It will get worse, and we had better start beginning to design global policy based on a world with a little bit less each year. Certainly, it will be a painful transition, but the geology (and the economics) are in.
There seems to be a visceral reaction to that premise - that growth is over - usually it comes without much critical analysis being applied. It's almost a default response, both from the majority of the left AND the right. Our survival instinct kicks in, and we gravitate towards viewpoints of optimism and hope and away from sobering reality and hard arithmetic. The idea that the Earth has natural limits is something they may indeed grasp, but the rationalization they use is "ok, but it's not here yet." ... Then there are those who actually accept that peak is here, but insist that it doesn't matter because the free market will endure, and price-point incentive to alternatives will arise in short order. ... The former denies known arithmetic, the latter attempts to assert that finance trumps physics and that transition time will be seamless. Both discount a dying world economy as merely "temporary."
In this thread, I will attempt to challenge those two lines of thinking.
Those who scoff that oil depletion is a problem like to apply ever-changing definitions to what peak oil actually means, so they can object to deviations in the model as they choose to frame it. Some insist "we" are saying that peak is about the resource volume as a whole in the long history of this tiny green planet, ... others insist "we" are saying it's about the near-impossible-to-define point when supply can no longer meet demand. Still others want to tell us our argument is about the apex in world production. There are elements of all those angles, and buttress the theme as a whole. We can debate any of those definitions, but the math still isn't good for denialists in any of those cases. ... Regardless, "peak oil" suffers a murky definition at this point, partly due to willful disinformation. ... So, to avoid confusion, and perhaps mitigate the endless stream of straw man creation, I like to define peak oil as the point where shrinking net energy sends the world into perpetual recession (or worse). I don't think anyone denies that global growth has plummeted since the 2007 "real estate" crash. In fact, since 2007, U.S. GDP is averaging 0.7. From post-WW2 to 2006, it averaged something like 3.4%. To me, 0.7, across a 5-year sample size? That's a problem. Some can cling to the literal definition of recession as two consecutive quarters of negative growth, but some of us know that's nonsense - by itself - and that GDP isn't even the lone metric of global growth. .... In any event, we are riding along the peak of world crude and condensate (the good stuff) production really since 2005, and there are no indications it can go any higher. We are maintaining minuscule production growth within the category the EIA likes to call "all liquids" by way of less energy dense alternatives that return a shrinking EROEI the more we have to rely on them. Light Saudi crude is NOT heavy Bakken/Orinoco low-viscosity crude, not by a long shot. Many people seem to lose sight of that fact when engaging in this subject material. In short, net energy is all that matters -- energy returned on energy invested (EROEI).
So, we know things are bad, and don't seem to be getting appreciatively better.... Europe is on the brink, China's growth has nose-dived, real U.S. unemployment is pathetic, tWoT is it's own perpetual feed loop, and civil unrest is almost everywhere, especially in key oil-producing nations. ... Municipalities grow insolvent, housing markets show no sustained signs of improvement, and grocery inflation suffers no end in sight. ... In taking in a big whiff of all that's currently sick about the world economy, some still want to insist it's all due to shady banking. I say Wall St. corruption only tells a fraction of the story.
Skeptics want to insist that spiking oil price points had nothing (or little) to do with 2008 credit crash. I can rely on a mountain of evidence - both direct and circumstantial - asserting that oil price had almost everything to do with it. The horrible loans within a corrupt Wall St. paradigm were certainly a big factor, but our version of unfettered capitalism has been shady for many, many decades. It took unique circumstances for the curtain to be raised on just how insidious and rapacious our great ponzi scheme truly is.
"cheap energy dictates to the markets, not the other way around..."
In its essence, outstanding debts are what if not borrowed future growth? Can we agree on that much? I'd hope so. Growth, ultimately, is fueled by cheap resources. What happens when there no longer is that decades-old promise of "more tomorrow?" .... Fiat money does not work the same if energy prices increase perpetually. As Nate Hagens, former EiC at theoildrum.com said this month at the annual ASPO conference:
"Money is created through loan. Before, this wasn't a problem. Money was scarce and there were many opportunities; now this has changed. Debt is a reallocation of resources over space and time: from the periphery to the center and from future to present generations. ... Now, every dollar of debt produces only a dollar or less. The problem is that standard economists thought that oil would behave like any other product - become cheaper and cheaper. Without debt we would be in (literal) recession since 2008 - what we do now will make the fall sooner and steeper."
The 2008 debt crash climaxed in Sept., a few months after of a spike to $143 per barrel. In January of that year, many non-conformist economists and most energy analysts were predicting a massive collapse in the fall of that year for the following reasons:
Peak Oil and the Financial Markets: A Forecast for 2008
1. Many monoline bond insurers will be downgraded in 2008, and some may fail.
2. More and more people influential in financial markets will begin to recognize peak oil.
3. Long term loans, including those for energy companies, are likely to become less available as awareness of peak oil rises.
4. There is likely to be a serious recession in 2008, deepening as the year goes on.
5. At least several large banks will fail.
6. The amount of debt available to consumers is likely to decline.
7. Fannie Mae and Freddie Mac may need government assistance.
8. A new class of homes -- those "never to be sold" -- will emerge.
9. Politicians will continue to make attempts to help homeowners, and perhaps other types of borrowers.
10. The amount of structured (sliced and diced) debt issued is likely to drop to close to zero.
11. Besides banks, many other players in financial markets are likely to find themselves in financial difficulty in 2008.
12. The value of the dollar will fall relative to some currencies, causing the relative price of oil to rise.
13. The stock market probably will decline during 2008.
14. Prices are likely to rise in 2008 for food and energy products. Prices may decline for homes and non-essential goods and services.
15. There is a chance that some type of discontinuity will make financial conditions suddenly take a turn for the worse.
"Once financial markets begin to recognize peak oil, I expect lenders will be more wary of long-term loans, because of uncertainty that these loans will be repaid once world oil production has begun to decline. Interest rates are likely to rise. Marginal borrowers may not be able to find credit at all. All of these effects are likely to make the gridlock in loans progressively greater over time.
The Fed may attempt to lower interest rates, but as defaults grow and lenders become more aware of peak oil, the risk margin for defaults included in interest rates will tend to rise. Thus, the actual interest rates charged to consumers and businesses may not decline, even when the Fed lowers target interest rates.
I don't expect the recognition of peak oil in financial markets to be complete in 2008, especially if a credit crisis causes oil prices to drop. Once peak oil is fully recognized though (most likely when its effects are very apparent, and mitigation is clearly not working), long-term debt may become unavailable, even for governments."
In the next few posts, when time allows... I will cover 1) the data - why we know peak is here already; and 2) why free market price points will not create game-changing alternatives.
Edited by Titus Pullo, 26 June 2012 - 02:58 AM.