviate much. Now extrapolate this behaviour to your neighbours, colleagues, the market as a whole. Far more so than for any other commodity, fossil fuels are pretty inelastic in terms of demand - since it cannot be substituted (especially liquid fuel for transport). Consider the options when refuelling your car - just petrol or diesel.

So I would say the portion spent on energy remains fairly consistent. So even though demand may fall, you reach a minimum level of consumption which remains quite high irrespective of supply...

It's a long complicated story but I guess if this aspect isn't understood or respected (ie concerns about energy are now overrated) then we're simply due for another energy crunch when supply falls below that crucial minimum level of consumption. (Ie below already minimal levels of demand). Then we may see energy inflation and other forms of deflation if that is possible.

My feeling is that finance companies have completely misunderstood the market and if there is not a fundamental shift in thinking the banking industry won't even survive. Thus there needs to be a re-think from our conventional theories. I don't see that happening on a scale large enough to rescue the banks or commerce, probably because your arguments (which seem sensible) are the average insight into the present circumstances.

clipped from www.theoildrum.com Hamilton acknowledges early on in his report that the proportion of income spent on energy is an important determinant of consumer spending patterns. The theory is fairly simple: if energy expenditures rise faster than income, then the share of income for other things besides purchasing energy must decline, such as spending on mortgage payments for a second home in Las Vegas. In other words, rapid, large increases in energy prices may curtail consumption enough to trigger larger financial problems – like the bursting of a housing bubble – that when aggregated across an economy may cause or contribute significantly to a recession.

Oil-Rich Nations Use More Energy, Cutting Exports

Luis J. Jimenez for The New York Times

The economies of many big oil-exporting countries are growing so fast that their need for energy within their borders is crimping how much they can sell abroad, adding new strains to the global oil market.

Experts say the sharp growth, if it continues, means several of the world’s most important suppliers may need to start importing oil within a decade to power all the new cars, houses and businesses they are buying and creating with their oil wealth.

Indonesia has already made this flip. By some projections, the same thing could happen within five years to Mexico, the No. 2 source of foreign oil for the United States, and soon after that to Iran, the world’s fourth-largest exporter. In some cases, the governments of these countries subsidize gasoline heavily for their citizens, selling it for as little as 7 cents a gallon, a practice that industry experts say fosters wasteful habits.

“It is a very serious threat that a lot of major exporters that we count on today for international oil supply are no longer going to be net exporters any more in 5 to 10 years,” said Amy Myers Jaffe, an oil analyst at Rice
University. By CLIFFORD KRAUSS
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