Where we are headed: Peak oil and the financial crisis

Nearly all of the economic analyses we see today have as their basic premise a view that the current financial crisis is a temporary aberration. We will have a V or U shaped recovery, especially if enough stimulus is applied, and the economy will soon be back to Business as Usual.

I believe this assumption is basically incorrect. The current financial crisis is a direct result of peak oil. There may be oscillations in the economic situation, but generally, we can't expect things to get much better. In fact, there is a very distinct possibility that things may get very much worse in the next few years.

In this post, I will put together some of the pieces I see. This post is based on a presentation, so includes more than the usual amount of graphics. The post repeats many things I have said before, but I wanted to bring more of the pieces together into more of an overview article. This is a link to a PDF version of the presentation. This is a link to the Powerpoint version.

Our One-Way Economy

Our economy is very much a one way economy--because of its heavy reliance on debt, it needs to grow.

It is easy to overlook the importance of debt. Most businesses would not be able to build new factories without debt. Businesses would tend to be much smaller than they are today without debt. International trade would be much more difficult without debt. Even at a personal level, debt is very important. How many citizens would be able to purchase homes without a mortgage, or go to college without a student loan?

In order for our debt-based system to work as planned, the economy needs to grow. Otherwise, there are way too many defaults.

In a growing economy, many debtors find that their financial situation has improved by the time it becomes necessary to pay back the loan. Even though it is necessary to pay back the loan plus interest, the debtor still has plenty of funds left over for other things, because of the growth of the economy, and his or her improved circumstances.

The reverse is true in a shrinking economy. When the time comes to repay the loan, many debtors find that they have been laid off or their incomes have declined. Repaying the debt becomes much more difficult. Default rates rise. Those who do repay debt often find they do not have funds left for all of their other obligations.

For a business, a declining economy makes capital planning difficult, because one doesn't know whether there will be sufficient demand for a product, or sufficient raw materials for the product, for the full lifetime of capital equipment that is being purchased. One would like to think that a new factory, or a new machine, will be usable for its planned lifetime, say 40 years. But in a declining economy, it is just as likely that some necessary element will be missing, 10 or 20 years from now.

In this environment, how does one amortize costs? Why would a lender be willing to make a long-term loan?

There is an academic paper called This Time is Different: A Panoramic View of Eight Centuries of Financial Crises. The paper finds that throughout history, government defaults on debt have occurred very frequently. The paper notes (page 15):

It is notable that the non-defaulters, by and large, are all hugely successful growth stories.

This is precisely the effect we would expect. When economies of countries are able to grow rapidy, they can repay their debt with interest. But as growth wanes, it becomes much more difficult to repay debt, and many more defaults occur.

Our debt-based financial system needs growth to continue. It is not a Ponzi scheme, but it has the same problem with not being sustainable without growth. The inability of the financial system to continue without growth becomes a separate risk factor to the economy, greatly magnifying the effect of even a slight long-term slowdown. The need for growth is the reason why Bernanke and Geithner are working so hard to get the economy to grow again.

The Energy Stumbling Block

If all of the raw materials we need continue to grow rapidly, then there is a chance the growth paradigm can continue. But increasingly, this is not the case. A major stumbling block is cheap energy:

Cheap energy keeps our cars and factories running. It leaves homeowners with money to repay their mortgages, and permits the long-distance transfer of goods needed for globalization.

We live in a finite world. Cheap energy can't go on forever. Eventually it runs out, and we have to move on to expensive energy. This is precisely what has been happening, for both oil and natural gas.

The OECD can be thought of as the organization of oil consuming nations. It includes the United States, Canada, Europe, Japan, and Australia. On this graph, Rune Likvern has plotted:

• The amount of oil consumed by the OECD
• The price of oil

What we see on this graph is that the oil consumed by OECD reached a peak in 2005, and has started to decline since then. Prices started to rise about the same time the amount of oil OECD was able to purchase began to decline.

What was happening at this time was that world oil production reached a plateau, about 2005. There were more and more bidders for what oil was available, and prices started to rise. OECD wanted more and more oil, but the oil producing nations also wanted more oil, and developing nations like China and India also wanted more oil. In response to all of this demand, the price of oil went up and up, but total world supply barely budged, and the amount of oil that OECD was able to buy started to drop.

The first pains of the higher prices started being felt in 2006, and rose in a crescendo until a major breaking point was hit in July 2008. In that month, the highest world oil production of all time and the highest price of all time both occurred, followed by a major break in the financial markets. Let's go back first to 2006.

Even prior to 2006, mortgage payments were a very vulnerable portion of the economy. Families had been encouraged to take on large amounts of debt, and the increased demand for homes had sent housing prices upward.

Once prices of oil started to rise, the higher gasoline and diesel prices helped push a system which was inherently unsustainable over. By 2006, families had become less able to maintain high mortgages, and home prices started to decline. This started the decline in home prices that we are seeing today. One can see from the graph that home prices in 2009 are still very high by historical standards, so this process is likely not yet over. If people are out of work and too many houses have been built, the ultimate level of home prices may even drop below historical norms.

This graph is a scatter diagram which plots the quantity of oil produced in a month and the price of oil in that month over a several year period. As the price of oil went up, the quantity of oil produced went up--but not by very much. The price finally hit the high point on the graph of $147 a barrel in July 2008, in the same month world oil production hit its maximum point.

At this point, a break occurred. Commercial credit started becoming much less available, which reduced demand. With the reduced demand caused by the lack of credit, prices dropped very quickly from $147 barrel to a low of $31 barrel in December 2008. The financial crisis as we know it had started.

This financial crisis is precisely what many of us had forecast would be the outcome of peak oil, because resources need to be level to increasing in order for the economy to keep growing. (One can disguise the lack of growth for a time by expanding credit, and Greenspan used precisely that approach in the early 2000s.) Once available resources start declining, growth begins to decline, debt defaults start rising, and soon after that, credit availability starts to decline. We can summarize what happens in the following chart:

All of these problems lead us to the current financial crisis, caused by trying to continually expand our economy in a finite world. Lack of low-priced oil was a major limiting factor. Even if we had managed to get past the need for low-priced oil, there were other limits as well that we were reaching, like fresh water and cheap natural gas. I won't be able to talk much about these today, but these limits would also tend to have the same impact on a financial system that requires growth--cause massive debt unwind, and possible collapse of the system.

The Underlying Problem of Peak Oil

Nearly all readers of this site are familiar with Peak Oil Theory.

US oil production reached its peak in 1970. M. King Hubbert had long predicted a peak in US oil production about that time, but few believed him. At the time of the peak, the US was producing oil only in the 48 states. When the need for more production became clear, we were able to bring Alaska production on, after building a pipeline.

We were also able to ramp up oil production in the North Sea and in Mexico, soon after US oil production started to decline. These sources are now beginning to decline as well. One can see from these graphs that the shape of production curves varies depending on location. It is not always symmetric.

This is a graph from a recent OPEC publication. The graph is a bit confusing, because it shows two things on it--OPEC oil production, using the scale on the left hand side, and world oil production, using the scale on the right hand side.

Once prices dropped from the high levels obtained in July 2008, companies suddenly became a great deal less interested in producing oil. New projects were put off, because the available price of oil dropped below the cost most companies needed to bring on new production. The graph indicates that production fall immediately after the drop in price.

(Note: Companies by and large didn't "shut in" existing production, because much of the cost for existing production had already been incurred, and the marginal cost for maintaining production was quite low. The continuing production from these older wells is the reason that we are temporarily able to buy oil cheaply now, even though we can't expect this long term. Production from these older wells declines each year, and must be made up for by new wells, if production is to even remain flat.)

(Note: The drop in world oil production in September 2008 was the result of two hurricanes in the US Gulf of Mexico.)

Tony Eriksen ("ace") made this forecast of oil production based on an analysis of likely future production for individual large fields, from this database. Prior to the drop in price, it looked like world oil production would continue on a plateau for a while longer, or possibly even increase a bit. Once companies understood the drop in price, they started deferring production plans until prices were better. But existing fields continue to decline due to depletion. The result of the cutback in new production, and the decline due to depletion in existing fields, is the expected pattern of decline Tony shows in this graph.

Where is the Energy Sector Headed?

As I indicate on this slide, I see the major factor affecting the energy sector to be the credit unwind. Pretty much all sectors are affected, because the collapse of the credit market affects the entire economy.

The problems of the credit unwind are pervasive. There are both the direct problems of not having credit, and the indirect problems of low prices and low funds available for investment. The result of this is that net investment drops considerably.

There seems to be lots of supply out there, but there isn't a good way to get to it.

The situation with natural gas isn't too much different from that with oil. Conventional natural gas is the inexpensive natural gas. It has been declining in supply. Unconventional natural gas is generally quite a bit more expensive. At today's prices, it doesn't make much sense to drill new unconventional wells, because the costs exceed the likely price that will be available.

Most unconventional gas is too expensive to produce at today's prices, so decline is likely in the next few years. Small companies are leaving the business, and not likely to come back, even if the price of gas goes up again.

This graph shows the number of drilling rigs in operation in the US, both for oil and for natural gas. These drilling rigs are leased, so a company cannot easily stop drilling until its contract is up for renewal. Even with this limitation, the number of drilling rigs has dropped almost in half from the high point, for both oil and gas. The drop in drilling rigs doesn't immediately affect production, but one can be certain it will affect production long-term. We are living in the calm before the storm.

Lack of growth is causing the credit unwind. There is nothing Bernanke or Geithner or the G20 meetings can do to fix the lack of growth--it is closely related to the lack of cheap oil and cheap natural gas, now that these have been depleted.

Growth is not possible any more--at best, we will get oscillation. Prices will drop, as it has recently. Demand will start to pick up again. Prices will rise rapidly, until a new lower production limit is reached, and more defaults on debt will occur, starting the cycle over again.

There is a real possibility that the whole system may crash. The value of the dollar may drop, or countries may become afraid of international trade, for fear that trading partners will not be able to make good on their promises. It may be necessary to start over with a new financial system that does not permit much debt. (This would not be easy. Governments are often overthrown when currencies fail.)

It seems to me that the amount of investment is likely to drop, even below the level it is today. The reason that investment is likely to drop is because the credit unwind is only part way finished. Without growth, the credit unwind can only continue. With low credit availability, prices will stay low. The amount of cash flow oil companies and other energy companies will have will stay low. With little opportunity for borrowing, there will not be very much income available for investment.

With little investment, even forecasts such as the one I showed by Tony Eriksen may prove to be optimistic. Instead of oil production declining slowly, it may decline much more quickly:

Such a drop in production might occur if there is a major financial crash. (See Where Is Oil Production Headed?: An Adverse Scenario.)

Long Term Prospects

Even the good scenario is not very good. Oil, gas and other commodity prices may fluctuate, but there will be little credit and little funds for investment. The economy will be doing no better than today, and quite probably worse.

In the bad scenario, there will be a major financial crash, and the United States will somehow need to replace our currency (and the currency of other countries around the world) with a currency that is less tied to debt--perhaps a currency tied to natural resources of some kind. Countries may cease to trust each other, and there may be a rise in protectionism. If new currencies are not adopted immediately, it may be difficult to carry on business.

Planning for the future, we need to assume that credit will be much less available than it is today. Cash will be king. In planning, cash flow will be more important than discounted present value. Economic growth will be something remembered fondly from the past. The closest approximation will be a temporary upswing while the world is oscillating between shortages at high prices and low prices with little credit availability.

The world is likely to become more localized in all of this. Successful companies will emphasize long-term relationships with local customers.

For Further Reading

Our World Is Finite: Is This a Problem? April 2007

Peak Oil and the Financial Markets: A Forecast for 2008 January 2008

Where Is Oil Production Headed?: An Adverse Scenario March 2009

For those still skeptical of the tie in between higher oil prices and housing, I recommend a reading of Driven to the Brink. How the Gas Price Spike Popped the. Housing Bubble and Devalued the Suburbs (PDF).

The collapse of America’s housing bubble—and its reverberations in financial markets—has obscured a tectonic shift in housing demand. Although housing prices are in decline almost everywhere, price declines are generally far more severe in far-flung suburbs and in metropolitan areas with weak close-in neighborhoods. The reason for this shift is rooted in the dramatic increase in gas prices over the past five years. Housing in cities and neighborhoods that require lengthy commutes and provide few transportation alternatives to the private vehicle are falling in value more precipitously than in more central, compact and accessible places.

The (permanent) loss in value for decentralized housing locales could be estimated by calculating NPV of annual payment streams for extra commuting costs. It was estimated in Wisconsin alone 50 cents of higher gas prices resulted in $300 million in annual gas spending; that spending comes out of home site prices (land values). A two-dollar price increase, $1.2 billion annually, NPV for a twenty-year time frame: ? Factored up for a national loss estimate= ?

I suspect easily $1 trillion in real estate value vaporized due to increased commuting costs. That would represent a roughly $10,000 discount on the site value (land alone) for about 100 million homesites nationwide. This value only returns if long-run commuting costs return to late 1990's/early 2000 values. Likely? Not. So, how to value all the loans associated with that land? Add on top of that destroyed structural value (pipes stolen, etc.) and add on that the declining employment and wages (net demand for housing). We are paying/have paid a hefty price for not planning for peak oil. Whoops.

In 2008, New Orleans home prices rose 4%. Much of that is post-K effect, but unflooded real estate in my area is definitely up.


Are wages and salaries going up too?

Are houses 2.5 to 3 times average yearly wages salaries?

A single shotgun (~600 sq ft) in decent condition in a decent neighborhood (say Gentilly) can be bought for $75,000. 75K is significant, because that is the homestead exclusion for property taxes in Louisiana.


A double shotgun renovated as a single shotgun (1,200 sq ft) for $75,000 about 6 blocks from the French Qtr on the border between good & bad neighborhoods.


I know analyses have shown that the drop in home values is much greater in distant suburbs than in central cities, going along with what you are saying.

The distinction between land values and home values is important to maintain. There are thousands (millions?) of vacant home sites, the inventory of lots, that quickly lost value. For an interesting example, see the unfortunate saga of one little regional player, Lakeland Finance in Minnesota. They obtained their funding for exurban projects from some now familiar faces (Bank of Scotland) and lo and behold, they have no idea how to value what was supposed to be $500 million of far-flung residential bliss.

Minnesota's housing wastelands

Millions in loans with no appraisals? That was business as usual for one Minnesota lender that didn't have to worry about regulators. Now it's insolvent, and cities and homeowners are stuck cleaning up the mess.

The Star Tribune site has a link to the RBS receiver report for these "troubled legacy assets" and the story includes some apocalyptic photos of what's left behind.

Demographics are also a factor in the collapse of demand for distant suburbs. Young families with children are a declining share of the population and this shift will grow in coming decades. So, land for commercial and residential development in distant suburbs is a bad investment, regardless of gasoline prices.

In other words, the drop in gasoline prices won't restore the distant suburbs, even if the disastrous credit conditions could be taken out of the picture.


And then there is the problem with net oil exports. Compounding the problem is the fact that the volume of net oil exports tends to be "front end loaded," i.e., as one would expect, the bulk of net exports occur around peak production. For example, Indonesia had shipped 44% of post-1996 cumulative net oil exports by the end of 1998, with the remaining 56% being shipped in the following six years. Our middle case is that the top five will have shipped about half of post-2005 cumulative net oil exports by the end of 2012, with the other half being shipped from 2013 to 2031.

Average annual US crude prices versus actual (EIA) and estimated (2008) net oil exports from the top five net oil exporters:

I got the opinion that the financial problems grew faster then the possible
extraction and utilization of unlimited mineral resources. It is possible
that high gasolene and heating prices in USA conencted to peak oil or if you
wish the bottlenecks in the extraction of resources triggerd the financial
crisis but if that had not happend the bubble ought to have popped in a few
months or years anyway.

But unfortunately I don not know how to prove that opinion.

When analyzes what the situation should look like, and comes up with an expectation as to how things look, and everything falls in place according to expectation, one has a fair amount of confidence that the model works. Go back and look at my post from 2007, when I was not yet on the staff of The Oil Drum. You might also look at my Financial Forecast for 2008.

Gail, I've suggested in the past actually calculating the differential on the amount of money spent on fuel, heating, etc., by the public as a result of the higher prices. This would help move your idea from theory to near-fact as the $ spent will likely align very nicely with what people couldn't pay on their mortgages.

You'd have to be a little careful with food and bio-fuels, etc., but I did a very rough calculation and came up with between 1 and 1.5 TRILLION dollars between '03 and '08. Back then, that was a lot of money.

But my math skills are non-existent and I'm just an angry keyboard monkey.



Good idea, but I am not sure I would know exactly how to go about it, either.

For one thing, the higher price of oil translated into higher prices of food and of goods of all sorts, so the homeowner got hit in many ways.

Also, it seems like there is sort of a multiplier effect as payments work their way through the system. The money a homeowner spends on oil products goes to a significant extent to pay foreign producers of that oil. If the homeowners had spent the money on their mortgage, this money would have gone to pay various employees of the mortgage company and holders of the debt, and they might have bought some additional products as well. This additional money would have helped the economy, over and above the original impact.


I don't think it would be an efficient use of your time, nor would it be necessary, to track all that down. Just covering the basics of oil prices, (some of) the various fuels and some of the food commodities (particularly in relation to ethanol) would be enough to establish a minimum level of additional costs high enough to support your thesis. Maybe not even all I have listed. Like I said, I'm getting between 1 and 1.5 trillion based on oil alone.


Go back and look at my post from 2007

The relevant paragraph appears to be:

"We can't know for sure what will happen, but these are some hypotheses:

1. Initially, higher prices for energy and food items and a major recession.

If the supply of oil lags behind demand, we can expect rising prices for oil and gasoline and possibly other types of energy. Prices for food may also rise, because oil is used in the production and transportation of food. Recession is likely to follow, because people will cut down on their purchases of discretionary items, so as to be able to afford the necessities. Layoffs will follow. People laid off will find it difficult to pay mortgages and other debt, so banks and other creditors will find themselves in increasing financial difficulty."

Your hypothesis appeared to be that the order of events would be:

  1. Oil prices rise
  2. Discretionary spending falls.
  3. Recession occurs.
  4. Mortgages get in trouble.
  5. Banks get in trouble.

Is that what we saw? The order that actually occurred seemed to be:

  1. Mortgages get in trouble.
  2. Discretionary spending falls.
  3. Banks get in trouble.
  4. Oil prices rise sharply, then fall sharply.
  5. Recession occurs.

It's not clear that your model correctly predicted the sequence of events, and hence the causative links it draws are somewhat suspect.

Moreover, several of these events were already widely predicted by early 2007. The subprime crisis - and hence the seeds of the banking crisis - had already started and gained significant attention by the time you posted (timeline, CR).

It's really not at all clear that the causal link from oil to the financial crisis you're suggesting exists. Oil markets seemed to be quit well-behaved for months after the financial crisis was well-known, meaning that oil is not a likely cause. In fact, oil prices in were fairly low (about $50) in Feb 2007, at exactly the same time the financial crisis was gaining strength and recognition. If high oil prices caused the financial crisis, why was it still growing during a period of relatively low oil prices?

The available evidence does not appear to support the hypothesis that high oil prices caused the financial crisis. It may have worsened an already-existing problem, but it seems clear that problems in the financial system were widespread and widely known even back when oil prices were fairly low.

Evidence suggests that this financial crisis is not due to peak oil.

The order that actually occurred seemed to be:

1. Mortgages get in trouble.
2. Discretionary spending falls.
3. Banks get in trouble.
4. Oil prices rise sharply, then fall sharply.
5. Recession occurs.

Ah, more like this:

1. Oil prices rise sharply (The sharpest rise percent-wise was actually around the '03-'04 time frame.)

2.Mortgages get in trouble.

3. Banks get in trouble.

4. Discretionary spending falls (more).

5. Oil prices fall sharply

6. Recession occurs.

Moreover, several of these events were already widely predicted by early 2007.

As were PO effects by Campbell, I think is the oft-quoted in this regard. He predicted it in '06 for about when it all happened.

I have posted elsewhere some possible connections. To repeat and expand.

* Glass-Steagall: '99
* Cheney on oil decline: '99, ME the prize
* BuCheney ignore terrorism in favor of focusing on Iraq: '01
* 9/11: '01
* Iraq scapegoated: 9/12/01
* Plans for Iraqi oil drawn up: '02
* Invasion: '03
*Oil prices rise: '03 - '08
* Iraqi oil production bogged down in war; no oil dividend: '03 - present
* Iraqi oil law mired in controversy; strongly favors original Big Oil conglomerates tossed out by Hussein: '03(?) - present?

I disagree with Gail that PO is THE cause, but it was and is a significant cause if one just looks at the evidence.

Dang... baby crying...

Back. So, there are very clear correlations. The arguments over causation will require more than just opinion. I have already made my suggestions to Gail in that regard. I think you may want to gather evidence as to why these correlations are not causal since it is not only Gail making such connections.


Depends on when you start the credit bubble off :)

Obviously price increase for anything will cause problems if housing cost are going up at a rapid rate but certainly the decade of long build up played a role in eventually eroding consumer savings well before the final pop.

If you look at the housing bubble correctly in my opinion is something thats been building since the 1980's with a steady decline in the loan requirements and steadily increasing values one would then say that the housing bubble popped itself when prices started increasing to rapidly. Things simple got out of hand. With this viewpoint the housing bubble was already popping itself by 2003-2004 when it went insane.

Two external factors are involved at this point the initially low interest rates really driving the bubble then increasing interest rates and rising oil prices and finally the insanity of the bubble itself by 2005.

I'd argue that the final rate of increase in prices was the biggest driving force since it leapt home prices well beyond wages its even worse then the loans themselves. If prices had not increased so rapidly the availability of exotic loans would not have had as big of a impact. The reason is far fewer people would have sought them to purchase a home.

Any ponzi scheme carries the seeds of its own destruction intrinsically no external factors are required given this its interesting that the government effectively drove the housing ponzi scheme to a fast collapse with its actions in concert with rising oil prices.

If you think about it if oil prices had really increased first and the government had done nothing to drive the housing bubble so fast it burst then oil prices would have risen and housing would have cooled off and probably slowly deflated we would have never got this huge crisis we have now.

Now for the tinfoil hat crowd the real driver i.e low interest rates was after 9/11 and as the Iraqi war started up. So if there was a real decision to crash the decades long housing bubble by brute force then it happened then. Before oil prices went up but at the start of the US war for Iraqi oil.

So without intervention history would have been different the housing bubble would not have gone so high before it popped and rising oil prices would have resulted in a less vicious pop and no crisis.

Now I'm not suggesting that all of this was planned outside of interest rate changes the rest could readily have been simply making the best of the situation (if your a banker)
However even before I became aware of peak oil it was obvious that growth in China and India would eventually mean the US got a lot less of the world resources. I'd say this was blatantly obvious to everyone. And this rather obvious point is what lead me to look at resources and eventually find out about peak oil. Next I'd say that a peak by 2030 at the latest was probably broadly accepted even in the highest circles if not sooner so its also obvious using this that the US would be squeezed hard by 2010-2020 at the latest as global growth simply squeezed the pig (US) ever more.

Bottom line is the US was going to hit the wall within 20 years with the most generous estimates and this could be seen as early as 2000 esp if you included our financial condition even then.

You really don't need much of a tinfoil hat to recognize that we where in sight of the end of the oil driven growth economy at least for the US. I guess at this point you really only have two choices either too collapse it slowly and live with the situation or rev it up till everyone hits the wall and try to grab the pieces before it falls apart. One has to guess that if this was the thinking then the real game was how do you make China fall ?
A slow collapse would simply have resulted in China bolstering its internal economy early on and not becoming so addicted to exports. If you look at the history we also really suckered in the Chinese big time after 2000.


But the decisions seem to reach even farther back in time. The roots of both the housing bubble and the trade deficit extend back into the 1980's.

The end result for the US seems to be no matter how you look at things that the peak in US production which was obvious by the 1980's seems to have driven most of the long term decisions and trends that where finally it seems forced to blow up now. Also one might guess looking at Alaskan production that by the mid 1990's or so that it was obvious that Alaska was not going to save our internal oil production. And last but not least given falling domestic oil production and growth in China with our without the active participation of the US in playing the export game the US would have been marginalized.

So although the exact timing of various things is not clear I'd say the big picture concerns and early decisions where made back in the 1980's and repeatedly reaffirmed and made from then on out. In fact following the fate of oil and money in the US back in time. Nixon left the Gold standard in 1971 US oil production peaked in 1970.

Striking coincide is it not ?

A massively unregulated and overleveraged financial market allowed for hyperinflation of commodities prices over and above real demand as well as pumping up of demand by priming credit markets for houses/credit cards.


So this was a positive circle. Easy credit to consumers was offloaded as CDOs, etc. squared and cubed to the nth degree and proceeds reinvested in anything available at the moment, gold, dollars, oil, etc. Now if markets had been regulated and no offshore derivative stuff then a rational price for houses, commodities could have been achieved. Make originating banks keep loans on their books and speculators take delivery of commodities and then you would have seen no bubble and no bust, just a slow growth cycle according to population growth until real geological PO squeezed it dry.

To some extent but the shape of extraction of a resource depends on of course the willingness of people to extract it.

The only example I can think of for rational extraction of a non renewable resource is stone quarries. In general we have to have stone ( even for concrete of course ). So its a intrinsic resource but its also one we will moderate our use of i.e use substitutes or alternatives if it becomes to expensive. Stone has its own unique set of economics but it is arguably and example of a resource that can be locally depleted and that we have adjusted to deal with.

If you really want to follow this conjecture through then you would need it seems to ensure that oil would have for some reason been using locally. Tar for example was used for thousands of years in a manner similar to stone.

It seems that if you dig into the problem then you see if a society does not make a resource intrinsic in the sense that its unable to substitute then it never really gets into a trap with the resource. The only example I have of this and its arguably weak is stone. We use it where it makes sense and don't where it becomes uneconomic. Local depletion never really scales to cause a peak oil like effect.

Maybe the old salt trade is another example hard to say the economics of the ancient salt trade are hard to understand everyone gets focused on the fact that in some place salt was worth its weight in gold. They tend to not follow through the entire trade system for salt.

However this is a good link but like I said to fixated on the price of salt.


1. Oil prices rise sharply (The sharpest rise percent-wise was actually around the '03-'04 time frame.)

Percent increases aren't what matter. A change from $100/mo to $200/mo is much easier to fit into the family budget than a change from $300/mo to $500/mo, even though the former is a larger percentage.

Moreover, saying "oil prices have been rising for 5 (or 10) years" doesn't have any predictive power. That's such a long period that a recession is statistically likely to occur during that period, so it's very difficult to draw a causal relation. With such a long span of time, there's a large risk of coincidental or post hoc reasoning. The terrorist attacks in London came after several years of rising oil prices, but that gives no indication of a causal relation.

If a trend continues for 5-10 years, lots of stuff will happen during that time, but that doesn't mean the trend caused any of it.

"It might be a correlation, it might not!"

Well, thanks, Pitt!

Now, care to actually address anything I said?


I have a few issues with the way Gail predicts this to play out.

1. Credit isn't gone, its trapped. There are banks itching to lend, but with the daily fluctuations in political solutions for the banks that lent themselves into insolvancy, the borrowers and lenders are afraid they'll get the raw end of whatever deal washington hands down next if they accept/let go of the money. the inability for the administration/political leaders to accept the fact that the money is gone/we can't pay our treasury bonds will keep the nation zombified like japan, money afraid to move. The key would have been to reveal losses, seperate good and bad debt and dissolve the destroyed banks. Instead, we continue to play the music in the game of musical chairs, hoping that as long as no one sits down, no one has to be out. There is no happy solution for Obama or any of us in the short run, but the longer this drags out, the longer our misery lasts.

2. Oil investment need not be low because of lack of overall economic growth. As demand for raw materials competing with other industries falls, the price of the top-down supply chain for oil and gas exploration falls too. If the average cost then falls below the average peak/valley, investment could restart in the oil industry. Deflation (an inevitable result of the downturn) could renew interest in exploration.

3. Your "One Scenario" graph makes no sense at all. Assuming trade continues, even the worst oil rate decline is less than that and there are already investments made that will reduce that decline. Assuming no new investment from here on out, its atleast 10x the length of time to reach 20 million. We're in for a slow-motion collapse at worst. If you assume trade breaks down, why bother having that graph at all, because essentially the US will be completely dependent on domestic supplies alone, which is not represented by that graph.

We may be in for the end of growth as we understand it or a backwards J recovery (recover above the trough, but fail to ever reach the economic peak again), but man's determination is to improve and eventually we'll be back with another innovation to get us cheap energy again. All we can do now is hold on and hope for wisdom in leaders (and plan for their idiocy), while preparing for our own survival.

As far as I see it, the one scenario graph is a potential future demand graph for oil, and no-one will pump oil for which there is no demand. For it to come about, the global economy must stagnate at or below our current level of consumption, because of some other constraint on it's growth. It could be food, water, natural gas, world war or something else. We do seem to be stuck with an economic system that is fundamentally unstable in any condition other than exponential growth, and until we redesign it, we are going to be living in very unstable times.

Great Article, Gail. Yr theory is just as good as anyone elses!

As for credit ... the Short History of Growth ...

What has been happening is a grand experiment, that the laws of supply and demand can be suspended indefinitely and that the costs of managing the resulting surpluses can be ignored or passed onto others and all associated risks hedged in derivatives markets.

Since an overview of the entire economy would be excessively large and time consuming, an example of the process in action can be found in residential real estate. I hope this will clear up misconceptions about what has happened in residential real estate and what are some likely outcomes. Take the time to read the entire paper, it is quite interesting:

The Evolution of the Subprime Mortgage Market

Souphala Chomsisengphet and Anthony Pennington-Cross

This paper describes subprime lending in the mortgage market and how it has evolved through
time. Subprime lending has introduced a substantial amount of risk-based pricing into the mortgage
market by creating a myriad of prices and product choices largely determined by borrower credit
history (mortgage and rental payments, foreclosures and bankruptcies, and overall credit scores)
and down payment requirements. Although subprime lending still differs from prime lending in
many ways, much of the growth (at least in the securitized portion of the market) has come in the
least-risky (A–) segment of the market. In addition, lenders have imposed prepayment penalties
to extend the duration of loans and required larger down payments to lower their credit risk
exposure from high-risk loans.

Federal Reserve Bank of St. Louis Review, January/February 2006, 88(1), pp. 31-56.

This is a good overview and quite thorough. The time period examined begins roughly in 1994- 95, at the end of the Savings and Loan crisis and deflation of the accompanying housing bubble from 1990- 93. It was at this time that sub- prime lending gained national attention. The study lists the reasons for the growth in this form of lending; changes in laws including those that regulated interest rates, bankruptcy and changes in the tax code; also an increase in securitization also the ocnsolidation of the enterprise into the hands of a few large businesses.

The primary issue of subprime lending beginning in 1995 is the simple fact of it; at that time it was clear that any person with means and the desire to own a house already owned one ... and some owned two! The only way to put customers into houses that were being constructed all around the country was to reach into categories of borrowers who would otherwise not qualify for a loan. This is the 'Why???' behind sub- prime loans.

It would have been sensible for house- builders to ... stop building houses ... or reduce the level of supply. Unfortunately for all concerned the house- building industry during the period built at least 2 million new houses in excess of 'solvent' demand every single year. For ten years and of twenty million houses; and many of these were larger and more expensive. For awhile the synergies of inflation- derived credit expansion allowed the housing market to defy supply and demand; Real estate brokers pumped up media- centric 'house cults' and an accompanying 'investment cults'. There were 'condo parties' in Miami, Los Angeles, Brooklyn and Las Vegas; loan originators became efficient at 'turning around' mortgage credit applications, securitization attracted an increasing flood of 'hot money' capital flows from hedge funds, banks and wealthy individuals. Eventually the originators were reduced to combing the drunk tanks and skid rows dragooning the bottom dwellers of the economic food chain. Dishwasers, ditch diggers, speculators; anyone who could hold a pen and sign the origination papers. By 2006, sub- prime home buyers were beginning to default before the end of the 'teaser rate' period. Others were in default at the end of their first months' occupancy. Supply and demand were seeking realignment.

As for the twenty million houses, these became an awful and perpetual weight upon the entire housing marketplace. A large percentaghe of these houses are in foreclosure, in others the owners owe more on the house than it is worth. At some point the excess houses will be demolished; there is no other way to rebalance supply and demand. The cost to do so is high according to this article in the New York Times about vacancies and foreclosures in Cleveland, OH: roughly $8,000 a house.

Many houses are currently worth a lot less than this, what could be considered a bottom- line valuation. In New Orleans, Detroit, Cleveland, Gary, Buffalo, Las Vegas, etc. there are many houses available for $3,000 or much less, even $100. At the median house price currently of $230,000 the twenty million excess houses are 'worth' $4.6 trillion US this is their 'wealthiness value' what the credit circus would apply if supply and demand could be re- suspended. At their removal price the twenty million are worth $160 billion and this is a GDP value since this number represents a liability - a cost. In the end it is not too unreasonable to measure the worth of all houses in America to fall to the value of $8,000, or what it costs to demolish them. Employment is declining, wages to pay for houses are likewise declining, the credit is systematically declining in all meanings of that term, investment values - that a house will be worth more to someone with money tomorrow - is declining.

The perishing of millions of elderly - the 'Greatest Generati8on' - is putting further millions of properties on the market as heirs demand cash ... this last and foreclosures are forcing the markets. Business hedging strategies and blindness to fundamentals are causing the house market to operate like the stock and futures markets did in October, 1987. In 1987 a similar hedging strategy fueled the Great Crash of October 17, 1987. If communications between Wall Street and Chicago had been better, the hedging technique would have driven both stock and index futures prices all the way to zero.

"Now this cannot happen!" although this is exactly what is happening right now this minute. It is happening in all markets and in all industries simultaneously; credit and finance, autos, houses, retail, general manufacturing, resources ... there is massive overcapacity.

The hedging and oversupply of credit distorted the market. For awhile the gravitational relationship between supply and demand was suspended; despite millions of excess houses - and cars and oil and shopping malls and stores and credit - the prices of all these things kept risiing.

At some point there was insufficient earning power to support the credit value of goods. That was and is the end of inflation.

The actions of the government are still distorting the relationship and are making the necessary adjustment much more destructive:

Says Doug Noland:

I would argue that this is a prime example of a dysfunctional market’s latest pricing distortion. As it did with the Mortgage Finance Bubble, the marketplace today readily accommodates the Government Finance Bubble. And while on the topic of mortgage finance, the Fed’s prodding has borrowing costs back below 5%. This cost of finance also grossly under-prices Credit and other risks.

I would argue that market pricing for government and mortgage finance remains highly distorted – a pricing system maligned by government intervention on top of layers of previous government interventions. These contortions become only more egregious, and I warn that our system will not actually commence its adjustment and repair phase until some semblance of true market pricing returns to the marketplace. Yet policymaking has placed peddle to the metal in the exact opposite direction.


our highly inflated and distorted system requires (annual) $2.0 TN or so of Credit creation to hold implosion at bay. It is my belief that this will ONLY be possible with Trillion-plus annual growth in both Treasury debt and Federal Reserves liabilities. Private sector Credit creation simply will not bounce back sufficiently to play much of a role. Mortgage, consumer, and business Credit – in this post-Bubble environment - will not re-emerge as much of a force for getting total system Credit near this $2 TN bogey. In this post-Bubble backdrop, only government finance has a sufficient inflationary bias to get Trillion-plus issuance. But the day that policymakers try to extract themselves from massive stimulus and monetization will be the day they risk an immediate erosion of confidence and a run on both government and private securities.

So, the outlook for growth or even inflation does not appear sanguine. If the Treasury defaults either by 'missing a payment' or by hyperinflation, the mechanism to drive real production increases will disappear. If the Treasury and the credit system can avoid a default abd allow "true market pricing" then all goods will be priced with an eye to how much it costs to take them to the dump ... at a very low, deflationary rate.

As for credit being trapped; it had best stay trapped. Leaking credit would inflate prices of goods before it trickled down to paying customers. Prices would rise, nobody would pay and the businesses would go belly- up. If there is one indisputable fact in this world it is this:

Everyone is broke.

Thanks for the interesting information.

Clearly our government caught on to the need for growth, and has done whatever it could to keep the appearance of growth going for longer than anyone would believe possible. Back in my Forecast for 2008, I talked about the "Never to be sold house". The idea was the same as what you are talking about. There are simply many too many houses. If families are poorer, and relatives have to start moving together (or even living in housing they can afford), there are going to be a huge number of left over houses. These extra houses will have to somehow be dealt with.

We likely haven't had much real growth (except in unneeded oversized homes; more expensive health care; and more financial products) in a long time. Somehow government statistics show all kinds of favorable statistics -- productivity growth, growth in real GDP, low unemployment--at the same time the system was starting to unravel.

Hey Gail!

First of all, thanks for that link, I've been looking for it - I know you posted it with a prior article.

One good turn deserves another; this is one of James Galbraith's studies:

I may have posted this once before, but it's worth looking at again if I have.

Mish had this posted over at his hut earlier (and this sort of thing can be found in more and more areas of the country.)

America's Abandoned Cities.

It's too bad that part of the 'development process' in making subdivisions is to scrape off the top layer of soil and haul it away in dump trucks for fill dirt on other developments. Otherwise the demolished developments could be converted to agriculture. The soil can be improved but ... it is a multi- year project.

As far as 'growth', it appears that GDP growth is mostly an artifact of monetary inflation. What's left over is (more or less) useless infrastructure; shitbox buildings, 'never to be sold' houses, freeways and bridges to nowhere in particular, waste dumps, dangling wires.

Somehow government statistics show all kinds of favorable statistics --

Gail!!! The government lies! Who would guess? Actually, they measure the surpluses and ignore the costs of managing them. Any surplus, even cash money, carries management costs that increase - exponentially? - with the size and quality of the surplus. A warehouse full of Picassos will require very expensive insurance, 'curators', climate control, security and weatherproofing. A warehouse filled with cash will require a number of financial planners and security - a bank.

I suspect a lot of 'wealthy' people will be surprised how fast their impregnible fortunes disappear.


Could immigration be used to soak up this excess of housing in the US and stimulate demand for other goods? I'm sure that at least a couple of hundred million Indians and Chinese or Mexicans could be rustled up to migrate to the land of the free and help solve the problem. They would probably be very industrious too and quickly refit far flung suburbs to productive uses.


Was your question facetious? I believe that trying to solve our over-growth, over-consumption problems by building a few more layers made out of immigrants for the bottom of the Ponzi pyramid is the180-degree wrong-direction answer. What will happen in 10-20 years after your boost of human nitrous oxide to the economy? An even bigger bubble and more horrendous crash with even fewer resources per person and more waste/pollution contaminating the environment?

I have been very surprised as this crisis unfolds that politicians haven't floated the idea of selling USA permanent residencies/work permits in a global auction. The USA still has a lot of value even as an option for a lot of law abiding global citizens. The Ponzi scheme would get fresh capital and the overall economy would benefit. Just a guesstimate: quickly 20 million could be sold at $50000 each. This is 1 trillion dollars-that is not chump change. That is just the immediate cash inflow to the Treasury-the effect on the RE market would be tremendous, along with the overall banking sector and retail. They are absurdly trying to keep a Ponzi scheme afloat without fresh capital.

Moonwatcher, Yes it was a little tongue in cheek but BrianT has pretty much summed up for me. I would not be surprised if the politicians seized on this as a "solution" to fill up empty homes and continue the consumerist orgy a little longer.

But more seriously I think is possible that China may come calling for its loans to be repaid and will want something a lttle more real that little bits of nicely printed paper. It would not surprise me if Chinas long term strategy is to take over the US by buying up all the productive capacity and then exporting their own people to work in them, displacing all the Americans. It may take fifty or even a hundred years, but the Chinese are very patient. They aslo pretty much hold the fate of the US dollar in ther hands. Call it a loaded gun, still holstered at the moment, but everyone knows whos belt it hangs on.

Good work, as usual, Gail.

One minor point I continue to quibble with: I am of the opinion that our economic problems are actually rooted not just in peak oil, but actually in peak global per capita energy. That peaked a couple of decades ago, if the Olduvai thesis is correct. (We've all seen the graph; I'm not necessarilly buying into everything about Olduvai, but the point that per capita energy has already peaked seems to be correct.)

If we had wise, forsighted, prudent leadership, we would have then shifted into what I call "managed decline mode" at that time. I believe that Jimmy Carter actually did try to take the first tentative steps in that direction. Unfortunately, we all know what happened to that.

What we got instead was an effort by people at the top to goose the system, resulting in a couple of decades of what I call "funny money growth". It is this story that leads directly into the current chapter with its massive over-leveraging of all types at all levels, and the impossibility of de-leveraging without inflicing massive economic pain.

What we are seeing now is a desperate, last-gasp effort on the part of the political and financial elites to restart the perpetual growth machine; stagnation and decline is apparently unthinkable and unacceptable to this lot, so they will apparently stop at nothing to try to restart the growth engine. (It is interesting that in past financial crises, A.K.A. "panics", it has been the masses that were in panic mode. This time around, it is the elites at the top that are in panic mode - though careful not to actually show any emotion in public.)

They will fail, of course. This is where peak oil does come in directly. Peak oil has now set a ceiling on the economy, effectively preventing any resumption of the old growth path (real or "funny money"); it is also going to be a ceiling that is continuously lowering.

Decline is our future; I see no real possibility of avoiding that. The only things that are still in question is: how fast, how hard, and to what level?

If we had been in "managed decline mode", the answers to those questions might have been: slowly, softly, and to a level that still allowed for a relatively good, civilized life for a lot of people on a sustainable basis. Unfortunately, every day that passes that we fail to shift into a "managed decline mode" renders that outcome less and less likely. We still haven't begun to shift into a "managed decline mode" yet; indeed, not only are we not even talking about it, I see no evidence that it is even "on the radar screen" of any of the political or financial elites. Anyone who even suggests that this is inevitable and necessary is instantly marginalized and ignored. This suggests to me that we are many years away from actually shifting to a managed decline mode. By that time, we will already be well on our way down the descent path, and a lot of options and opportunities to manage a slow and soft descent to one of the less painful outcome levels will have already been missed. Even then, I would not take it as a given that we must inevitably crash all the way back to neolithic or even paleolithic levels; however, the more catastrophic outcomes start to look increasingly possible the longer we delay accepting the inevitable.

"peak global per capita energy"

Could you clarify because I don't see a peak "decades ago."


I was not aware of the last four data points in that series. The fact that global per capita energy has been almost flat for two decades, though, still supports my thesis that the world had shifted then from growth mode to stagnation mode, with decline to follow. I don't know what the reasons were for the increase over the past four years, although I suspect that China and India have a lot to do with it. Most of us would argue that this is not sustainable and must certainly bump up soon against the peak oil ceiling.


"my thesis that the world had shifted then from growth mode to stagnation mode,"

You are probably forgetting that GDP/ energy(BTU) has been increasing by 1-3%per year over last 30years, faster after a price spikes, slower after a price declines BUT always going up. Vehicle fuel economy from 12mpg to >22 mpg, high efficiency light bulbs, better refrigerators, more insulation in homes etc, CA leading the way in US. No reason for this to stop in next 100years.
Also some growth in population, thus a big increase in GDP as well as GDP/capita over last 20-30 years.

The fact that global per capita energy has been almost flat for two decades, though, still supports my thesis that the world had shifted then from growth mode to stagnation mode

You've fallen prey to Simpson's paradox, and the data by no means supports the conclusion you're attaching to it.

See here for a detailed explanation; the short form is that it's an illusion caused by the developing world's population increasing faster than the developed world's population. Energy use has increased for everyone, but the larger proportion of people in developing nations skews the average.

I don't know what the reasons were for the increase over the past four years

Energy use has been increasing for almost everyone for almost all of the last few decades. To view the last four years as some kind of anomaly is to deeply misunderstand the data.

I believe that if you go back to 1973 you will see the peak per-capita oil conusmption. Population was a lot less then.

EIA data doesn't go back that far.

Euan did a bit a while ago that throws that myth on the fire.

Gail have you changed your thoughts on this topic? I thought that I had understood you to be saying that oil had had indirect effects on this financial crisis. The falling EROEI meant that there wasn't so much gain to be made from normal investments. This precipitated the search for yield and led to all the funny-money lending which we'e seen for this past decade, and which is now crashing.

However, in this piece you seem to be saying much more that it was the direct rise in price in oil which popped things.

Have I misunderstood you? or is this merely a chnage of emphasis?


The economy has to have growth to keep it going, so it is very vulnerable to a rise in oil prices, which cuts back growth.

There is a relationship between the amount of debt an economy can sustain and the economic growth rate. To sustain lots of debt, one needs lots of growth.

About 2001, when real growth was lacking, our leaders tried to ramp up debt based growth (low interest loans) and this was continued and expanded. The high level of debt required a high level of growth to sustain it. But with oil production stagnating, there was no way that growth could continue at a high enough level to keep up with debt, which is why the whole system is falling apart. Peak oil would assure that this effect happened eventually. The precise timing was influenced by the high level of debt in the system.

I don't think I am really saying anything different than in the past.

I think that I've seen you emphasize more that the reason why real growth wasn't coming after 2001 was due to lower EROEI, the end of easy oil etc.

But as I say, this may simply be me reading things in which weren't there, or just seeing things differently from day to day,


Ain't necessarily so ... the dynamics of financialization determine its structure, not the needs of the greater economy. The growth of participants' profits is what determines the architecture.

Much of the hoopla surrounding financialization has been the propaganda promoting a 'Post Petroleum' economy where 'IT Services' and 'New Means of Communication' will replace dirty, heavy industry. Of course, this was false.

I don't think it matters whether the this or that by itself is 'The' reason for our current predicament. Since energy is an input and it has a cost - relative and absolute - and that cost is hard to turn into an investment (there is no return on energy expenditure after the fact) the effects of accumulated energy cost will ultimately have a dampening effect on economic activity. That's why I cannot quibble with Gail's conceptualization. Even if it's technically tenditious today, it won't be sometime in the (immediate) future.

peak global per capita energy

Thinking of what the hubbert curve looks like, I'd expect that a longer rear-view mirror will show that problems started surfacing in the financial system when the upward trend in the production curve started to fall and that would be well before peak. It might correspond better to per capita, but still, "the system" itself would be sensitive to a falling rate of return regardless. That would be the point where marginal returns began to diminish - well before absolute returns and peak itself. [Sorry, I'm a little confused with first and second derivatives here, but the whole argument tying the financial system to Peak Oil seems to me about changes and inflection points in rates of change. Tainter.]

Another point is about "plenty of stuff if prices where higher". What if it's not the higher prices that is the issue, but the greater chunk of the economic pie overall that the higher prices indicate? That would put the argument in line with Hall's pieces of some months back, where he drew those charts of energy taking bigger and bigger bites out of the overall economy. It's not that the price is high, but that the price*quantity is too big a proportion of the economy. So there will never be a situation where we can find "plenty of stuff" at higher prices because we can't generate the price*quantity of stuff in aggregate.

The financial crisis is first and foremost an evironmental and ecological crisis. Limits.

So yes, Peak Oil has set a limit on the economy and we have to shrink because we cannot make the economic pie as big as it would have to be. It's an EROI argument as well.

And yes again to managed decline. Scale, distribution and allocation. What is fair and who decides. This is an entirely different economic paradigm. And if Nate is right, that the adherents of the current paradigm have to die off first, then maybe the "enlightened" might not want to do anything that decreases die-off among the old guard. For example, there are some proposals about extending Medicare, working from oldest to youngest. I've started making the case for working from youngest up instead. The boomer generation - we've ripped off enough of the planet - not our turn any more.

cfm in Gray, ME

I think you are right. As the rate of increase in fuel supply dropped, even this would be enough to make problems for our system that required growth. Our government, realizing the need for growth, would step in and push growth ahead any way it could--encouraging builders to build more big houses, even if we didn't need them; encouraging financing for even those who had no chance of paying the loans back; holding interest rates down (as it is doing now).

I agree it is a limits issue. One can print more money, but this doesn't make more resources. All we can do is allocate what is available.

Heathcare is a whole other issue. The elderly are offered surgery, no matter how old they are, or how poor health they are in. The amount of care provided in the last six months or year of life is very high, with very little benefit. We would be better off spending more on health care of young people. Also, why do we need so many specialists and sub specialists, with very high salaries? It seems like no matter how mundane the problem (draining a cyst, for example), one has to transport the elderly person to yet another specialist.

As the rate of increase in fuel supply dropped, even this would be enough to make problems for our system that required growth.

If oil supply growing less quickly were enough to destroy an economy, how did it survive the late 70s/early 80s, when oil consumption fell 20%, and didn't recover for twenty years?

Recent history tells us that an outright drop in oil supply, much less a mere slowdown, is not sufficient to destroy the economy. Why is this time so different?

Debt. Absolute and relative. Public and Private.

Why are you conflating falling supply with falling consumption, i.e. conservation?


This is not a popular point of view, and a lot of folks are going to disagree--vehemently--though it was iterated long ago by Colin Campbell (video).

So expansion tomorrow covered the debt of today. But unseen by anybody, or unrecognized, was that this expansion was not just money, it was the good old cheap energy to make the wheels turn and do everything. So we now face a situation, I think quite soon, when—and this is happening, the bankers begin to wake up, and say well this expansion isn’t going to go on anymore without the cheap energy to make it happen. That means that the massive amount of debt throughout the world is losing its collateral. It’s getting thin, thin cover. So I think the crisis that might emerge—and this…the physical decline of oil is only two or three percent a year, this is not a cliff or a catastrophe, it’s quite a gentle thing. But the perception that arises on passing peak, this long decline, this could come instantaneously to the bankers, who suddenly wake up and say, “My God! We’ve got bad debt on our hands.”

More recently, it was even articulated by the CEO of FedEx, Fred Smith (radio).

I didn't think we were in a recession. And when I said it, I didn't think that fuel was going to run to $147 a barrel. And people forget this because so much focus has been on the financial sector. And clearly it was over-leveraged and we backed into this subprime mortgage business and all of these derivatives and so forth. But the match that lit the tinder box was the run-up in oil prices, because what it did was to make the subprime borrower literally have to choose between putting the gasoline in the car and going to work or making the mortgage payment.

My own view is that this is for the historians to decide. And yet the claim that the inflection in the flow rate of crude oil in 2005 has nothing to do with the current economic collapse forces us to accept the following improbabilities:

1. That the state of the economy is completely unrelated to stagnant energy flows;

2. That the onset of collapse during peak oil is a mere coincidence;

3. That the many experienced academics who predicted a peak and collapse between 2005-2010 were just lucky;

4. That historical correlations between oil price spikes and recessions (1973-76, 81-83, 91-93) are irrelevant;

5. That the inflection in oil flow rate in 2005, the subsequent mother of all oil price spikes—WTI at $147 in the summer of 08—the subsequent flight of trillions in wealth from oil consuming nations to oil producing nations, the subsequent price spike in all oil-dependent activities, the subsequent reduction of discretionary spending, and the subsequent decline in the economy, is not sequential at all but an illusion.

We are living an experiment we cannot repeat while varying the conditions.

We can only guess what would have happened if, in 2005, the previously-undiscovered super-giant Ummagumma oil field in Pennsylvania had come on line; if oil production had gone on increasing exponentially; and if oil prices had stayed cheap. Would the real-estate-triggered collapse have been as comprehensive? Who’s to say?

Likewise, we can only guess what would have happened if, in 2005, our financial institutions had been as sound as houses (as it were); if debt loads had been sustainable; and if mortgage rates had stayed affordable to people of modest means. Would the peak oil flow rate and subsequent price spike have gone on to ruin the economy to the extent it is now? Who knows?

It will interesting to hear the responses to this.

But the match that lit the tinder box was the run-up in oil prices. . .

No argument from me.

My August, 2006 missive:

Net Oil Exports Revisited
by Jeffrey J. Brown

Mr. Witter estimates that a simple revision to the mean suggests a 30% drop in residential property values in the US over the next three years. This is without considering in the effect of further increases in energy prices.

I believe that vast expanses of American Suburbia are going to become virtually abandoned in the years ahead. Alan Drake has noted that a good deal of suburbia was so poorly constructed that a lot of it is biodegradable. Alan has outlined how we can go back to what we used to have: electric trolley cars connected to electric light rail lines.

Hi westexas,

I found this breakdown of stimulus spending. The section that deals with, "Fossil energy research and development" states a figure of $3,400,000,000. I have no idea if this is a large amount or not in relation to the problem, maybe you or anyone would care to comment?

It wasn't just Collin Campbell and I that talked about the expected relationship to the financial market. M. King Hubbert pointed out the relationship many years ago:

"The world's present industrial civilization is handicapped by the coexistence of two universal, overlapping, and incompatible intellectual systems: the accumulated knowledge of the last four centuries of the properties and interrelationships of matter and energy; and the associated monetary culture which has evolved from folkways of prehistoric origin… Despite their inherent incompatibilities, these two systems during the last two centuries have had one fundamental characteristic in common, namely, exponential growth, which has made a reasonably stable coexistence possible. But, for various reasons, it is impossible for the matter-energy system to sustain exponential growth for more than a few tens of doublings, and this phase is by now almost over. The monetary system has no such constraints, and, according to one of its most fundamental rules, it must continue to grow by compound interest. This disparity between a monetary system which continues to grow exponentially and a physical system which is unable to do so leads to an increase with time in the ratio of money to the output of the physical system. This manifests itself as price inflation. A monetary alternative corresponding to a zero physical growth rate would be a zero interest rate. The result in either case would be large-scale financial instability."

The steep ride up the and down the energy curve is the most abnormal thing that has ever happened in human history. Most of human history is a no-growth situation. Our culture is built on growth and that phase of human history is almost over and we are not prepared for it. Our biggest problem is not the end of our resources. That will be gradual. Our biggest problem is a cultural problem. We don't know how to cope with it.

In my opinion, starting about 1970, our MBA's got the bright idea that we could make the most of growth through leverage--borrow from the future to make more for today. This only works going up the hill. Once the economy starts going down, one suddenly has a mountain of debt that can't be paid back. Because of all this debt, there are often multiple entities with claims on the same resources. One has a huge immediate problem that is quite different from the slow geological decline of the oil.

In my opinion, starting about 1970, our MBA's got the bright idea that we could make the most of growth through leverage--borrow from the future to make more for today.

Really. You think that started in 1970. How cute.

wow. what an awesome quote. thanks gail. (that seems to be like my main post. sorry. don't get an ego, girl ;)

hubbert didn't freak out. im guessing he know approx. how much time we all had.

time can move so slowly. i believe bandaids will steer us clear of the worst of violence, the dies irae every doomer sees all too clearly.

it's so strange. i have two children, aged 2 and 4. my wife is a nurse, 26 credits away from being a practitioner. and we're like trying like all h e double hockey sticks to get our house in shape to sell. but then where to buy? countryish affluent suburb will be fine intra-societally, post-peak. but will the internally displaced metro area target it? medium(ly) affluent 'burb will be mediocre at best intra-societally, as the looser fringes tear at the greater fabric, but will it be ignored?

like i said, so strange. i think im about to go back to school to get my contractor's license in a jiffy, so i can install as many solar panels as possible as quickly as possible with what stimulus money i can get my hands on. that is a win-win-win situation.

still, where to live? and how do i clean up after these two angels fast enough to sell this damnibul house while opinion is up. up!

oh. ccpo. you are doing excellent work. thanks for your response a few weeks ago (just read it. (i am so busy)).

if gail's assertion that peak oil is now and massive drop is in 11'-12', then eroei will remain in obscurity (mechanically, and then academically speaking) for oh about 5-7 years. (and that's discounting military action.)

im so glad our president is our president. can you imagine if bush had been our president during peak oil? oh wait...

i really wish i could say something more technical.

(still firmly convinced that our fate rests in the hands of the scientists.)

thanks everyone,

Missing from this analysis is any acknowledgment of trade deficits and international capital flows.

U.S. Trade deficit (billions of dollars)

Year          Total      Petroleum    Pct Petroleum
                          End-use*       End-use
1998          247985       43348         17.48%
1999          345559       59187         17.13%
2000          449468      108284         24.09%
2001          427165       92950         21.76%
2002          484353       93234         19.25%
2003          547552      120402         21.99%
2004          666183      163998         24.62%
2005          782740      229191         29.28%
2006          836077      270918         32.40%
2007          819373      293221         35.79%
2008**        856177      418621         48.89%

*This includes petroleum and products extracted from petroleum
**Extrapolated for full year based on 1st nine months


These trade deficits were recycled back as low-interest-rate loans to U.S. corporations (mostly to the banking and shadow banking industries), causing inflated asset prices, including residential housing, commercial real estate, stocks, bonds, securities such as MBSs, CDOs, etc. and perhaps speculative instruments linked to the price of oil and gas.

This begs the question: "What would have happened if the U.S. could not have borrowed the money to buy oil?" I think three things might have been different:

1) One of the elements that contributed most to blowing up the credit bubble--the loaning back to the U.S. of dollars spent to buy oil--would not have existed, and thus the credit bubble would have been smaller.

2) If the U.S. had not been able to borrow the money to buy oil, it would have to have made do on less--U.S. demand would have been lower.

3) If U.S. demand were to have been lower, the price probably would not have acheived the heights that it did.

Also, all this analysis seems to be based on one assumption, and that is that economic growth is not possible without growth in energy consumption. It seems to me that "growth," which we officially define as GNP, is a value-laden concept. Could we not choose to redefine "growth" so that it is not so energy intensive?

I am afraid I couldn't cover everything.

Growth in this case really has to do with having income to pay back loans. Growth from the point of the wage-earner stopped earlier than growth from the point of view of profit-making corporations, because wages weren't rising. (We were hiring programmers from India instead.) Hence the early vulnerability of home mortgages to default.

Growth is also needed to pay back governmental debt. Does anyone really think the US economy will grow enough to pay back all of the additional debt we are taking on now?

Does anyone really think the US economy will grow enough to pay back all of the additional debt we are taking on now?

Barak Obama and his advisors apparently do, if last night's press conference is any indication. At least that is the official public position.

I believe the Obama administration is engaged in what might be called an economic hail mary pass. He and his advisors are not stupid. They undoubtedly know that the foundation of today's economy is crumbling and total collapse is a very real possibility. Remember when the president repeatedly warned that we face extreme economic problems? The media, market and politicians told him to stop being so negative and to give us "hope" that things will soon return to normal. Well, now he is following their advice. I understand that crying "FIRE!" in a crowded theater is not the best way to safely evacuate everyone. However, now we are being told that the fire really isn't so bad and is under control, so we can return to our seats and continue to enjoy the show. I think I will begin walking towards the exit sign.

"Does anyone really think the US economy will grow enough to pay back all of the additional debt we are taking on now?"

I do, if the economy grows at 3% and the US is paying 2% interest on debt above inflation, the governments revenues can grow more than 3% so principal will be repaid( if they have a Clinton type president/Congress that runs a balanced budget; 8years of GWB type spender/tax cuts could give a different outcome.) Raising taxes on those who can pay is a good start, raising gasoline taxes for all is an even better second action, raising sales taxes on low mpg vehicles even better, as long as the taxes are not spent on new highways.

Gail, thanks for this post. I just started a similar discussion on the Dutch Peak Oil forum today. Speaking about a coincidence. However... my conclusion is that the relation between peak oil and the credit crisis is not as tight as you say it is. I read the article on the rolling stone website: The Big Takeover ( http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print ) and after reading that i'm convinced that even if oil production still was rising we would have had a credit crisis anyway. Maybe a bit later, but eventually it would have crashed because the credit system was not sustainable by design (if you read the article you'll understand why i say this). By the way, i think the rising oil prices helped the credit system crash, but those high prices were imho also a result of almost the same greed as with the design and the abuse of the credit system and not so much the result of physical oil demand.

And if the relation is not as tight, maybe we can get a (small) recovery of the economy before peak oil really kicks in. Before the credit crisis we spoke about economical decline due to peak oil after 2010, 2012, 215 or even later... Were we really wrong then? When you just look at the production charts who would have thought that it all would happen so fast. Imho the correlation between the oil production (that is what peak oil basically comes from) and the economical data of the last year is not extremely high. Proving a causal connection is very far away, if not impossible...

Quite a few of us (M. King Hubbert, Collin Campbell, and myself, at a minimum) all expected this kind of problem, because money has to keep rising exponentially to repay debt with interest and resources can't continue to grow fast enough, even with gains from efficiency. See quotes elsewhere on the thread.

I suppose one can conjecture other explanations. I don't see a point in why, however.

1st point i try to make is that the credit system was bad enough in itself to crash and 2nd point i try to make that it's nearly impossible to "prove" a causal connection between peak oil and the credit crisis. It's too easy to connect peak oil and the credit crisis because they occur at the same time and some things we thought would happen after peak oil actualy happen.

I agree that Gail's work here is a bit too simplistic, but at the end of the day, her general observations are accurate. All the more so when you consider that the real power in the White House was Cheney, and nearly all the major players in that administration came from the oil industry, even C. Rice.

When you factor in that Cheney now-infamously implicitly cited Peak Oil was coming in 1999, and that they went into Iraq on trumped up charges, Greenspan's and Bush's blowing up of the credit bubble makes a lot more sense.

There is no way they didn't know this was coming in some form or other. Again, Cheney stated the need for something like 50 mbd of new oil by 2010 back in '99, while noting the ME was the prize.

So, yeah, it's basically impossible to say this is not all connected.

EDIT: I should add BuCheney needed the bubble to pay for the simultaneous wars and huge tax cuts.


While there is no doubt that the sharp run-up in oil prices has been a drag on the economy, I find it hard to see it as a main contributing cause to the suburban housing problem.

To take an example, if a not-untypical suburban household drives a total of 20,000 miles per year at an average mileage of 20 mpg, then they will consume 1,000 gallons of gasoline a year. Thus, in their case the difference between $2.00 gasoline and $4.00 gasoline amounts to $2,000 per year, a serious financial drain to be sure, but I think hardly enough to make most people decide to sell their suburban house, or to avoid moving to the suburbs, or to seriously drive down housing prices in general.

No, I think the effects of this financial mess, involving excessive bad debt, excessive leverage, and outright fraud, largely dwarfs the effects of peaking (as opposed to 'peak') oil. If our financial system had been healthy at the time of the oil price spike, then the effect of that spike would very likely have been only a minor downturn, not the near collapse we actually have.

This whole thing happened far to fast for anything solidly physical to have caused it.
Electronic money has no mass, moves at the speed of light, and can go in and out of existence with a stroke on a keyboard. Oil, on the other hand, does have mass and far more institutional inertia regarding the manner in which supply and demand try to come into balance.

joule -- Valid points to a degree but I'll offer my view. First, the housing melt down was triggered by mortgage defaults and not any lessened desire to live in the suburbs regardless of the price of gasoline. We would agree there perhaps. But the question really goes to the cause of the big increase in mortgage defaults. IMO, many would have defaulted even had energy costs not spiked. Too many liars borrowing money who had limited abilities to repay. For many of the others it wasn't the increase in the monthly gasoline bill. It was the loss of a job as a result of economic recession (or at least the slow down) brought on by higher energy prices over the last several years. But I would agree this is where the logic gets complicated: higher energy led to increased lay offs which led to increased defaults which led to declining home values which led to collapse of the over-leveraged financial system (especially the derivative market) which led to huge losses of equity in the system which led to huge declines in borrowing capability which led to a big drop in demand for housing which led to an ever decreasing ability for folks to refinance those adjustable mortgages which led to more defaults which drove home prices down even more which hurt the financial markets even more. So many feed back loops it difficult at times to see where one stops and another begins.

Thus the question seems to be could the increase in energy prices have really been such a tipping point? I agree that the system seemed doomed to fail just from the volume of potential bad home loans written. But would it have been as damaged without the energy price increases in the last 3 or 4 years? And had it not been so bad would the whole financial market not have collapse as catastrophically as it did? Every one is free to have their own answer but I don’t think it would be easily to back up any one argument too definitively. Just too many “what ifs”. One could make a point that the financial meltdown has brought about a delay in the negative effects of PO. Or just as easily say that we are suffering from many of those same proposed effects but due to a different source. Or that we’re seeing combined but interrelated effects of both. This is one reason I think it’s nearly impossible to predict how much or little current federal actions will help or hurt the system. It seems as though we’ve entered a world that will be dominated by unintended consequences. The only real questions is how badly we’re injured or aided by those circumstances.


I wholly agree with you that there are all sorts of messy feedback loops at work here, probably many of which we are not even aware of. The possible chain of causes you mention sound plausible to me, and I really think it's hard to pin it all on any single cause, which is why I think that this notion of peak oil being the primary cause is more than a bit dubious.

Suffice to say that the our entire system is getting increasingly stressed from multiple directions. At least that we can be absolutely certain of. But just as different individuals are susceptible to different kinds of health problems, so too do different complex economic systems get sick in their own unique and largely unpredictable ways. I guess this is just a different way of saying that failure modes are hard to predict, but that when a system gets over-stressed, it WILL eventually fail one way or another.

I think I agree with this point of view.

Why do we have to try to explain the collapse as a result of high-oil prices and high-oil prices as a result of peak oil (or some other nice explanation of a clean chain of causation).

I think we are seeing a system stressed to the breaking point. When it finally goes "kaboom" a lot of "unusual things" tend to happen around the same time. It may not be a very meaningfull question to ask which of these unusual things caused which other unusual things.

I'd rather think of it in a more holistic sense. All of the unusual things are signs of increased stress on the system as whole and are all somehow deeply interrelated to one another in complex ways.

E.g. Did the oil price spike cause the financial system to crash? Or did the fact that there wasn't enough dwindling oil to keep fueling the economy cause the financial system crash? Or did the runaway lending practices drive up the economy to the breaking point?

Why does it need to be *one* of the above? It would seem more plausible that all these things were all working together and "causing each other" to drive an unsustainable system to its breaking point.

I like your health analogy joule. Look at the physical ailments we suffer from as a result of our current longevity. A couple of hundreds years ago probably few died of the many common “old age” diseases we see today…you just didn’t live long enough to develop them. Curing many of those Old World ills did allow us to advance. Perhaps all complex system, have a viable life time. I suspect you understand the premise of “complex adaptive systems”. But it makes you wonder how long adaptations can be developed before a system becomes so complex that positive adjustments are no longer available. Even without the Mother of All Black Swan events (financial melt down or PO) our system had reached a level of complexity which had little ability to sustain itself.

You're looking too narrowly. It wasn't just gas. The higher oil prices also caused higher food prices, heating fuel prices, etc. The total extra drain on savings/income was not small.

As I noted above, a back-of-the-envelope calc got me to 1 - 1.5T in additional costs. I'd like to see someone with the skills take a shot at it and see how close I am.


It's also worth understanding how the typical middle class family is much less resilient than a generation ago. Elizabeth Warren does a terrific job of describing this in this talk . Families have become reliant on two incomes, two vehicles, two commutes, and are paying a higher share of pre- and post- K-12education - among many other factors - than before, just to maintain their place at the table. Any little hit has a much bigger effect. My summary is poor, listen to her talk. Quite enlightening.

And I think overall Gail all but nails it. Include a consideration of per capita net energy, and it's clear that the real economy can no longer grow, thus the chaos in the fake (financial) economy.

For many of the others it wasn't the increase in the monthly gasoline bill. It was the loss of a job as a result of economic recession (or at least the slow down) brought on by higher energy prices over the last several years.

The US unemployment rate was low and stable up until 2008 (chart), suggesting that energy price -> recesion -> unemployment -> housing crisis is very unlikely to be the correct causal chain. The unemployment rate fell slightly between early 2005 and early 2008, despite a doubling of oil prices.

It can be very tempting to attribute world events to our own favoured causes, but there's very little quantitative evidence that the current recession is due to oil prices.

I agree that the system seemed doomed to fail just from the volume of potential bad home loans written. But would it have been as damaged without the energy price increases in the last 3 or 4 years?

Consider how abnormal the housing price indices and price-to-rent ratios were. US mortgage assets were roughly $21T, and the Case-Shiller index suggests they've declined about 30%, for a total loss of about $6T in just over a year.

Compare that to the cost to the US from importing more expensive oil. The average import price in 2004 was $34, vs. $48, $58, $67, and $92 in the next four years. That's an average of about $66, or $32/bbl higher. At about 12Mb/d of net imports during that period, that's 4.4Gb/yr, or an extra $140B/yr over what would have been spent at 2004's oil prices.

Housing has drained ten times as much money from the US's balance sheet in a third the time that increased oil prices have. Keep that in mind when comparing their relative power to affect the economy.

Your view is far too simplistic. Consumer debt levels were rising drastically in the 2004-2007 time frame, suggesting consumers were already stretched thin by 2004. It is important to note that oil rose by approximately 300% from 1999 to 2004. Were there other factors? Most certainly!

However, you seem to be claiming that because events don't line up in exactly a neat row that the causation cannot be there. I would suggest that rarely in human affairs do such correlations line up so neatly.

The credit bubble was unsustainable in itself, regardless, and would have burst eventually with or without the effects of peak oil (or "peak lite" as Robert sometimes says). But did the run up in the price of oil, making the exurban developments unaffordable due to transportation costs, play some small part in helping to burst that bubble? Very possibly since that run up worsened the credit situation of those who were living in those exurban developments and they were already in credit trouble.

Finally, you are ignoring the lag time effects of the rise in oil prices from nearly $10 per barrel in the late 1990s to over $147 per barrel at its peak. Economic response to a change in price is never immediate and rarely is the first response correct. This is precisely why economists consider unemployment to be a lagging indicator of the state of health of an economy. Assuming that unemployment fits neatly into some domino theory of causation is yet another flaw with your logic.

Note: I am not suggesting that Gail is correct, but rather that your criticism of her fails on multiple fronts. Very rarely can you pick out causal chains like 1-2-3 from the debris of an economic implosion.

Housing has drained ten times as much money from the US's balance sheet in a third the time that increased oil prices have. Keep that in mind when comparing their relative power to affect the economy.

you seem to be claiming that because events don't line up in exactly a neat row that the causation cannot be there.

No; I'm saying that the evidence is not there to attribute a primary causative role to oil prices. It probably had a secondary or tertiary causative role.

did the run up in the price of oil, making the exurban developments unaffordable due to transportation costs, play some small part in helping to burst that bubble?

Probably. If you think I'm saying it could not have had any role, you've misread.

you are ignoring the lag time effects of the rise in oil prices

How can I ignore something that hasn't been presented?

If an argument had been made that appropriately time-lagged oil price rises correlate well with later economic troubles, I would have addressed it. Why do you expect me to address arguments that haven't even been made?

Actually, I did address that point indirectly. The magnitude of the loss in household wealth from the real estate bust is so much larger and so much faster than the loss from higher oil prices that it's highly unlikely oil could be the primary cause, regardless of what the lag might be. It's simply not big enough compared to other factors.

Housing has lost $6T in the last two years, and the stock market about $9T. Compared to that, $0.5T from more expensive oil is fairly minor.

Pitt, help me out here.

My share of the $0.5T attributable to increased liquid fuel costs was a 'hard cost'. It came directly out of my income stream.

In contrast, any drop in value for the house or investments I still own hasn't had an immediate 'hard cost' for me. Presumably I'm not alone in this situation.

So, . . ., is it really fair to compare 100% of these unrealized losses to the very tangible expense of higher prices at the pump?

BTW, love to read your comments. You go a nice job at pointing out errors in fact and logic. How about creating some new material for a post too?

So, . . ., is it really fair to compare 100% of these unrealized losses to the very tangible expense of higher prices at the pump?

Absolutely. Credit is what runs the economy. When credit streams dry up, corporations and individuals run out of spending money just as fast as if they spent them on more expensive gasoline.

When a developer buys land from a farmer, carves it on paper into "lots" and shows (again on paper) a ten-fold increase in "value"- a trickle of new electronic money has been created. When the Royal Bank of Scotland puts that new "value" on their books and utilizes it as collateral for other adventures, the electronic money begins to replicate. BUT, when the potential buyer of the new vacant lot at the edge of the city (an a-typical commuter, the "drive to qualify", "stretch" or "super" commuter) has to figure out the net present value of an annual payment of $2500 or $3000 (the added commuting cost from higher gas) each year going forward.

The potential buyer has no rational choice but to offer $10,000 to $20,000 less for the lot. Multiply that by the number of lots, multiply that by the number of deals that RBS has leveraged based on the assumed (now wrong) value of farmland lots in Minnesota (see article posted above), wait a couple of years to learn that petroleum resources are indeed finite (the cost of commuting could very well go UP with each passing year, now recalculate the NPV of your annual gasoline bill), and voila, RBS is insolvent.

This is a tough theory to swallow. Your proof is nothing but a false cause and effect conclusion. Higher oil prices did slow the economy somewhat, but it would only affect demand meaningfully for low-wage earners -- anyone already near the tipping point. Most people easily afforded a few dollars more to fill their SUV's, though it did irritate them.

The real cause of the financial crisis was peak credit. That affected high, low and average wage earners -- also high, low and average sized businesses.

A key point you and many others miss is the central role that expectations of ever more available energy have played in the inflation of bubbles. In a sense even Gail has this a bit backward.

The main point, to me, is that, since the middle of the 1800s at least there has been an expectation of ever more available energy, mostly in the form of ffs. As long as there will be more energy available, banks and others will be willing to extend credit.

As we approached peak, we had the highest levels of energy ever extracted and by then a deeply entrenched ideology that continued, infinite growth was a kind of fundamental economic law. This emboldened banksters and others to make ever wilder bets on a future they were sure would always pay off.

So it may or may not have been peak that burst the bubble (I think it must have played some role), but it was the long slope moving up towards peak that really created a culture addicted to the expectation of limitless growth and therefore to (near) limitless debt based on that expectation.

The curves for the exploitation of virtually every natural resource are going asymtotic to 0 as grades fall. Our ability to exploit those resources at such diminished quality depends highly on the ready availability of cheap energy - and not only cheap energy, but perhaps ever cheaper energy. But now we are in a position where energy is not even there no matter the price and we can't generate the price because we can't amp up the economy enough to pay for the energy it needs.

It's not a matter of how much any individual suburbanite has to pay to drive his car and therefore he goes bankrupt, but what proportion of the overall economy can go to various uses. The energy price bump sucked too big a chunk of the overall economy and everything designed to operate at one energy regime started to fail. We are shifting to a new energy regime. All sort of stuff that worked at 10 or 20:1 (where energy was maybe less than 5% of the total economy) are not going to find oxygen at 5 or 10:1 (where energy production will take much more of the economy).

We are looking at 10% or 20% of our population returning to agriculture (which is a form of energy production) as available oil halves and halves again - perhaps over the next two decades; that will be a different energy regime, not a "recovery".

cfm in Gray, ME

it will probably need to be a much bigger amount then that

since some types of fertilsers are made from fossil fuels your need to come up with more fertilizers somehow

not to mention your need to come up with a fuel source for tractors since oil wont likely be able to fuel all the tractors youed need

most likely your see the earths 6 billion population decline over the next 30 years by a lot i dont see any thing on the horszion to make it possable to sustian 6 billion ppl on earth

since some types of fertilsers are made from fossil fuels your need to come up with more fertilizers somehow

Just make the hydrogen feedstock via renewable-powered electrolysis. This is a well-understood process that is already in commercial use, and would require only 4% of the world's electricity to completely replace all natural gas use in fertilizer production.

Fertilizer is made from fossil fuels only for convenience.

not to mention your need to come up with a fuel source for tractors since oil wont likely be able to fuel all the tractors youed need

Why not? Oil isn't going to disappear overnight, and tractors account for a tiny fraction of the world's oil demand.

In the US, the transportation sector accounts for about 28% of greenhouse gas emissions, vs. 0.6% from agricultural sector fuel consumption. Accordingly, the agricultural sector directly consumes no more than about 2% of gasoline&diesel used in the US.

2% of 20Mb/d is 0.4Mb/d, which is less than a tenth of US domestic production, or less than half of oil sands production. There will be enough oil for tractors for a long, long time.

The curves for the exploitation of virtually every natural resource are going asymtotic to 0 as grades fall.

Reality disagrees with you:

"Iron ore market review says production, exports, and prices all climbed in 2007....The iron ore boom continues unabated and even accelerated in early 2008."

Iron ore production has increased by 40% in the last 5 years, continually reaching new all-time highs.

Please don't spread misinformation.

I didn't word that clearly, sorry. The ore concentrations are decreasing rapidly - asymptotic to zero. Where once we'd get x pounds from a ton of ore, now it takes ten tons. And all the additional associated inputs.

The ore concentrations are decreasing rapidly - asymptotic to zero.

That doesn't seem to be true, though. For example, commercial iron ore deposits seem to still be about 25-65% iron.

Ore concentrations tend to decrease, certainly, but it's not at all clear that the decrease is all that rapid, at least for some minerals.

He's technically right if semantically wrong. Most mineral ores are log normal, meaning yes, they asymptotically approach zero. But it takes twice as long to exhaust the resource every time you drop the ore grade because theres four times as much of it in the lower grades. This isn't a problem at all for iron, aluminium, or even uranium because the base concentration in the crust is so damned high. Its a bit of a problem for copper when you consider the base crust concentration and how much of it we use for industry and a problem for phosphorous if we never could figure out how to recycle it.

As always thanks much for putting this information out there.

I do have a question though. Is there a possible third alternative to this scenario at all? One that might include somebody finding some kind of holy grail of energy or something? I have no idea what that might be but what if say in six months somebody got that perpetual motion machine running and we were able to find an energy source which was limitless and free. What effects do you think that would have on the global financial situation? Would it make it worse or better?

Further here is an interesting breakthrough... http://www.superconductors.org/233K.htm

"some kind of holy grail of energy"

Excellent topic. Perhaps worth a separate thread?

It is obvious to me that such a "holy grail of energy" would even more firmly doom the earth and all its inhabitant (including humans, though they me be nearly the last to go) to annihilation.

Humans (especially those influenced by industrial capitalism) do not use energy to improve the natural resilience of the earth. They use it to destroy that resilience in pursuit of short-term "profit." Put more energy into a earth destroying system and you get faster and more total destruction of the earth.

I agree with Gail that PO is behind the current fiscal crisis but the chain of cause & effects goes further than that. PO is primarily a function of human overpopulation, which in turn has its evolutionary & thermodynamic causes. You are correct that the development of some cheap & abundant new source of energy - the perfection of nuclear fusion powerplants for instance - would absolutely doom the entire biosphere with humans along with it, in very short order. Humans would use that energy to power explosive population growth and lifestyle extravagance, appropriating even more than the ~40% of annual global primary productivity to our own sustenance we already usurp. Ecosystems would collapse even faster than they already are and human extinction come that much quicker. Finding any such "holy grail of energy" would be our doom.

I think that's a tad pessimistic. Say the Navy's test with cold fusion works out and we can extract massive amounts of energy cheaply and with no environmental consequence. We're still limited by many other natural resources. Sure people would waste more energy than ever if it were cheaper, but so what? How could it hurt us if we could shut down all of the coal plants and stop using fossil fuels and replace them with this new energy source? The military already has the means to destroy the world and yet we're still here. I doubt the population would explode because farm land and minerals are limiting. Iceland has great sources of cheap renewable energy and it hasn't hurt them. Their credit crisis is another story of course.

Because we are currently killing everything on the Planet, and would do so at an increased rate. Technology will not save your Soul, or your ass, this time around.

The only solution is to go back to the Trees, so to speak. Live with Nature.

Compelling argument. I'm convinced. For some reason I was under the impression that technology WOULD save my soul. Thanks for clearing that up for me.

Cold fusion...good gravy!

Here we go again...all the other researchers were looking for neutrons in the wrong energy bands...all the other researchers' test equipment was mis-calibrated...

Looking for a very small number of excess neutrons emanating from an aqueous solution? At least I saw one reference to looking for gammas,which are the more logical secondary product to look for in that environment.

This smacks of the infamous Hafnium 142m stimulated by the dental X-ray machine DARPA flim-flam.

Even if there are fusion reactions, the energy densities are obviously far too low to be exploitable for commercial energy generation, much like the suspected fusion reactions in the middle of the collapsing bubbles in aqueous solutions that are evidenced by the sonoluminescence phenomenon.

Don't get me wrong...I have been hoping for a fusion breakthrough for decades. I think that there are much more realizable innovations to be made relatively quickly in the nuclear fission regime.

In a longer post on one of the drumbeat I brought up the idea of a subcritcal fission reactor driven by thermalized neutrons from a source such as this. The idea is the electricity needed to create the neutrons to make your fission pile go critical is significantly less then you get out of the fission reaction. Thus its nicely energy positive even after the electrical conversion. Cut the electricity and viola your reactor goes subcritical shutting down.

If its doable I could see where this could make for a much cleaner reactor that can use a variety of safer fissionable materials not normally considered as viable for fission.

Accelerator driven subctitical assemblies aren't cleaner than critical reactors and they're not significantly safer than modern critical reactors. They still have failure modes with decay heat and they're vastly more expensive. The only advantage they really have going for them is in licensing.

Like the Orion Project ?????


The key to getting out of this mess is getting growth to continue (people's real incomes, businesses' incomes, countries' taxes), so that those borrowing can repay their loans with interest. We have limits of a lot of types we are reaching. Fresh water is one of them. Oil is another. Any number of minerals that we pull out of the ground. There are any number of other limits. (Pollution, climate change)

Even if you can get your perpetual motion machine to work, I don't think you get past these other things. Eventually things have to slow down, because we have a finite world.

If our MBA friends hadn't decided "leverage" was such a wonderful thing, we wouldn't be in the mess we are in. Without debt, we could just go down the resource depletion curve in a normal manner, and it wouldn't be such a problem.

Of course, without debt we would have an entirely different kind of economic structure and philosophy.

Any suggestions on options for economic systems that do not involve debt? Sharia Law? Others?

There's no doubt we're going to end up with a major problem, but your entire post doesn't mention inflation a single time.

All of the problems you mention with debt and needing a growing economy aren't taking into account inflation. Inflation gives the illusion of solving everything. If income rises, so do the taxes an that income. Best of all, the government gets the capital gains from the inflation. If a stock is worth $30 today and we have 200% inflation over the next 10 years, that stock is now worth $60. Even though the stock hasn't increased in "real" value, you're still on the hook for the capital gains.

We ARE going to inflate. Now that the Fed is going to directly purchase government securities, it's really going to take off. Next, a market is going to reappear for MBSs and their values will come back to realistic levels. Then, the mortgages that actually do bomb out will be paid for with the funds from CDSs. Through AIG, the government has already shown that they will be counterpary to those contracts. Suddenly, the banks are going to be flush with cash to lend.

The whole cycle will repeat but much, much worse due to the moral hazards we've created.

Yes, it all does come down to peak oil and peak resources in general. Yes, we are going to collapse, but I don't think it's going to look like you are predicting. I think it's going to be hyperinflationary followed by a sudden collapse. We're going to keep the illusion up as long as we can.

Great post Gail!

Like Agnostoman, I was wondering about inflation as well.

I think I follow Gail's arguments about the relationship between growth and the ability to repay loans. This all makes a lot of sense.

I certainly agree that the "real" econony based on physical resources and realities can not grow perpetually.

On the other hand, I see no similar line of reasoning that perpetual growth is impossible for a "non physical resource" such as money. Especially with as some here on TOD have pointed out are fiat currencies. More and more money can be created (printed) out of thin air. More and more money will flow in the economy and repaying loans would not be an issue.

The caveat would be of course the money would be increasingly less valuable since it can only buy smaller and smaller chunks of a shrinking economy. => inflation

I don't really know how to reconcile this with Gail's story. But I do agree with Agnostoman it should be part of the story somehow.

On the one hand I see a massive deleveraging, which would seem to shrink money supply and thereby induce deflation. On the other hand I see the monetary policies referred to as "printing money" which would seem to push towards inflation as the only way out of the "how to repay loans in a shrinking economy dilemma". It is not clear to me how such opposing forces might actually play out.

So I have some questions (for Gail or anyone else who has thoughts on the matter):

1) Have you thought about the role inflation and deflation may play a part in how you see things evolving?

2) What would this (inflation/deflation) do to interest rates?


PS: It seems clear that even if we use the "inflation solution" something will have to give somewhere as their will be an exponentially increasing disconnect between the "money economy" and the "real economy". Common sense would dictate the real economy will eventually prevail and some kind of "collapse" has to ensue. But how will this collapse unfold?

Yes, inflation goes on. If lenders don't think interest will be high enough to give them a positive rate of return, even net of inflation, they will stop lending. You need to have some real growth to get returns so they exceed the inflation rate, so that debtors have money to pay back loans (including interest, which include an allowance for expected inflation.)

If all gets kind of complicated to talk about. Perhaps one can print money and fool people for a while. I doubt one can keep the situation up for very long.

I would agree that there is a possibility that the economy will be forced into hyperinflation, and suddenly collapse from there. This is certainly the direction our economic leaders would like to go (inflation, not hyperinflation). With all of the debt defaults, I kind of doubt they will be able to succeed in engineering the hyperinflation. I am sure there will be some sort of stress, before a collapse comes, but I am not certain precisely how it will operate (dollar falling, or what).

The point about lenders is valid, but, if they have billions of dollars sitting around, why not lend it? Also, if the bank is borrowing funds form the Federal Reserve at 0%, they have nothing to worry about. They can loan those funds out, and they will still only have to pay the Fed back the original amount they borrowed.

Now, Debt Defaults are an interesting point. Much of the debt that is or has defaulted is backed by "insurance" (CDSs, etc). Much of the deflation argument rests on the counterpart to those risks not having the reserves to pay the "claims". As we've seen with AIG, the Federal Government has all but explicitly guaranteed the providers of said "insurance". There's even a plan afoot to create a central counterparty (Again, the government) which would assume all of the risk. If that ends up being the case, the debt default is a moot point. The debt is destroyed, but repaid by newly printed US Government dollars.

Don't forget that many of the "write downs" of MBSs that have left banks on the edge of bankruptcy are just that. Write downs. You have a distressed market with no buyers and no sellers. Even so, you still must value your bonds at the current price. In some cases, this is $.22 on the dollar, which is insane. Even if Half of the loans in an MBS go bad, and you only recover half of the value of the property, you're still talking about $.75 on the dollar. A few companies have already begun to see this and are starting to purchase these assets. At some point, the values are going to come to more realistic levels and it's going to leave the banks flush with cash.

China and the rest of the word is not going to stand for all of the money we're printing to bail out derivative counterparties, so, they will stop buying our bonds, and in theory, rates should go up. But they won't. The Federal Reserve will continue to monetize the debt to keep rates low because the alternative would be.. well.. the scenario you are predict... It all comes down to politics, so they are going to do whatever they must to avoid that. The FED itself may not want to, but the elected officials will put tremendous pressure on them to do this (Has a politician ever been re-elected for taking a long term view? Think Carter). So, that will take us to double digit annual inflation alone. Then comes the next phase:

Now, the inflation Jeanie is out of the pot. Like so many other things, inflation is psychological. Trillions of dollars in US Debt and hard currency is held by many different countries. They see that currency and debt becoming worth less and less. So, they dump it. They might use the money to buy commodities like oil and gold. They might trade it for other more "reliable" currencies. Next the people of America realize what's going on, and they suddenly jump into the spending spree. That's when hyperinflation happens.

nice clear explanations of the details of u'r 'weightings' of inflation. thanks.

gail u do not have adequate education in economics & it shows[sarcasm];

it CLEARLY shows !!!thanks.

gail u do not have adequate education in economics & it shows[sarcasm];
it CLEARLY shows !!!thanks.

Them thar people in charge at AIG - now they are edu-ma-kay-ed fellers.

They need their bonus money so they can stay at AIG

I don't see hyperinflation. Hyperinflation is a deliberate policy of printing money to pay off debt.

In the case of 1923 Germany to pay off the WWI war debt of $33 billion dollars with a GDP of $10 billion dollars per year.

Today US government debt is say $12 trillion with a GDP of about $13 trillion. In WW2 the debt was, I think, 150% of GDP and no hyperinflation.

There's no such thing as 'sneaking hyperinflation'.
In fact the cure for hyperinflation is to peg your currency to the US dollar, the reserve currency.

The people who like to worry about hyperinflation are silly gold bugs.

LOL, that should boost the value of their gold coin collections.

I don't see hyperinflation. Hyperinflation is a deliberate policy of printing money to pay off debt.

Quoted from: http://www.federalreserve.gov/newsevents/press/monetary/20090318a.htm

Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

That seems to be exactly what you're talking about. The Federal Reserve is going to buy $300 billion dollars of Government debt. They are using Printed Money, plain and simple. This is just a the first wave of many.

The debt to asset ratio for businesses usually can't exceed 1.0 so $12 trillion total debt/$13 trillion GDP asset=.92 is still do-able.

Germany 1923 at $33 billion Versailles war foreign debt(not even all debts!)/$10 billion GDP(1924$)= 3.3 is totally hopeless therefore hyperinflation.

OTOH, if the US economy contracts by 25% due to Hoover-Republican style economics
[GDP 1929 of $800 billion ($1991) fell to $600 billion dollars by 1933]
then we ARE screwed as the debt to asset ratio becomes $10 trillion?/75% of $13 trillion = 1.03.

Add a potential 1.75 trillion dollar deficit fot 2009 and more to follow in the out years. Subtract some GDP growth:

New home sales fell 41% in February 2009.


82 banks went down since 2007 more to follow.

AIG needs another 1.6 trillion dollars to get out of debt. It has already failed regardless of its size. Might have to dissolve their debts in bankruptcy court rather than carry them on the Federal books. Insurance companies should not write insurance for what they cannot back with cash reserves. There ought to be a law against them writing naked derivatives.

If lenders don't think interest will be high enough to give them a positive rate of return, even net of inflation, they will stop lending.

No - they just need to get a higher return from lending than from not-lending. Even if lending is a net real loss of 1%/yr, that's still better than not lending in the face of 2% annual inflation.

You need to have some real growth to get returns so they exceed the inflation rate, so that debtors have money to pay back loans (including interest, which include an allowance for expected inflation.)

Why do you assume that returns need to exceed inflation? They don't in real life. In fact, everyone here has probably lent money for a lower interest rate than inflation - namely, a normal deposit account at your local bank.

Lending at a rate of return lower than the inflation rate is not at all unusual. Lending doesn't need to be good to make financial sense, it just needs to be better than the alternatives.

Lending doesn't need to be good to make financial sense, it just needs to be better than the alternatives.

Adaptation to environmental parameters doesn't have to be perfect, or even all that good, it just has to be better than that of one's competitors.

Gail, I'm very much on the same page with you here. One bone to pick: while I agree that this crisis may well have been precipitated by peaking oil, that's not its deepest cause. Crises are inherent in capitalism and have been occurring since its beginnings, although with greater irregularity and violence when they do occur. Ever growing mountains of debt have played a major role in extending cycles.

The Depression of the 30s (one now has to make it clear which depression one is talking about), for example, occurred at a point when the was still plenty of oil and other resources in the ground, and there was no external block to the growth of capitalism. But it took WW2 expenditures to revive growth.

This time, however, I fully agree, growth as the way out IS blocked. And pursuing it risks (or maybe guarantees) hyperinflation down the road. And it may well be true that this expansion was pricked by rising energy prices, but I think the the crisis would have occurred not soon after in any case. The run up in housing prices was not caused by oil prices, yet it is and was evident that the run up could not continue forever.

Marx turned out to be wrong about some things, but he did a good job explaining the internal dynamics of capitalism. What's playing out now is the interaction of the internal dynamics of capitalism with the onset of physical limits to growth.

I could not agree more. Capitalism has been very resilient with ample resources and humans evolutionary history of short term goals, heuristic thought, and basing reality on story and myth.
Resource limitation is bringing capitalism to its death, and the resulting human adaptation is an open question.

I've mused on the possible connection of PO and the financial collapse myself, so I welcome Gail's gathering of thoughts and graphs.

But I believe there are "missing graphs" which (must) demonstrate the links between rising oil prices (during the run-up to the end of 2007), unemployment, and inflation.

There appears to be a growing media-led acceptance that markets collapsed mid-2008 following the "siezure" of Bear Stearns and Lehman Bros by the US Govt, or, depending which side of the tracks you stand, when oil hit $147.

This is to forget Northern Rock, the first of the banks to collapse under the highly leveraged strain of securitised mortgages in the final months of 2007; this, IMO, was the first crack in the veneer.

Which shifts the chronology of events back in Gail's analysis, IMO (plus we need to allow for the lag effect of these events to trickle down).

I think there is merit in the argument if one can illustrate how productive capacity declined as a result of rising energy costs (input costs), leading to a rise in output prices (inflation), and rising unemployment (leading to loan defaults).

I think the evidence is there (based on cursory findings, I believe US unemployment began to rise early 2007), but I have not actually sat down and correlated it.

2004 was the inflection point for housing (down) and gasoline (up). See the PDF linked up top (1.4mb).

The popping of the housing price bubble coincided with the run-up in gas prices. It can be argued that the magnitude of the increase in gas prices wasn’t sufficient to offset the gains households were seeing in the housing market. In a more steady market, gas price increases might not have been enough to derail the housing boom, but in the heated atmosphere of the bubble, gas price increases may have been the trigger that broke the expectation of continued growth. The households most affected by the rise in gas prices were those who had stretched the family budget to buy a house on the suburban fringe, often commuting long distances in the process. These families spent a higher fraction of their income on gas than the typical household and had less flexibility to accommodate the higher price of gas than others. And for the same reasons, as gas prices rose, houses in these far-flung neighborhoods tended to lose their market appeal first and fastest.

But I believe there are "missing graphs" which (must) demonstrate the links between rising oil prices (during the run-up to the end of 2007), unemployment, and inflation.

They are here, in last fall's New Scientist report. In particular, in the sidebar to this article. Sorry, you don't get unemployment on one axis plotted against oil price. Besides, it's not the price that matters, but the chunk of the overall economy demanded by energy.

Thanks for this post Gail, just thinking about it helped me tie together a couple of loose ends. It's becoming so clear. It's as simple as downshifting. Buy hoes.

cfm in Gray, ME

Dryki - very useful links and graphs, thank you, but I couldn't find the "missing graphs".

There appears to be a growing media-led acceptance that markets collapsed mid-2008 following the "siezure" of Bear Stearns and Lehman Bros by the US Govt, or, depending which side of the tracks you stand, when oil hit $147.

The stock market didn't crash until late August/early Sept (chart), by which time oil had already fallen by $30-40/bbl from its July highs. By contrast, the collapse of Lehman Bros in early Sept08 coincides exactly with the timing of the market collapse (as do the problems of Fannie Mae, Freddie Mac, AIG, and Merril Lynch).

It's not clear why you would attribute the market collapse to oil prices from several months prior when major movements in the financial market were occurring exactly when the market fell most sharply.

Well, obviously cancer causes you to want to smoke, right?

No you're pretending that oil prices today have no lag in becoming real higher costs later? That is, if I buy a barrel of oil today it becomes gasoline, diesel and heating fuel today, too?

You can't possibly believe what you stated above is supposed to make sense, so why did you post it?

you're pretending that oil prices today have no lag in becoming real higher costs later?

Not at all; I was just addressing the (incorrect) claim that the high in oil prices and the market crisis happened at the same time.

Regarding lag, though, all you've done is claim that the effect of oil prices is magically whatever you need it to be to support your pre-determined conclusion, and that's not convincing in the slightest. Come back with some evidence regarding the lag in effect and then we'll have something to discuss.

I was just addressing the (incorrect) claim that the high in oil prices and the market crisis happened at the same time.

I didn't claim that, nor am I.

From a low of around $50 in Jan 2007, oil rose throughout the year breaking $100 12 mths later. During this time, in the UK, energy companies began hiking domestic prices.

Northern Rock collapsed Sept 2007. Denial that this wasn't a seismic shift in fundamentals set in amongst the political classes here in the UK; "We'll pull through this in 6 mths."

I recall seeing a chart somewhere showing US unemployment rising during 2007, I'm sure.

Additionally, problems with wheat and rice crops during 2007 caused prices to surge going into 2008 as news leaked of world grain shortages, exacerbated by increased oil prices.

Then there's the price of metals.

I agree that, through hindsight and the right supporting graphs, you can work an argument to support almost anything.

Added: Conversely, I'm guessing even if PO was a prime cause of today's troubles, graphs could show otherwise - So I agree with Campbell in that it matters not when.

It's a bit like proving who, exactly, started a riot; we just know there was a riot.

No, Pitt, as is your long habit, you aren't saying anything. You are tossing out numbers that make no sense, then insulting me to cover. Your comments on specific moments is silly. The peak in oil prices and the timing of the crash are irrelevant to each other. It is the five years of rising prices that is at issue.

Blah, blah, blah...

I don't think they're irrelevant. Consider:-

  1. the West in general imports the bulk of its oil
  2. the West in general has a trade deficit; that is, more money is leaving the country than coming in
  3. as a basic commodity, if the price of oil doubles in a week you won't halve consumption to compensate
  4. so if the price of oil rises or falls, this makes a big difference to how much money we have to find to send out of the country
  5. over the last two decades, the West has produced less and less goods for export cash
  6. so that more and more of the money the West has spent has been borrowed
  7. thus the credit markets had to grow; but like a balloon, they could only be blown up so large before bursting
  8. the credit markets were already under great stress from a decade of expansion and unbridled consumption, they might have needed only a small push to knock them over; in the event, that small push was everyone suddenly admitting that CDOs were worthless - but it could have been almost anything

So I don't think the oil peaking and resulting price rise was the cause of the financial crisis. But it didn't help. Just as corporate leaders sought billions from the market to keep their dodgy deals going, so too did oil traders seek billions to keep buying stuff to burn.

It's a bit like some guy with a decent job, but who spends $1,000 more a month than he earns. You can argue about whether it was the $500 extra for the rent of the apartment he couldn't really afford, the $100 extra for the petrol for his SUV instead of a regular car or taking the train, or the $200 on clothes. But in the end he was living beyond his means.

And that, really, is the root cause of this mess. We've been living beyond our means. It's not just bank CEOs snorting coke off hookers' arses, it's me taking a trip to Italy or my friend putting an extension on his house. Because we want to spend more than our financial and resource income, people offer us credit at interest and knock tops off mountains to dig stuff up. And because we do that, they can create things like Collateralised Debt Obligations and Credit Default Swaps that in the end inevitably turn to shit.

Blaming the bankers for this mess is like a coke addict blaming some Colombian drug lord. Yes, he's responsible - but we're more responsible.

A couple of pretty obvious comments:

1. If available BOEs drop off as predicted, the price will soar, and so will profitability. Funds will always be available for such businesses and investments will definitely be made. Governments will ensure that this is so.

2. When currencies are not backed by anything (fiat currency off the gold standard) there is nothing to stop money being printed. The government will always be able to increase the supply of money. Many will not want to borrow it. Profitable businesses will want to borrow and will be able to borrow.

3. Combination of BOE shortage and artificially inflated money supply will send the prices to the moon and there will be plenty available for production. Labor costs will also fall as will many other production costs too if the economic environment remains so bleak.

So we can expect that the investment will be there - the key factor is the lag before the invesment is turned on again and production responds. That will be where the mega price and supply crunch will occur in my opinion. I am expecting this around 2010 Q4 to 2010 Q1.

@ GAIL the Actuary.
GAIL, what do you think of this:

Study: Unconventional Natural Gas Resources Boost US Reserves to 118 Years Worth at Current Production Levels

A study released by the American Clean Skies Foundation (ACSF) and conducted by Navigant Consulting, Inc. (NCI) concludes that the United States has 2,247 trillion cubic feet (Tcf) of natural gas proved reserves and unproved technically recoverable resources, including major contributions from unconventional resources from three sources: tight sands, coalbed methane and especially from shale. Reserves at that level would supply natural gas for 118 years at current production levels, according to the report.

After nine years of no net growth in US natural gas production through 2006, production in the Lower 48 states made a large upward shift. Production grew 3% between first-quarter 2006 and first-quarter 2007, followed by an exceptionally large 9% increase between first-quarter 2007 and first-quarter 2008, according to the US Energy Information Administration (EIA).

Total US natural gas production reached 19.3 Tcf/year (52.9 Bcf/day) by the end of 2007, a 4.3% increase over the 18.5 Tcf/year (50.7 Bcf/day) level at the end of 2006. Over the last decade, production from unconventional sources has increased almost 65%, from 5.4 Tcf/year (14.8 Bcf/day) in 1998 to 8.9 Tcf/year (24.4 Bcf/day) in 2007. Unconventional production has increased from 28% of total production in 1998 to 46% in 2007.

The EIA ascribes the sudden increase in production to the improved technology, developed over many years, that now allows economic production of resources in deep water and large unconventional resources, which are difficult to produce. High and increasing natural gas prices have spurred more natural gas drilling and the trend to move from drilling simpler vertical wells to horizontal wells. Horizontal drilling is fast becoming the primary method used to produce gas from geologic formations like shale.

As one indicator of the transition from conventional to unconventional production, the number of rigs drilling horizontal wells has grown to 519 rigs (28% of the total) from about 40 rigs (6% of the total) in the late 1990s. In the Barnett Shale in Texas, the wells go down about a mile and a half, make a turn and go horizontally about a mile, running through the rocks that hold natural gas.

The EIA has historically underestimated and understated the contribution and potential of unconventional natural gas, according to the ACSF, which engaged NCI to develop a comprehensive assessment of the current state of North American natural gas production, with a particular focus on analyzing the future of rapidly expanding natural gas production from unconventional formations such as shale.

The assessments and estimates on natural gas supply are very impressive and have, frankly, caught industry forecasters off guard. The extent of this ramp-up has not been fully captured by many reserve estimators, probably because their emergence has been too rapid for existing models to capture accurately.
—Rick Smead, study co-author and project manager for NCI

The study found that while all three unconventional gas sources have increased production over the past decade, natural gas production from shale formations is growing exponentially, increasing from less than a billion cubic feet a day in 1998 to about 5 billion cubic feet a day currently—a compound annual rate of growth of more than 20%, and more than 600% for the time period.

There are approximately 22 shale basins located onshore in more than 20 states in the US including Texas, Oklahoma, Arkansas, Louisiana, West Virginia, Wyoming, Colorado, New Mexico, West Virginia, Pennsylvania, New York and Michigan.

NCI’s researchers formulated the study’s snapshot of domestic natural gas reserves by analyzing production and reserve data by basin and by type of gas on as current a basis as possible. Sources included studies, state agencies responsible for minerals management, and corporate investor data, as well as direct outreach to more than 60 large natural gas producers nationwide. Researchers then compared this snapshot with current models including ones produced by the US EIA.

Recent technological innovation has transformed the natural gas exploration and production industry, particularly as it pertains to shale. The findings in this study indicate significant potential for expanded use of domestically produced natural gas for many purposes, including power generation and even transportation fuel for many years to come.
—Dr. Kenneth B. Medlock III, co-author and professor of economics at Rice University

North American Natural Gas Supply Assessment



George -- I'll jump in ahead of Gail and offer a few points. Above all else, those reserve numbers, including the "years of supply" are worthless unless they include a price projection. Perhaps they did but often such numbers are thrown out with no regard to the economic realities. Right now there are X billions of cf of NG which are viable at $10/mcf. There is a lot less available at $3.50/mcf. We were one of the major UNG players in the US. In 2 months we dropped our UNG rig count from 18 to 3 with no plans to increase that number for at least one year...and probably longer.

Everything you mention as far as technology improvements is quit true. And there are trillions of CF of NG in those shales out there. And very little of that NG will be drilled in the next couple of years...at least. Those increased rates you mentioned were real and true record setters. But the rapid decline rates of UNG wells are in the process of setting new records: perhaps the greatest decline rate in NG production ever seen in this country. We'll know for sure in another 12 to 18 months. But the bottom line is good news: as energy demand and prices increase we know we have a viable resource out there waiting to be developed. Some day (if we survive the collapse) we’ll have 20 or 30 or more rigs drilling UNG. But that day is probably several years off at a minimum IMO.

Thank you ROCKMAN for this clear explanation !

As I remember the USGS says North America has 1200 TCF which at ~24 Tcf per year is a 50 year supply.
I think it is roughly about 1/3 conventional, 1/3 unconventional and 1/3 to be discovered.
I think Jean Laherrere gave +300 Tcf but that might be for conventional gas only.

I have probably written more articles (and more positive articles) about unconventional natural gas than anyone else on The Oil Drum. These are three:

US Natural Gas: The Role of Unconventional Gas

US Natural Gas: Lessons from BP's Tight Gas Facility in Wamsutter WY

Can US Natural Gas Production be Ramped Up?

The problem isn't lack of resources; it is the problems that occur when the economy as a whole is not growing rapidly enough to support the debt that our economy depends on. Unconventional natural gas producers tend to be small and highly leveraged. They are the first to get squeezed out when there is not enough credit to go around. A lot of rigs have been sent away, and employees laid off.

I suppose the natural gas industry may do somewhat better for a time, but what we are dealing with is a situation where true recovery is not likely. Instead, we will have more of the current problems, a bump-up to a better price for a short time, and a crash back down to an even lower level than we have now. There won't be too many producers who can survive this kind of environment. If the government gets smart, and takes natural gas under its wing (or sets a minimum price), I could see a better result, but this seems unlikely.

I am afraid that in the end, a lot of unconventional natural gas will end up still in the ground, because of all of the financial problems.

I don't think we are economically constrained when it comes to energy--I think we are geologically constrained.

Here are all the oil and gas estimates of USGS by 'province'.

We will produce as close to our current consumption as possible until the last well is emptied. Given the large amount of unconventional gas we are producing now further increases without too much effort would seem to be expected. But still overall there's only ~50 years left.

I agree Gail. In the short term (40 or 50 years) I don't think we have an energy source problem. A gasoline problem for sure. But NG...no problem. I don't believe any of the trillions of cf of NG different folks offer for the UNG plays since they never seem to offer the pricing scenario which supports their numbers. But there is a lot of NG out and we know how to get it out when the price is right. I see wells netting $50,000 per day from zones that would not have been perforated 10 years ago even if the well had already existed.

But to swing more of the economy (especially transportation) towards NG will require capital. Even if the gov't does create some sort of floor for NG prices as you suggest the bigger question remains: will the economy recover sufficiently to expend the capital needed to take full advantage of these NG reserves. With the right pricing there will be abundant NG. But will we be able to afford the transition costs. The same worry exists for the expansion of all the alts IMO: even when the economics of such efforts are sufficient will the economy be able to bear the financial strain of such advances? Some decades down the road NG will play out....I wouldn't try to offer a time line. But the UNG might help us bridge the gap IF the economy supports the rest of the system. As you offer: it's easy to be pessimistic about such a possibility.

Rockman cheap NG powers a good bit of our electricity and industry in a world of expensive NG I'd argue our industrial base would change significantly. Expensive enough and it would spread through our entire industrial infrastructure from plastics to fertilizer.

I seriously doubt we can run our world like we do now on expensive NG regardless of how much is left. I'd offer that many of the remaining sources offer the same tantalizing problem as the tar sands or other large remaining oil sources. We will never get them at a price/production rate even close to todays and the amount society would spend to procure them would be a huge drain on the society itself.

Given how deeply NG is interwoven into our society a long term period of expensive NG and a rising price pattern like we saw with oil could be devastating. One thing thats not mentioned in this thread was the overlapping price spike of both NG and oil during the housing but it was certainly a one two punch.

One could readily argue that rising NG prices may well have withdrawn more wealth esp from companies then the oil prices.

Looking forward one could expect the same scenario unfolding rising NG and rising oil prices.

One last note your now convinced we won't see a cliff in NG production with a simple model but I think what your missing is that what we should see are rapidly accelerating decline rates at first the decline rate is slow but then it starts doubling. So your correct in that the initial decline will be shallow but with the decline rate itself probably accelerating exponentially you get a cliff.

My opinion is of course the same for oil we should see the decline rate go +3%,0%,-3%,-6%,-12% before finally stabilizing.

To some extent you may think to much in terms of money :)

Think about it this way.

Back in ancient times a chinese trader discovers not a fountain of youth but a entire river flowing from a huge spring in the Himalayas. He sells this water for a lot of money as he gets better at distributing it the price goes down and the entire society enjoys at least a few drops. Over time the spring starts drying up and the water gets more expensive and he makes even more money. Then the spring dries to a trickle and he makes immense amounts. But one day no one comes to gather the water. He leaves his mountain to find out what happened and all he finds are abandoned cities and fallow fields. Finally he finds a old man living in the cave and the old man tells him that all the people eventually abandoned doing useful work and gambled and ran scams and ponzi schemes amongst each other to make enough money to buy the elixir. Eventually everything just collapsed.

This is the same situation you get with high NG prices and high oil prices the demand will be there and you will make a lot of money but the underlying society will be rapidly impoverished and eventually collapsed because it has passed over Nates EROEI cliff.

To try and explain it in terms of prices may be simple rising energy costs must be covered by expanding the profitiability of society in a real sense ponzi scheme and games just delay the time of the end. If the society cannot increase its efficiency to overcome higher energy costs it will decline as it declines energy becomes even less affordable. Also of course as efficiency increases it becomes exponentially harder to increase efficiency even further and ever higher prices are needed to justify expending money on more efficiency but this is the same money you need to run day to day society to afford the higher energy costs.

No society can afford steep increases in costs for any of the basic commodities if you substitute food for energy then maybe it becomes more obvious. In the above if its food then obviously society has no choice and no matter what it does and regardless of the price of food once the absolute quantity of food either becomes to scarce or to expensive the society collapses. Its a intrinsic problem when a basic resource becomes scarce nothing you can do about it unless you manage to find a substitute. But this leads to my problem of partial substitution where a expensive source is only partially replaced it tends towards causing all sources to peak about the same time either in real availability or in the sense of the ability of the partial substitute to expand at a reasonable price and become a total replacement. Because we continued to expand coal usage after oil was found and aggressively expanded NG usage alongside oil this partial substitution pattern just about ensures that we will find that we no longer have a full substitution capability. The reason is simple the societies economy has to expand to cover the costs of full substitution yet relentlessly increasing prices for all the partial sources absolutely ensures it cannot expand. Expensive NG can be seen as a partial substitution for cheap NG for example.

And last but not least if you look at mitigation proposals offered on the oil drum all are about restructuring our society to substitute oil usage with nothing. Using my original example what they are suggesting is that one day the population gets tired of the cost of the elixir of youth and everyone agrees to simply stop buying the stuff and get along with life and realize they don't need it to be happy regardless of its price.

I'm skeptical that this works on any broad scale thus my assertion of enclave formation in a few regions.

In any case for me at least its why thinking like a central bank is hard they also have their own brand of fountain of youth called fiat money or at least snake oil marketed as the fountain of youth :) You have to think differently as a intrinsic supplier of energy or money itself its not about making money in the traditional sense but driving a society so you have customers for your products be it snake oil (fiat currencies) or energy. Your position is actually similar to the heroin dealer you have to get your customers hooked and keep them hooked to keep selling and you have to keep the price in a range they can afford.
If your heroin gets to expensive they will go to the meth dealer down the street until no one has any drugs.

NG (hydrogen rich) + coal (hydrogen poor) -> diesel and gasoline at the right price.

We'll see what the oil price floor is before capital floods in.

Thank you very much Gail !!

I propose that we immediately institute a plan that calls for the complete banning of loaning of money in any form. If there is a need to have something, the money has to be saved up first and only then can the goods or services be purchased.
This would apply to individuals, businesses and governments!
This might be the only real solution to financial problems as we get ever deeper into post peak oil problems.

(Sarcasm on)
Anyone want to elect me Dictator? I promise I'll put qualified people like my brother-in-law in for Sec of Treasury (as soon as I can get him out of prison for not paying his taxes) and like my Uncle for head of the Fed (as soon as I get him out of the mental institution).
(Sarcasm off)

The end result will be similar, as the replacement for loans will be equity investments on lopsided terms. Those with cash will end up owning everything. That's one good reason why, IMHO, the banksters are working so hard to get out personal cash and siphoning off billions from the taxpayer -- first cash will be king, and it'll be time to spend. Then cash will be worthless, and it'll be good to be a land-baron again.

I fully expect China to trade their cash reserves for world resources, and some of their T-bills for US equities. Before we have a final debt default, there is likely to be an asset fire-sale by out nation. The other decent option is a turn to extreme nationalism to prevent this, which would result in an immediate bond collapse.

I expect an asset grab by foreign buyers. They there will be some sort of collapse, and I wonder if local governments won't try to take back assets which have been sold to foreigners by force. The outcome will depend on who is successful in this struggle.

An interesting premise Gail: our citizens force the US gov't to "repatriate" some assets alla Hugo Chavez. Unfortunately a lot of those gobbled up hard assets (read: oil) will be in foreign lands (Brazil...Angola)and owned by a country with nuclear weapons (read: China). No need to speculate about China's plan: they began trading US $'s for oil assets a decade ago before they became worried about the future value of the $ and T-bills. I can’t imagine the Chinese aren’t gearing up to make an much biggest push in this regard as assets become even greater bargains with the collapse of oil prices.

I propose that we immediately institute a plan that calls for the complete banning of loaning of money in any form.

Ever notice how when people would list the differences between Islam and other religions - the no loaning money was not mentioned?

eric -- glad you brought this topic up. Saw a short report a while ago about Islam and loans. Not enough meat in that report but I suspect there are a few here that can confirm/deny the basic premise: Islam does not ban the loaning of money but does not approve on interest changes on loans. But the lenders do make a profit from the loans. Instead of interest they charge set fees for the loan. Thus these are not "free" loans.

Not sure if any of this is factually correct. Chime in anyone.

Yes - the 'fees' are how they've gotten past the interest issue.

When people say 'Islam is an affront to the American way of life' - that is true. For the American way of life is all about interest - you paying it and the drivers of policy/laws getting the interest payments.

So if I loan you $100 and expect to get $110 back, that is charging that evil interest. On the other hand, if I loan you $110, deduct a $10 "fee" now, hand over $100, and expect that $100 back later, that is not charging interest and is holy and pure.


It makes no difference on a short-term loan of small amounts of money, but makes a big difference on long-term loans of larger amounts. That's because fees are agreed and fixed when the contract is signed, while interest rates vary.

For example, we recently signed a mortgage for $142,000 at 7.5%, or $10,650 annually minimum payments. During the last six months, the rate has dropped to 4.5%, or $6,390. However, it's a 25 year mortgage. It seems rather unlikely that the rate will remain at 4.5% for a quarter century. In fact, looking back 25 years in Australia we find interest rates as high as 19%, which would mean $26,980 minimum payments annually.

Thus, having a variable interest rate over many years means an unpredictability about how much you'll have to pay, with the chance that the amount will exceed your ability to repay, however careful the rest of your spending. It allows the possibility of malice by the lender - if they want to seize your property, all they need do is raise rates to ridiculous levels.

Whereas if they just say, "fee: $10,000/yr until you pay off the principal", that leads to a very different financial relationship and future planning for you.

It should also be noted that with Islamic banks, commercial loans are handled differently. They just invest in your business, with your agreeing to buy their share back at some later point, in the meantime sharing the profits and losses.

Gail is there a particular reason you are equating cheap energy with cheap oil?
Oil is a big part of the mix but it is not the whole thing...
If it is cheap energy youa re talking about then the current cost of solar is about 2.5 times the cost of electricity generated from other sources (which will come down), at which amount we can have as much energy as we want.
So are you saying we are doomed because energy costs are going to go up 150%?
How do you adjust for the fact that countries like Norway and britain have paid much much more than the US for energy for such a long time and we have seen no noticable impact? In fact UK has paid more for oil than the US did at the peak ($147) for quite some time.

Auto miles per capita are quite lower in the UK. IMO everyone agrees that the current USA far flung suburban model cannot exist at e.g $300 a barrel, so a lot of resources were squandered.

The average fleet of cars and light trucks in the U.K. gets 70% more miles per gallon than the average fleet in the USA !! (based on the same US gallon of 3.7854 litres)

Brian -- The burbs will suffer to some degree by higher fuel costs. But the pain may vary greatly. Houston probably has some of the widest flung burbs in the country. Technically the city limits of Houston could stretch 100+ miles out thanks to the annexation power they have. But while those Houston burbs 40 or more miles from the city center do have downtown commuters, the greater majority don't make that drive daily. Houston burbs have essentially developed into smaller outlying cities. They have their own commercial districts, medical facilities, shopping malls, employment centers, etc. Except for those commuting to work there is seldom a need to drive more than a few miles for all the necessities of life. Life there is no more energy dependent then the city center dwellers…and a whole lot less expensive. Even commuting isn’t as expensive for many. Some of the burbs, as well as the city of Houston, have their own mass transit systems for their residents with special lanes which allow them to cruise at 60 mph all the way down town for less then the price of a parking spot let alone the cost of gasoline. I believe Houston has the third or fourth population in the country but it may not be typical of other areas. But it’s not difficult imagining increased energy costs driving more folks here to the burbs then away from them. It would be interesting to hear the horror stories from folks at the other end of this spectrum.

Good points-I wasn't aware that Houston had developed into a grouping of smaller centres.

Yes, good points. But then again, the very spread-out nature of this kind of ex-urban sprawl makes many options for mass transit, especially rail-based ones, problematic at best.

True dohboi but that's why you'll never see rail-based mass transit in Houston IMO. There just isn't a large enough core of long distant commuters like you see in NYC for instance. It's much more efficient to load them into buses and run them down our ever expanding HOV lanes.

But that's why I brought Houston up. Is it an anomaly or are there many large communities in the country which have also developed such a dispersed pattern. From my own perspective, if we do eventually run into the worse case scenario of break down due to PO I would rather be in one of those distal burbs then in d/t Houston. It's sad to contemplate but it's far easier to see the potential for uncontrolable social unrest in the inner city then these burbs. Whether by design or coincidence, most of the burbs are fortress-like in layout.

Auto miles per capita are quite lower in the UK.

Yeah, and a person living on the Navajo Reservation may have to drive further to get their mail than the UK is wide. Guess that when oil goes to $300 per barrel we'll just have to go back to horses out here in the great American West.

The consumers in high petrol/oil/Co2/energy tax countries pay a lot more then the consumers in USA. This gives incentives for smaller cars, energy efficient housing, shorter commutes and so on but the tax money still get recycled back into the economy. The result of the incentive makes these economies less affected by high oil prices but they are still dependant on benefits fropm cheap oil minus the inefficiencies of the distribution of tax money. The outcome also depend on how the tax money is used, the benefits are negated if the tax money is recycled back to the consumers to buy votes in an easy way and the benefits are large if the money is used to build long term energy efficient infrastructure.

Great replies from all

Great presentation, Gail! It gives me the chills reading it, and I have been following peak oil debate for several years now.

What was the audience for the presentation? How did they react?

I did a similar presentation (not exactly this) for an Atlanta Electric Car enthusiasts group last week.

I will be doing a couple of more presentations in the next couple of weeks also--each somewhat different. One is a for convention of people in manufacturing who are generally not at all peak oil aware.

Here is another perspective. I think "peak oil is direct cause of financial crisis" is a bit strong. More accurate might be " global peak oil laid bare some major dislocations in the capitalist/fiat system based on natural resource extraction".

Source: Professor Richard Wolff - U Mass - Amherst

I just rewatched, Capitalism Hits the Fan by UMass Professor Richard Wolff. He asserts that real wages in the US increased every single decade from 1830 to 1970 (including during great depression), but have been flat ever since (and recently declining). But since the 1970s (computers and other inventions) have increased our productivity, and thus corporate profits. But remember, we've been on a total fiat system since 1971. So flat real wages in the face of growing profits would have resulted in too large of wealth disparity which would have lead to social unrest/chaos. There had to be a relief valve, giving the guise that resource limits combined with concentration of wealth had not shut the door on Joe Sixpack. Enter leverage, easy credit, home-equity loans etc. The average person wasn't earning any more, but they were keeping up positional goods consumption because of access to debt. One can see that under an abstract fiat system (where numbers only seem to reflect some underlying reality but actually don't), a dramatic wealth transfer (denominated in dollars) was masked by leverage and borrowing.

It is telling that exponential growth in energy production per capita peaked at exact same time that real wages peaked. (also US peak in oil production and end of natural resource backed currency within 2 years).

This is all linked. More and more I am thinking the largest aspect of Peak Oil is going to be the social inequality that results. The 'free market' will not work if 80-90% of people are broke, and unable to afford energy and other natural resources at prices that the energy and natural resource companies would require to make a profit. I suspect that the next round of GINI coefficient and wealth disparity calculations will show a moonshot towards the right tail. How to keep social stability in this environment will be a herculean task, and likely require new institutions.

Said differently, we have been living well beyond our means not since Peak Oil, but for almost 40 years (and less beyond for longer), - the difference has been made up by borrowing from the future, borrowing from the environment, borrowing from other social classes, and most worrisome, borrowing from thin air.

Taking it a speculative step further, one wonders how much population has increased due to fiat leverage as well - can't really borrow from mother nature too long - (water cuts in Ghawar and horizontal wells in Barnett Shales are two examples)...

The free market doesn't give a damn if 80-90% of the people are broke and dying. On the other hand, I suspect that if 80-90% of the people are broke and dying, they may not give a damn about the free market, either.

Nate -- that's the best connectivity I've seen yet. Though you present such a relative simple premise it does seem to cover the situation rather well. Working in the oil patch it's easy for me to foresee me and mine coming out on the rosy side of the scenario. But such affluence only buys the material aspects and not the socialization we would like to see in our society. I grew up on the bottom end of this pyramid but at least had expectations of being able to better my circumstances. It's very disturbing to imagine a large chunk of our country losing the belief in such possibilities for themselves.

That's it a nutshell Rockman.
One also has to ask why we had the perception of these opportunities to begin with, but then again, how could it be otherwise?

Real wages are not the entire picture, need to know other income. Would agree with you that unequal distribution has become an issue( destabilizing). Taxes always need to be progressive, to keep one society NOT two ( the peasants and those that step on them).

Agreed - as I said - this data is hard to get a grasp on - the above just shows a birds eye view on cheap oil and leverage camouflaging two societies as one. I think 'other income' mostly applies to the higher wager earners, but I could be wrong..

How to keep social stability in this environment will be a herculean task, and likely require new institutions.

Got RealID? The pizza video

HR 645: Introduced in Jan. 2009: Preparing for US Civil Unrest w/ FEMA Detention Camps on Military Bases

"The Man" is way ahead of you Nate.

cfm in Gray, ME

I take some (limited) comfort in my belief that "The Man" is far too incompetent to pull much of this off. Don't get me wrong: "He" can make a royal mess of things through failure...

For a long time I said Microsoft was our salvation; it was such crap. All those .govs running Microshit Access were not a problem. But "The Man" is getting better - our tax dollars at work. Real ID, however, is a problem [no stimulus dollar for highways without it]; I want 1000 of me fractal images to screw that system up. Tape my picture to every traffic camera. I'd get buff for that :-), but it's wrong point of leverage. I suspect the way to bring that program down is to overload the railroad tracks delivering coal to the power plants dedicated to fueling the clusters processing the data. Give the NSA more data and watch it croak(), carp() and die(); The appropriate way to kill it off is to fund it.

cfm in Gray, ME

"Give the NSA more data" . . . I think that's exactly right. I don't know if we can easily quantify this, but it's my impression that, while our ability to process data has been continually increasing, the amount of data that needs processing has been increasing at a consistently faster rate, leading to a steadily decreasing situational awareness.

As you say, "The appropriate way to kill it off is to fund it." Case in point: the Department of Homeland Security. In part (I realize I sound like a broken record here) this is due to the hierarchal nature of these government agencies: More funding equals more people, which must be organized within a human-compatible span of control (roughly 5:1), which means more an more information relays between the "footsoldier" and the "general." With each relay, information transmission is degraded--making a hierarchal organization larger decreases the ability of its leadership to understand its own operations and operational environment...

Yuze guys are spot on...choke the bureaucracy with too much data...I work for 'the Man' (not in the realm/capacity you are referring to)and I can attest to the clown show of compartmental-ism and double-redundancy...many groups working the same data sets and the same issues yet they don't talk to each other...reports written that no one pays attention to, much less acts appropriately on.

That Pizza Video is a gem! Too funny, and too true!

Yes, the Man is already two steps ahead.

And your pizza will be the least of it.


I agree that we have been living beyond our means for 40 years, borrowing where ever we can.

I always associate that living beyond our means with the rise in the MBA population after 1970 and their emphasis on the importance of leverage (borrowing from the future). This only works as long as resources are expanding.

At some point, one hits a limit, and payback of debt can't continue according to plan. This happens about the time resources stop expanding fast enough to support the repayment of debt with interest. Then one hits a huge problem, and debt starts to unwind.

With natural resources, we can overuse what we have available (deplete groundwater; cut down forests; kill wildlife; pollute) but there is not the same promise of payback, so there is not as hard a wall to hit as with financial debt. If there are fewer funds for investment because of the financial crisis, our overuse of natural resources may actually be scaled back (fewer deep wells, for example), allowing for some replenishment or re-growth. If people start killing wildlife for food or using forests for firewood, the overuse may get worse, though, in some case.

Nate, a million thanks for that Wolff link. It's lucid, entertaining, and very thought-provoking.

Something I thought I'd never utter about an economics lecture....

"The underlying problem is not the stock market. It is the credit (bond) market - that is, the underlying reality that there is too much debt out there in relationship to GDP, it cannot all be serviced, and as the economy contracts it feeds a vicious spiral where a default produces unemployment which drops both spendable income (and thus income available debt service) AND tax revenues, giving it to the credit market in all orifices. This is "deflationary destruction" and it is inevitable when government pushes off the normal cyclical cleaning out that recessions do, as our government has." .............

Mar- 25 -09


I have made the observation here before that diesel seems to have been discluded from this discussion of the link to PO.

I know for my part all my suppliers were crying real tears about 4 dollar+ diesel. US foods guy said this translated to several million extra dollard a month expense and eventually they all started passing in the cost to us in the form of higher prices and fuel surcharges.

Then there were spot shortages.

IMO diesel is the life blood of commerce and just had to be a factor in the POP!

I agree. Diesel is very important. It is diesel use that is dropping off now, as the economy contracts, and diesel that was at $4+ a while back. When oil prices went up, nearly every business was hit with higher costs because of diesel prices.

"IMO diesel is the life blood of commerce"

I would actually go one step (or perhaps a number of steps) further and say that diesel is really what it's always been all about. This is the high-quality stuff. Gasoline is essentially a waste product in the production of diesel from oil. The whole car culture is essentially a marketing ploy to create a market for relatively low quality waste stream.

The current financial crisis is a direct result of peak oil.

This is a nice thesis. It would be an even better thesis if it were supported by the facts. Gail has provided a blizzard of graphs, factoids, and mini powerpoints all of which rival the output of a fast churning Bass-O-Matic. Gail would have us believe that the output of her Bass-O-Matic is an accurate representation of current fiscal reality and its causes. I will argue that if Gail is correct then everyone else is wrong.

Let us start with the IMF and thier publication "IMF report on Risks to Global Financial Stabilty."

. . . with liquidity risks, both market and funding
liquidity, at the forefront of the current episode
of turbulence. What began as a deterioration in
credit quality altered the market liquidity of a
number of structured credit products. Market
illiquidity, in turn, produced uncertainty about
those products’ valuations, which translated into
a disruption in the underlying funding markets.

No mention of a rise in oil prices. Note the causal chain proposed by the IMF:
1) Deterioration in credit quality
2) Changed market liquidity
3) Resulted in uncertain valuation of financial instruments
4) Disruption in underlying funding markets - the credit crunch

The credit crunch resulted in a scarcity of credit. This shows up in the Baltic Index as a collapse in shipping. Not because Bunker C became expensive but because shippers depend on letters of credit and these became unavailable.

The same scarcity of credit also impacts oil prices. As Simmons has noted in various videos and excerpts posted to TOD, the oil market is one of price takers not price makers. Price discovery occurs with what Simmons calls "dry barrels," the trading of speculative contracts and this price then determines the price of wet barrels, the stuff you can ship and burn.

The lack of credit impaired the actions of traders, some of the troubled New York financial institutions being major actors in this market. Given the lack of available credit to support further speculative investment the oil price bubble collapsed and existing contracts were liquidated resulting in a collapse in oil prices.

Gail would have you believe that the price of oil rose until a high price resulted in financial collapse. The true picture of events is that there was a financial collapse which impacted all market actviity, including the market for oil. One of the impacts was a A general retrenchement in all economic activity resulted in a collapse in demand - not just for oil but for all the goods and services available in the economy.

We can further support this thesis by looking at vehicle miles travelled in the US. There were credit tremors as far back as 2007. If you follow Mish or Calculated Risk then you will have seen a graph similar to the following:


The US had a property bubble that inflated from roughly 2002 up to 2007. People were placed in mortgages that they could not afford through Liar Loans (no income, no problem), Negative Amortization loans (interest added onto the principal until reset) and Teaser rates (until mortgage reset). The above graph shows the date of those resets. Financial institutions which had created and sold instruments derived from those mortgages had leveraged themselves at 30 to 1. Once mortgages began to default due to the resets this high leverage worked in reverse and created compounding problems for the mortgage industry, for the banks and hedge funds involved in buying and selling derivative instruments and finally for the entire global financial system which is, in essence, facing a margin call for an amount several times greater than world GDP. Improbable but true. It is this set of problems that have resulted in a financial collapse which has fed into the "real" economy and caused a drop in demand, not just for oil, but for all goods and services.

We can verify this by reference to one last graph. If Gail is correct then the increasing price of oil should have resulted in demand destruction (people couldn't pay for gas). This demand destruction should be coincident with the rise in the price of gas and should also be reflected in a decline in VMT. After all, according to Gail, folks could not afford gas at the market price circa 2007. But if we look at the following graph we see VMT increased despite the rising prices and VMT did not collapse until late fall 2008 at the time the overall economy collapsed.

In her text Gail reports "Once prices dropped from the high levels obtained in July 2008." So gas prices dropped. Therefore driving is now cheaper and we should expect an increase. Instead we see a collapse in VMT commencing at the same time prices dropped. If Gail was correct in her analysis then cheap and plentiful oil should help prop up house prices and result in greater VMT. But we do not see this effect at all. We see continued declines and drops. If Gail were correct in her analysis, this availability of supply at cheap prices should result in a correction in the economy. This is ublikely to happen as the cause as identified by Gail is not the cause of the downturn. Her analysis is wrong.

No mention of a rise in oil prices. Note the causal chain proposed by the IMF:
1) Deterioration in credit quality
2) Changed market liquidity
3) Resulted in uncertain valuation of financial instruments
4) Disruption in underlying funding markets - the credit crunch

So what caused item #1 (deterioration of credit quality) in this causal chain?

Maybe the people doing this analysis have a huge blind spot that makes them unable to see anything outside of the financial system?

In any case, if you buy into this chain of causation, it still doesn't explain what caused the deterioration of credit. It would seem to me that if you were looking for an explanation Gail's explanation is as good as any. I see no reason why Gail's explanation would be in conflict with the chain of causation above. They can coexist quite nicely in my mind.

Sure there was / is a credit problem. There is also an energy problem. They are not independent. The run up in energy prices / peak oil is not the only cause of the bubble to burst, but is a part of the picture nevertheless.

An analogy...

Imagine this house of cards. We keep stacking more and more cards on top of the house while the "foundation" of the house is being slowly removed.

Eventually the house collapses. You could give two reasons for the collapse:

- well, it was a house of cards (bad credit) that's simply not very sturdy
=> sooner or later it has to collapse
- it was build on a shrinking base (dwindling energy supply)
=> sooner or later it has to collapse

You seem to be saying these two explanations are mutually exclusive. I think both can be true.

To me however, it seems clear that energy is the bigger and more fundamental problem. This is the problem that won't go away even if you do manage to restart the perpetual growth money economy. Sooner or later it will hit that wall again. No matter what kind of cards (i.e. credit / monetary system) you use, you will never be able to build any sort of lasting structure if you must keep growing the structure while at the same time its foundation is systematically being removed out from under it.

By the way, to add to the analogy of the "house of cards" being built of shoddy material (bad credit). Why is that? (why is it build out of bad rather than good credit?)

Maybe because in a system that must deliver perpetual exponential growth to avoid collapsing, when nearing its breaking point, the only thing left to sustain this growth for a little longer at the required exponential rate will be of the shoddy kind. The more sturdy (good credit) is simply not available in sufficient quantity to feed this runaway beast's perpetually growing appetite for more credit.

Why did good credit "run out"? Maybe because for credit to be good, it must have some meaningful relationship to underlying physical reality fundamentals which can not sustain exponential growth?

This all seems to fit perfectly and logically together if you ask me.

We can verify this by reference to one last graph. If Gail is correct then the increasing price of oil should have resulted in demand destruction (people couldn't pay for gas). This demand destruction should be coincident with the rise in the price of gas and should also be reflected in a decline in VMT.

I think it's quite easy to question this assumption. In most people's environments, not buying fuel means that they aren't going anywhere by two weeks, in particular, their job.

Nobody buys gasoline on a 30 year loan.

If you stop paying your mortgage, though, you could probably end up staying in your house for a year or two at least in these environments.

After all, according to Gail, folks could not afford gas at the market price circa 2007. But if we look at the following graph we see VMT increased despite the rising prices and VMT did not collapse until late fall 2008 at the time the overall economy collapsed

Money is fungible. The question is if they can afford debt service PLUS increased fuel costs.

Debt service is easier to turn off, in practice.

If people were, literally physically, sleeping outside two weeks after they stopped paying their mortgage, then things could be different.

VMT is of course made up significantly by job commuting. Unemployed people stay home more.

I agree that the immediate effect was the over leverage---people paid too much for housing with tricky loans and didn't budget a large increase in fuel & food. The *sum* was too much.

In the short run, I agree that financial, not energy, considerations are primary in the economic problem.

In the long run though---what is going to reach its old peak again first---crude oil or U.S. residential housing? No question about that one.

The IMF report cited:
IMF report on Risks to Global Financial Stability

is found at the following URL:

One can see that under an abstract fiat system (where numbers only seem to reflect some underlying reality but actually don't), a dramatic wealth transfer (denominated in dollars) was masked by leverage and borrowing.

This is a good insight. But the "unmasking" did not come about because of Peak Oil.

The "unmasking" occurred due to the fact that if you are leveraged 40 to 1 and your initial equity is wiped out then you face a margin call for 40 times your initial investment. If all of your free capital was committed to the market and you had derivative holdings and borrowings to further juice your leverage then you end up insolvent.

As Warren Buffet has observed, once the tide goes out you can see who was swimming naked. America's banks are swimming naked and the Treasury and the Fed have been jumping through hoops to find a way to cover this nakedness. Sadly, the citizens of the US are made to buy suits for their bankers.

I have huge respect for Gail's work and want to thank her for her the statistical analytical work she does which has been so educational to me. However, I think BOP is correct and with each day of study and observation I am more and more convinced that peak oil or resource depletion had nothing whatsoever to do with this economic crisis.

Let me ask a question or two just to help clarify my own thoughts on this:

-Does anyone believe that if oil had stayed at say $45 per barrel right from the start of this century that house prices were NOT already rising too fast and going too high for any rational person to belive this could continue?

-Does anyone believe the flood of hedge fund money and big bank money (after the removal of Glass-Steagal) had NO effect on prices, which grew even faster already from a high base?

-Lastly for now, what was the REAL price of oil for most of the period we are discussing (post 2000) after discounting currency declines in the U.S. dollar and inflation? Did the oil get "high" or did the dollar get "cheap"? Dollar rebounded, oil came "down". What a coincidence.

Gail's arrow at the opening of the post (one way upward) has always been a myth and is misleading. What happened to the 1930's, the 1970's, and now the post 2000's in that arrow? It has never been one way growth, but a series of fluctuations, up for awhile, down for awhile and relatively unpredictable as to when the tide will change. Those are shocked by this crisis are the folks who seemed to have forgotten that markets go DOWN as well as UP.

At the start of the century I head one analyst who said the old business cycle was essentially "over", it didn't apply anymore because of internationalism (somebody would always be up when you were down) and the service economy which could more easily shift, change and move with the market trends. The recession vs. boom cycle was done.

I knew then that we were due for an education. We got it.


To paraphrase:

--Does anyone believe that if there was a world-wide expectation of ever decreasing energy availability rather than its opposite for the last fifty years that there would be housing (or other) bubbles?

--Does anyone believe that if there was a world-wide expectation of ever decreasing energy availability rather than its opposite for the last fifty years that there would even be such things as hedge funds?

--Hasn't it been shown on this and other sites that, while the value of the dollar played some role in price fluctuations of oil over the last few years, it can not account for anything near all of it?

'The current financial crisis is a direct result of peak oil.'

In 2008 the price of oil surged to 147, causing distress and reduced consumption in the US, fully exposed to world price changes, though not so much in Europe, highly taxed, and others, highly subsidized. THe cost to the US, from a base of say 50/b to an average 2008 price of say 100, was 50/b x 20Mb/d x 365 days = $365B. However, the US produces say 2/3 of the oil it consumes, so 2/3 of this amount was redistributed within the US while 1/3, say 120B, was the net cost to US society. Compared with this the decline in housing wealth from the peak mid-2006, combined with the decline in equity wealth from the peak in Oct, 2007, is maybe $4T or so, or 30x the loss of wealth from the 2008 oil spike. Accordingly, while it is fair to say that high oil price was a contributing factor in 2008, say 3% of the two year bubble collapse, it is hard to conclude that the above statement is correct... and, in any event, if the high price we experienced in 2008 was the cause, then today's moderate price should bring us back to decent GDP growth. Sadly we continue to contract.

It is worth looking at the seventies... as has been pointed out elsewhere, during a period where oil use declined severely GDP continued to grow... this is another indication that the ongoing GDP contraction is not primarily on account of high oil price last year.

Furthermore, copious gas from shale (we have a lot of shale) indicates there is no near term collapse in US NG production, even though the price collapse has gone too far (gas from shale was too successful.) Similarly, more (much maligned) new technology, e.g. THAI, might produce much more oil from Canada, if not immediately then possibly over the next several years... pretty neat that this source is not far away or in politically difficult regions.

I've been reading TOD for a long time, but it has mostly become a doomer site... takes a while to skip through all of that to get to actual discussions of world wide oil and gas production.

The cost to the US, from a base of say 50/b to an average 2008 price of say 100

1. The price rise started in '03 from around $24/barrel.

2. The money paid in the US did not all recirculate. There were many tens of billions (hundreds from '03 to '08?) that stayed in the Big Oil coffers. You'll need to add some back in to the cost to the public.

3. It wasn't just higher gas and fuel prices. Food, and other commodities were also hit. You'll need to add that in.


Taking your comments one at a time...
1. You can prove anything you want by picking your start year. In 1981 oil hit 39/b and pundits confidently predicted it would go to 100. 50/b is not causing a worldwide crisis, and anyway Europe has been paying $6/g, or 250/b, for years. True most of this money remains in europe and is not transferred to the persian gulf, but individuals can nevertheless handle high gas price plus high taxes on income too once they get used to it... naturally if price remains unusually high they will cut usage to a point, exactly as Europe has done, and without crashing their banks, savings, retirement accounts or economy. Something I did not add in, and which was noted elsewhere in the thread, is that the dollar had been weak for some time, and this weakness accounts for part of the runup in price of this and other commodities.
2. Money paid to multinationals that is neither spent, paid out in salaries, bonuses, dividends or taxes is retained earnings. It is these earnings that allow corporations to eventually make large investments, just as retained earnings from years earlier allow firms to invest today in, say. ultra deep water. This is no different from a country perspective than if the funds are entirely paid to any of the listed recipients except that if the oil corporation (as opposed, say, to a bank) retains the earnings a large, difficult and expensive project is at least possible.
3. At first glance one might think that po drove ethanol production and that this in turn drove corn and the other grains; this was only very distantly related to po. Far more important were the bribes amd paid to congress to enact .51/g ethanol subsidies (and the clout that Iowa has in the first presidential caucus), without which no ethanol would ever have been produced in the US. Today ethanol producers are losing their shirts even with much lower corn price because the subsidy is too small, a problem likely to be remedied. The claim is that ethanol is the bridge to cellulose, it is really a bridge to nowhere.
IMO high food prices were partly on account of a general commodity bubble, which was related to the housing and equity bubbles, and partly on account of ethanol. Consider the metals group, all except gold much lower today, gold propped up by fear... in what way were these po related?


It is worth looking at the seventies... as has been pointed out elsewhere, during a period where oil use declined severely GDP continued to grow...

As someone who REMEMBERS the 1970s I can assure you that the economic disruption that occurred then was real and shocking and only now being exceeded in depth--and was pretty directly related to oil, like totally.

The GDP was rising? So already the GDP had been converted into a perpetually rising number independent of economic performance?

But GDP is bogus anyway, cooked since the mid 1990s and by the 00s cooked into oblivian. Not worth the glance. We should be choosing real numbers, not faked ones.

The GDP was rising? So already the GDP had been converted into a perpetually rising number independent of economic performance?

Do you realize what you're saying? "If the evidence doesn't support my belief, then the evidence must be wrong" is badly flawed reasoning.

the economic disruption that occurred then was real and shocking and only now being exceeded in depth--and was pretty directly related to oil, like totally.

Yes, there was a nasty recession in 74/75 and 79-82, as the GDP data shows. No need to assume that there's a big conspiracy around GDP numbers.

No need to assume that there's a big conspiracy around GDP numbers.

If the numbers don't look good, fudge em!


Shadowstats has been discussed previously, complete with references.

The short version is that Shadowstats claims household purchasing power has fallen by 40% in the last 15 years, whereas official figures claim it's increased slightly. If you take a look at household budgets, spending patterns are basically the same; in particular, essentials such as food took up no more of the household budget in 2005 than in 1990. This is not consistent with a massive drop in spending power, but is consistent with stagnant real wages, meaning empirical evidence supports the official figures.

So either everything magically got cheaper at the same rate as inflation was mis-stated, or the shadowstats guy is just plain wrong.

You do good propaganda. You are claiming budget = source of funds. You know that's not the case, so why say it? Why pretend those budges haven't been funded by debt? Remove the ability to keep your budget afloat with credit card debt and credit lines on your house, and things would look quite different. Purchasing patterns would have shifted years ago.

Why pretend those budges haven't been funded by debt?

I'm not. I've taken into account the decrease in saving rate (~10%), which incorporates the increase in debt.

Taking into account decreased saving and increased debt, shadowstats claims a 40% drop in purchasing power, and that claim is not remotely compatible with actual observed spending patterns.

I was there. I saw. So the GDP MUST be crap.

Have no idea how they fudged it. At this point I no longer care.

I was there. I saw. So the GDP MUST be crap.

You didn't "see GDP"; you saw your local area, which may have had a much harder time than the country as a whole.

The USA is a very big place; trying to generalize from your own town to the whole country is going to give you a very inaccurate perspective.

First, I think you underestimate the impact of subprime mortgage lending. Others have commented on that.

More importantly, you seem to totally ignore the role of advancing technology in economic growth. Sure, cheap energy helps economic growth, but new and improved technology is probably the most important factor in economic growth. In the last two decades, economic growth has been mainly driven by computer hardware and software, and most recently the internet and wireless. In the past, assembly lines, jet travel, the steam engine, farm mechanization, and many more advances have driven growth.

So the question is: which technology will drive future economic growth? Or, will there be a technology to drive future growth? Of course, anyone who knows the answer to that question is positioned to be the next billionaire.

Suppose there is a major advance which allows high quality fuel to be made from algae. The could unleash a wave of strong growth and render peak oil less relevant.

And we are to suppose that these technological advances which played such a big role in the economic growth do not require energy to produce and operate?

Here is your list
- computer hardware & software
- jet travel
- internet
- wireless
- steam engine
- assembly line mechanisation
- farm mechanisation

Name one item on this wonderful list of technological wonders that doesn't require energy to produce and operate.

I think you underestimate the role of energy in technological development.

And we are to suppose that these technological advances which played such a big role in the economic growth do not require energy to produce and operate?

No. What gave you that idea?

The key point to notice is that technological advances allow more to be accomplished with the same amount of energy (or other resource). As an example, online shopping takes 35% less energy than traditional shopping.

That's one of the reasons a fixation on zero economic growth is misguided. If the problem is growth in resource consumption, say "zero resource consumption growth" and realize that that will correspond to slow-but-positive economic growth.

"I think you underestimate the role of energy in technological development."
Likewise you are underestimating the role of technology in developing new energy resources and the growth in GDP/unit of energy consumed.

Who is going to loan us all the money ??

NEW YORK (AP) -- Stocks lost ground after a weak auction of U.S. government debt stirred worries about how easily Washington will be able to raise money to fund its economic rescue program.

Investors gave an unexpectedly cool response to a $24 billion auction of 5-year Treasury notes Wednesday, which also sent prices for Treasurys lower.


Just as Denninger said upstream

Weak Auction Sinks Treasurys
NEW YORK -- A fresh round of selling hit Treasurys Wednesday after a record $34 billion five-year note auction enticed lukewarm demand.

Bonds were already down before the auction following a failed 40-year U.K. government debt sale, the first failed auction of conventional U.K. government bonds since 1995. Rising stocks, and an unexpected rise in U.S. durable-goods orders also weighed on bond prices.

Following the auction at 1 p.m. EDT, prices of Treasurys hit session lows across the curve, with the intermediate and long end of the curve bearing the brunt of the selling.



The market is down and Treasurys are also down. Nate will confirm that this is odd.

But oil is selling at one third of its recent high and there is so much oversupply that OPEC has cut quota. So what is the relationship between this fall in T-bills and Peak Oil?

Let Gail find it as I cannot. Read Denniger for the reason:



I have read him some during the last weeks but I lack the background knowledge to realy understand what he is stating. His language is as if he had stared into a deep and dark abyss for too long, haunted might be the right word, worried or angry dont realy cut it.

The basic problems seems to be too manny outstanding promises compared to the known or likely ways for fulfilling them within the time limit the promised people would like to wait. But the mechanisms for all of this are mind boggling complex wich to an engineer soul suggests that they could become way much simpler. ;-)

Well the oil market is slowly and surely working its way though a short term oil glut.

Until we see what the real long term supply and demand situation is like its hard to say.

Given that the oil industry worked quite well with storage levels less than today one could readily assume that a normal oil market would function quite well without the current high level of storage. This says nothing about supply/demand it simply says that the current short term oil market has to much oil in storage even if prices remain low.

Storage levels could fall but supply remain ample and the price will settle to some value.
Or we could already be running a deficit in supply and storage levels will eventually fall and the price will keep increasing.

OPEC could resume production increases but one has to expect that at the very least the would move slower if prices are indeed rising. However at some point if the OPEC cutbacks prove ineffective one has to assume that they will increase supply to preserve cash flow leading to prices starting to fall.

Regardless of what happens one would expect the oil market itself will enter whatever its future stable pattern is only after storage level pull back from they current 17 year high or maintain the current level even for say six months or more. This could be the new comfortable level of storage and if it persists the market will adjust to it.

Regardless currently from our our historical data the current storage levels are distorting the market until they either prove to be the new standard or supply and demand work to at least bring them back into historical norms at some price.

Great post, great comments, I find all of it very interesting.

Despite, or because of, the fact that I'm not entirely awake and on a bit of sleep deficit, I'll post a brief odd comment even though I'm not a "finance" guy.

So did 'peak oil' cause the financial crisis? hmmm.

Fiscal bubbles of various sorts seem to crop up from time to time as emergent properties of the unique context they spring from.

If there are insufficient regulatory (or other) restraints, these seem to grow until they pop, in the manner of self-organized criticalities which are ubiquitous across many classes of system.

By their nature, such criticalities evolve to the point that arbitrarily small perturbations will trigger collapse. A destructive earthquake can ultimately be triggered by the shifting of a single molecule, or fail to be triggered by a nuclear blast. The statistical frequency of cascades of a given size can say useful things about a system, but the susceptibility of such a system to cascade due to a given perturbation is not knowable.

At ski resorts they will often fire cannons after a heavy snowfall, to trigger any avalanches which have evolved to states which may be triggered by perturbations smaller than the amount of particle shifting caused by the pressure wave of a cannon shot, thus helping prevent an avalanche triggered by an ill-timed sneeze. Yet even in the absence of cannons, sneezes, or mouse farts avalanches will eventually occur from microscopic triggers if the conditions for evolving towards criticality continue.

I'm always amused/apalled when I happen to see financial reporting in the media: "Dow up 100 points on jobs report", etc. Those silly folks have no idea why the Dow went up 100 points, but it comforts people to think that a deterministic cause has been assigned, much like when you're in a rattling DC-10 plunging through the night sky over the pacific, you appreciate the laconic drawl of a pilot on the intercom saying "waal, folks, as you can tell we're havin' a bit of choppy air so I've turned on the seatbelt sign, so just sit back and we'll get through it".

I'm suggesting that it isn't possible to determine even in principle exactly what precipitated the fiscal collapse, except to say that it was based on the totality of the context and the stage of evolution of an insufficiently-damped system approaching criticality in several overlapping ways.

The actual fiscal downturn may have been ultimately triggered by the momentary facial expression of a single trader on the NYMEX floor, or something equally obscure. If oil hadn't peaked, the context would have been different and it wouldn't have played out the same, but that's also true of every other part of the complex context in which the system was evolving.

Sometimes an asteroid impact will trigger mass extinctions. Sometimes the same-sized impact will cause none.

There may not even be such a thing as "climate".

Human intuition and reductive analysis are not always well-suited to dealing with the evolving criticalities and thresholds of complex systems. We will never be able to predict earthquakes except statistically, and the extent of our predictive ability about our evolving fiscal and social criticalities may be nearly as limited for the same deep reasons.

hokay, there's a comment from the lunatic fringe. Now where can I find some coffee, I seem to be babbling...

Sometimes an asteroid impact will trigger mass extinctions. Sometimes the same-sized impact will cause none.

Not that it impugns the point you were making, but just to address this literally... oddly, asteroid impact seems in general to not cause mass extinctions. For awhile we had hoped to implicate the impactor that formed Lake Manicouagan in Quebec in the Triassic/Jurassic extinction, only to discover that the impact was 12+ million years too early. Very curious--a nearly K/T sized impact and not even a blip in the biosphere.

Thanks, I was speaking literally, and you exactly illustrate my point.

I'd like to add some forward looking comments i.e speculate about what happens next.

First and foremost the worlds central banks are not going to allow the major currencies to hyperinflate. This means at some point they will force the major governments to curtail spending. This is possible because the central banks are either private entities or effectively private entities and collectively they can if needed force any government in the world to perform an action they desire. And yes this includes the US government. Now because the governments are generally bought out by the same banking system the chance of real force becoming a issue is mute.

However at some point the central banks will not stand in the way of preventing the flood of government debt from causing the interest rates on government bonds to rise. Recovery or no recovery at some point and it could be trillions and trillions later the central banks if faced with hyperinflation will force governments to control spending.

The reason is simple if the fiat currencies become worthless then the bankers lose their power they are not going to do that.

A simple projection is that the bankers will support the government in taking on new debt until all the toxic assets have been transferred to public accounts and the banks are well capitalized. Past this point the governments would now be in competition for capitol the banks want and the same for lending programs offered by the government. The banks will announce they are healthy and government programs would be stopped as funding dries up.
I expect that as the assets are washed that anything of value would be transferred back to the banks at pennies on the dollar. So the banks will be setting on huge piles of cash and a large number of assets of some value with the banks doing their best to pay far less than even their worst valuation for the assets. This would eventually consist of say mortgages purchased back for pennies on the dollar so foreclosure sales are actually profitable even with a substantial decline in housing prices. As and exact example lets say the eventually buy back some mortgages for say 10 cents on the dollar or 90% off. So they would be in a house with a 500k loan for 50k they can readily sale this as a foreclosure for 100-150k and actually turn a profit on the sale. And then of course they would also provide the financing.

As you can see they recognize that the clock is going to be turned back on the debt bubble and they are simply maneuvering to ensure the banking system remains viable in a low growth to no growth environment.

Next we here repeatedly that banks are not lending this is a bit of a falsehood since the truth is without growth it would be suicide for banks to practice fractional lending. So my opinion is whats going on is banks are now positioning themselves to lend 1:1 with reserves.
And next of course given that lending rates and amounts will drop substantially they are also going to hold off on lending until the interest rates improve substantially.

So overall the banking system is not full of fools they know exactly what they are doing and what it consists of is simply preparing the banking system itself to work without fractional reserve lending in a world thats no longer growing.

The problem is not that the banking system is restructuring to deal with and extended period of little or no growth. The problem is that they took advantage of the slowing of growth and government policies to create a financial bubble and then they are leaving the government to pick of the tab. This will ensure that if we are correct about peak oil the government will be basically helpless to deal with it. The government will increasingly be forced to pay ever higher interest rates for new and rolled over debt effectively using the entire tax base to pay interest.

The Feds buying up treasuries to pump money into the system to transfer bad loans to the government is probably the worst situation we can imagine since they can readily unload these treasuries and effectively take control of the interest rate on treasuries away from the treasury itself.

Peak oil simply accelerates this transition and seen from this viewpoint its really not important my opinion is that with the middle class effectively in default the banking system is simply no longer interested in really supporting it. At the end of the day a banker simply does not care if he makes a 100 dollar loan for 20% interest or a 400 dollar loan for 5% interest its the same profit either way. But this does point out that as deflation continues that banks will seek the highest interest rates possible. And if they manage to get well capitalized and lend at 1:1 they don't care if interest rates increase dramatically for borrowing capitol since the banks are no longer going to be borrowing money to lend.

What peak oil does is to accelerate the decline in the amount of cash people have to pay debt and interest as this cash declines it just forces the banking system along the path it looks like they have already chosen. And the problem that remains is the route they have chosen to reverse fractional reserve lending leave both the people and government with a stark choice of accepting the status quo or forcibly usurping the banking system.

Peak oil certainly played a role in force some portion of the population into default earlier then they might have as prices rose and peak oil will play a role in preventing the return to growth anytime soon. As long as the banking system succeeds in the recapitalization plan they simply don't care.

Obviously what probably should have happened is the Government should have intervened at a minimal level to restructure the banking system in a sounder fashion the defaults should have been exposed excepted and allowed to happen. The fed could readily have stood as the lender of last resort without saving the insolvent banks. We did not need to save them and its obvious they are not lending anyway just playing a game. This would have left us with a much smaller well capitalized sound and remorseful banking system and a government still able to borrow if needed to transition our economy off of oil. As long as the Fed and Treasury backstopped the dollar the defaults are not fatal and as long as they obviously where working to ensure that sound banks where being created sentiment and support would have remained.

We still would have had to deal with a deflationary economy and peak oil but my opinion is the transition would have been ten times easier.

One has to wonder how long stability will last now that the banking system has successfully forced the worlds governments into a corner. They may have succeeded in ruling the world but this may be a very brief reign.

And example of our loving banks in action.


March 25 (Bloomberg) -- The U.K. failed to find enough buyers for 1.75 billion pounds ($2.55 billion) of bonds for the first time in almost seven years as debt investors repudiated Prime Minister Gordon Brown’s plan to stem the worst economic crisis in three decades.

Gilts slumped after the London-based Debt Management Office, which manages bond auctions on behalf of the Treasury, said investors bid for 1.63 billion pounds of the 40-year securities. The last time the U.K. government was unable to attract enough investors was in 2002 when it tried to sell 30- year inflation-protected bonds. The yield on the 4.25 percent gilt due 2049 rose 10 basis points to 4.55 percent.

Brown’s government aims to sell a record 146.4 billion pounds of debt this fiscal year and as much as 147.9 billion pounds in 2010 as he tries to pull Europe’s second-largest economy out of its worst recession since 1980. The prime minister’s plan drew criticism yesterday when Bank of England Governor Mervyn King told lawmakers in Parliament in London the government should be “cautious” about spending and deficits.

“This is a warning signal investors are sending to the government,” said Neil Mackinnon, chief economist at hedge fund ECU Group Plc in London, who helps manage about $1 billion in assets and is a former U.K. Treasury official. “Investors are giving the thumbs down to the gilt market.”

Doesn't history say that bankers fall to swords when their avarice is too successful?

What happens if the US or some other nation refuses to play ball? Congress could dissolve the Fed, the Treasury, and effectively the IMF in one afternoon if they so desire.

You think so ?

Looks like my insights starting to become common knowledge.

March 25 (Bloomberg) -- Federal Reserve Bank of San Francisco President Janet Yellen said the central bank wants authority to issue its own debt, a move that would bolster its efforts to raise interest rates as the credit crisis abates.

The Fed normally raises interest rates by selling Treasuries on its balance sheet, draining reserves from the banking system. That task is tougher with the Fed’s commitment last week to buy more than $1 trillion in mortgage-backed securities, which are harder to sell quickly without roiling markets. The central bank cut its main rate to almost zero in December and switched its focus to emergency credit programs.

On the power to sell debt, “I would feel happier having it now” so the Fed could use that authority to adjust its balance sheet, Yellen told reporters today after a speech in New York. Even without that tool, “there is a great deal we can do,” she said, “but it would certainly be a nice thing to have.”

Yellen said she was unsure whether the central bank has formally requested authority to sell its own bonds or informed Congress it plans to make such a request.

All I can say its a bit unfair for me to predict that the feds are going to decouple for the dollar from US treasuries then for them to blatantly broadcast it a few days later.
My opinion is brilliant insight deserves at least several weeks to stew before the truth comes out :)

Memmel: I have to say I don't understand the premise. I read her story and I don't understand it either-she is talking about inflation risks without explaining how all this debt she wants to issue is going to be repaid-is your premise the new Fed debt will be valuable while the Treasury bills will be devalued?

The analysis was junk. Yes this is exactly what I'm saying basically they are going to decouple the dollar from the US government the Fed issuing debt to back the dollar vs the US Government issuing debt. The Federal Reserve Note would effectively become a private bank note. Its no different from private bank notes issued in the past. I'd not be surprised to see the Fed also buy up a lot of gold at some point to help back its notes. Otherwise they are effectively backed by collateral in the form of loans owned by the Federal reserve.

Thats why we have this massive asset sweep underway the intention is to figure out whats good whats bad they will then have the US Government buy up the toxic assets for a premium using a massive issuance of treasuries a lot purchased with newly minted dollars.

Then a few magic games and the banks will use the money they received from the Government for their toxic assets to buy back a fraction for a excellent prices my example is 10 cents on the dollar for MBS debt probably thats high. So first the banks get full value for the bad loans then they buy some that have real assets backing them at rock bottom prices then as these default they can actually make money twice selling them again at a higher price once on the profit and next on loaning money to the buyers.

The key is that once the game is done the banks are setting on massive amounts of capitol. Understand that a lot of the debt they will sell to the Government is in the form of long term mortgages so they will rapidly clear their loan books I'd not be surprised to see some profit taking at this point also.

At the end of the day you have banks and the Fed sitting on massive piles of cash and probably a lot of poor assets that they did not pay much for.

To go forward the next problem is the Fed wants to sell all the treasuries it accumulated but this will drive up interest rates so since the currencies are still fiat it has to have a way to issue debt at a different interest rate vs treasuries. Treasuries will be quickly viewed as having little value and Fed debt will be the new standard and pay a lower interest rate. So the Fed gets its cake and eats it too. It continues to borrow as needed to maintain the financial system at good rates while the US Government is left with skyrocketing rates on its treasuries and is quickly forced to either default or quit borrowing.

At some point along this game the Fed will form some sort go global currency with the other central banks of some sort who knows exactly what or when. But at this point they become true international banks not tied to any government and they can and will put the governments of the world on a austerity program.

If we are at peak oil and if the bankers wish to ensure the survival of fiat currencies which is their livelihood then they have no choice but to massively curtail fractional reserve lending build up huge asset basis and act like fairly simple banks issuing asset backed notes as tender.

This means a few things will probably take place.

1.) The Federal Reserve will buy massive numbers of treasuries as long as the money is recycled to buy toxic waste at face value.

2.) The Federal Reserve will distance itself from the US Government and then the Treasury itself and move rapidly to be a independent bank.

3.) The Federal Reserve and associated banks will accumulate assets at rock bottom prices to serve as support for asset a asset backed currency.

4.) The Federal Reserve will build up gold reserves as one of the assets backing the currency expect them to get the gold at Fort Knox at some point for free to back the currency. I mention gold but its not critical it primary use is to prevent a flight to gold from fiat currencies. But moves in gold may be telling.

5.) Probably at some point oil will be incorporated into the asset classes backing the currency this is I suspect how they plan to ensure the world governments once they finally act are powerless buy incorporating oil into the asset classes for a asset backed currency they pretty much tie the hands of the governments since and attempt to regain control of the currency would immediately result in a oil embargo.

The only thing really unfair about the whole thing is it will leave our governments massively in debt and probably paying very high interest rates for debt using most if not all of the tax revenue deficit spending no longer works since it just drives up the interest rates the governments pay. This in and of itself is not a bad thing except that we won't have any collective way to restructure our economies to deal with peak oil. Any move to alternative energy will be effectively controlled and funded by the banking system. Given that oil itself could well be a critical part of a new world asset backed currency one can imagine that they will be in no hurry to fund alternatives.

My opinion is if I'm correct and this is the game thats being played that its intrinsically unstable we may well end up with a international currency thats actually stable but at a national level and regional level things will be really unstable so its not clear how much has been accomplished. One can imagine that international trade will drop rapidly and localization will become more prominent probably with some sort of new local or national currencies functioning internally. So I think in effect the banks win the battle but lose the war by the time that they control everything international trade may well decline to the point that gold or other asset equivalents such as bill of lading or other sorts of debt can be used for the remaining international trade. Or maybe we do use the new currency but borrowing rates plummet so much that its not super profitable. What I think the bankers are really missing is that its not just growth that fueled our economy but consolidation and economies of scale once the growth ends the need for economies of scale ends and thus regardless of what they do to create a stable global fiat currency at the end of the day no body cares since they are back to trading locally.

At then end of the day all they have done really is make a time that will be one of the hardest in the last hundred year ever that much harder. It could mean at the end that all they did was destroy the village in order to save it.

You might be right-in any event I would applaud your original thinking on this subject. Lots of people realize they are looting the USA but you take it to a new level IMO-you are echoing a lot of the Alex Jones film on Obama without the rhetoric.

How about we nationalize the Fed?

All this shit about socialism. How about we start with the Federal Reserve? I'm laughing too hard gotta go.

cfm, TROLLING in landlocked Gray, ME

The fact thats not even on the table speak volumes about our current situation.

If congress was really in control then this would have been the first step take control of the fed.

Whats amazing to me is I can figure out a very plausible way for the Fed to convert the dollar into a true global currency and yet not support treasuries i.e allow the government to default for all intents and purposes.

And whats even more interesting is the facts seem to me at least to fit this scenario.

For us at least we should be aware that the people who are setting up the US government to default don't give a rats ass about peak oil or mortgages or global warming or pretty much anything else except maybe the treasuries held in other central banks. I'd love to see how many other CB's not only have short term treasuries and have unloaded longer term ones.

You have to assume they are all in this game together makes you REALLY wonder whats up in China they must of had a coup detat and just don't know it yet. This means to me that we can expect a real coup in China if the Chines CB is really in on the game. Maybe they are cut out of the deal but I can't see that happening. Thus if I'm right we can expect some amazing events to happen in china if the people start rioting. Or probably more correct when the riots start in China.

I had originally assumed for example the the UK pound would be saved but maybe the plan is to have it be the sacrificial currency because the Bank of England can't escape its government. What I mean by this is for a while now I've been warning that we will have one of the major currencies fail i.e pull a Iceland. Not the US dollar but some other currency.
Maybe the plan is to let the pound go down at the right time and use the crisis to get the global currency.

Maybe I'm crazy but once I became convinced that the central banks will not allow the dollar to hyperinflate then you pretty much end up with my conclusion. I don't see another way out.
One could even argue that its a better end game than hyperinflation but thats a tough one.

In any case the game I thinks going has only jelled for me for a few days I'll have to start thinking about symptoms we might see. I could readily see high oil prices as one thing these bankers would not mind seeing since it will drive down asset prices even further and they are doing and asset sweep. They sure won't prevent it. Also I can't see that they are all that worried if the dollar weakens over the short term. In fact I'd say they have no problem weakening the dollar significantly esp against the Chinese Yuan. And I'd say they want the Yen to strengthen significantly. The Euro slightly. The Yen however is another currency that may be effectively sacrificed for example. But the game I'm guessing if a takeover is planned in China is to significantly destabilize China and drain the current Government of assets while protecting the wealth of the central bank almost the same game as in the US just played differently. Given how the Euro works its effectively already controlled so the CB's have that currency under control. This leave the Yen and the Pound. Well Japan is already toast its Governments done so this leaves its Central Bank probably wanting to see its Yen strengthen a lot before a new global currency is formed. The short straw again goes to the British pound no matter how you slice and dice it.

mike / memmel
The last few posts by Willem Buiter on his blog lend some credence to your speculation - for example the different positions of the Fed & ECB compared with Bank of England.

His most recent one deals with deliberate wrongdoing

I [WB] am becoming more and more impressed with the importance of misfeasance and malfeasance - of negligent, unethical and outright criminal behaviour, ranging from high crimes to misdemeanours.

Memmel said:

So my opinion is whats going on is banks are now positioning themselves to lend 1:1 with reserves.

I don't understand how the totality of commercial banks can operate by loaning money at a positive interest rate, especially a high positive interest rate, and a reserve ratio of 1:1. Does loan interest not imply that the money supply must increase? Where is the increase to come from if not from fractional reserve lending?

Having asked the question, the answer occurs. Your thesis is consistent with an the average operating reserve ratio of about 1.x:1, where x is the average interest rate. Still a radically low reserve ratio, with the same general implications as your comment.

Britain was enjoying an unusual surge in their property values, now they are enduring what was recently described as the most economically troubled times since WWII:

British Recession -- Independent, Ireland

British working class cutting back spending due to hard times -- China View, China

In addition to increased risk of British personal and business defaults, the North Sea oilfield is in a long term production decline.

I agree with the basic premise that past peak oil will cause a downturn in world economies, but I'm not sure we can yet conclude that is happening. Why, because this latest economic downturn was due primarily to the mortgage meltdown from deregulation, and because we have China and India as examples of economies that are growing quite fast, in spite of higher energy costs.

I think what's happened in the US is stagnation. Too much willingness to be fine with the status quo, and not enough impedus to change industry as the world changes. For example, did the US establish high speed electric commuter trains like France and Japan? Did the US deploy as many wind turbines and solar panels per capita as Europe? Did our auto manufacturers produce hybrids as quickly as Japanese auto makers? Have we modernized our electric grid? Are we protecting intellectual property, like patents for complex modern day equipment?

Or, is the US simply treading the same old water? You can see this malaise with the same old politics of resistance to Obama's call for change. Part of what he was talking about in last night's press conference was that change, if embraced for new technologies, like renewable energy can create growth. And if we create enough growth, then our economy will be robust enough to support healthcare.

But it will be a hard sell, because the good ol boys on Capitol hill are use to only tweeking things a tiny bit, like by 2.1% or 1.4%, but nothing ever changes 180 degrees.

There's nothing like keeping it fresh with new technology, and this country has gotten so stale its become putrid. Its time for change folks!

For what it is worth, I have a slightly toned down version of the report, for those who think I am being a little extreme in my views. The report is probably a little better for those who are not peak oil aware, or feel that one absolutely has to have tight proof that this is the explanation, and not some other.

PDF version: Finite Resources: One Possible Explanation for the Financial Crisis

Powerpoint version: Finite Resources: One Possible Explanation for the Financial Crisis

Bravo, Gail!

I've been saying this — that the financial crisis was a direct result of the energy crisis — for a couple years now, ever since the housing bubble began to burst.

However, I do not think this is the swan song, nor do I think the financial markets will not recover. Rather, I think it will be a bumpy road down.

What's happened is that the growth-based economy has bumped up against the glass ceiling of energy availability. This has caused a "bounce" off that glass ceiling, if you will, and at some point, $40-$50 oil will once again fuel growth, and we will come up and smack our heads on the glass ceiling again. Only the next time, it won't be at 85.5 million barrels a day; it may be at 83 mb/d (3% annual decline), or lower.

We'll see this cycle repeat: bumping up against energy constraint glass ceiling, followed by an energy-shock recession, followed by cheap(er) energy, followed by wildly optimistic growth, followed by bumping up against the glass ceiling again, only lower this time.

And, with the possible exception of those in this and similar websites, no one will figure it out, or they'll remain in wilful denial.

Jan, EcoReality Co-op

Thanks, Gail, for a great article.

I agree that a declining economy decreases credit, and this causes businesses to be short of cash. But is the solution a new currency? Why not print more of our own currency, and hand it out to the people? Obviously we should not print enough to cause hyper-inflation. But we could print enough to make up for the money that is lost due to the fact that the fractional reserve system is not creating as much money as it usually does, since lending is down. If the government were to run the printing presses, and give everybody a brand new $100 bill, some of that would be used to buy things, spurring the economy, and some would be saved in local banks, giving them a supply of capital that they could lend at interest rates high enough to overcome the problem of frequent loan foreclosure. It seems to me that such a system would work. What am I missing?

This might sound totally irrational (and probably is), but does anyone else here have a feeling that some shadowy research group is going to release some fundamental new technology to solve all our woes in the near future - 'zero point energy device' or fusion or perhaps something else? I am not trying to stir things up, nor am I falling I hope for all the fluff about alternative energy, but if you think about it, if some group wanted to make political capital they could just by waiting for things to get economically and socially worse and they reveal their technology break through and be hailed saviors of the world etc... Does anyone else think along these lines or should I go see a specialist rofl ?

Something totally revolutionary rarely happens in science and technology. Perhaps the closest thing was the experiment in 1820 by Hans Christian Ørsted that was supposed to show that magnetism and electricity were not related, but had the unexpected result that when a current passed through a wire it deflected a compass needle.


By 1831-32 electric generators and motors were developed, and experimentation with the telegraph began about the same time.

Some of history’s greatest minds developed electromagnetic theory, most notably James Clerk Maxwell, Oliver Heaviside and Heinrich Hertz. Einstein relied heavily on this work in developing his theories.

Electromagnetism is one of the four fundamental forces of nature, the others being the weak force, gravity and the strong nuclear force.
Sometimes inventors precede the scientists, as in the case of thermodynamics, which grew out of attempts to improve the efficiency of steam engines, but also proved to be applicable to physical chemistry. (Thermodynamics is the only science that can demonstrate the passage of time.)

Thermodynamics sets our limits. Thermodynamics can tell us how efficient new processes will be before they are ever built. This includes energy of chemical reactions, whether arising from or required to create a reaction.

Radioactivity was investigated in part because elements like radium were hotter than their surroundings with no known source of heat input, thus defying the First Law of thermodynamics. This eventually led to the discovery of nuclear energy.

One of my interests is following the science timeline:


Here you can see the relationship between different scientific discoveries. There is a great deal of building on the discoveries by others, even by the greatest geniuses in history.

We have good understanding of the laws of nature, at least as far as physics goes. The last great discoveries in physics were mostly in the early 20th Century and dealt with quantum mechanics and subatomic particles. This science brought us nuclear energy, computer science, lasers and CAT scans.

The other new field is genetic engineering, which I do not see as contributing enough to the economy to offset the depletion of natural resources.

Perhaps something with the promise of Cold Fusion will come along, but we have to ask why we have not fully exploited nuclear energy when we know it works.

We have good understanding of the laws of nature

No we don't.

The only thing we have is a self-serving high-esteem view of ourselves (i.e. that we are made in God's image).

There are many fundamentals of the Universe that most of us don't understand. We sweep these questions under the rug.

For example, ... why does gravity exist?
... How did the Universe come into being and where does all this stuff go when the Universe fizzles out (assuming a Hubble constant greater than one)?
... Why does an electrical current flow when a magnetic flux line sweeps through it? What is a magnetic flux line?

We have some BS stories, but often we truly don't understand.

Profbaldwin: Basically you are expecting a Messiah. I recommend you to go to the church of your choice and pray - that's much cheaper than a specialist.

Don't have that feeling at all...

If only 2 choices?? - see the specialist.

At the risk of sounding like a "me too" post let me join in congratulating Gail on a well written presentation. A lot of criticism here seems to be of the "whcih came first, the chicken or the egg?" type but, I tend to agree with Gail's analysis. While the world's financial and commodity markets when combined with religious, national, cultural and political influences present a system that is way too complex to analyze with any accuracy, I think she does a sterling job of establishiong a very fundamental relationshhip between energy and the economy.

As I have said before in some post or the other, I have always been suspicious of the status quo. I have always thought there was something wrong with the way things were, something was out of balance, un-natural. Since coming here to the Oil Drum I have been enlightened by the posts and the related discussions. I now think I understand why I felt things were out of kilter for a long time and that my subliminal suspicions were justified. I now also realize that I have a yearning for things to continue BAU in a strange twist, for example, I want to continue to have personal motorized mobility. I sense this hope for a fairy tale ending from others when they speak of "technology saving us".

I was at a party just last Saturday night and had a conversation with a member of the local military air wing that was at college the same time as me. The conversation turned to the economy and in response to my pessimism he pointed out that mankind has "always" been saved from disaster by some technology that appears on the downslope of the bell curve and "takes over where the previous energy source left off. Now he's obviously an intelligent fairly well informed guy and I didn't feel qualified to respond so I just walked away feeling a bit dazed and wondering if at 47, I should start believing in fairy tales again.

Alan from the islands

I have always thought there was something wrong with the way things were, something was out of balance ...

Well said.

I too had these uneasy feelings that something was not right and yet I couldn't put my finger on it.

The discussions here at TOD have at least assured me that I am not alone. Most people you run into (at parties, etc.) are not willing to step back and critically evaluate the system. Stuff is just going dandy for them at the moment and they are not about to rock the boat, let alone give it a gentle nudge.

Now as far as Peak Oil being the root cause of all our problems, I'm not ready to buy that simpleton's story.

The world is a complicated place. What's simple are the models of it that we fabricate in our inadequate brains. Simple thinks as simple is. We love simple stories that explain away a much more complex situation. Narrative fallacies, as Nassim Taleb of Black Swan fame coins it.

Once prices of oil started to rise, the higher gasoline and diesel prices helped push a system which was inherently unsustainable over. By 2006, families had become less able to maintain high mortgages, and home prices started to decline. [...]

At this point, a break occurred. Commercial credit started becoming much less available, which reduced demand. With the reduced demand caused by the lack of credit, prices dropped very quickly from $147 barrel to a low of $31 barrel in December 2008. The financial crisis as we know it had started.

This is the central thesis of your article, upon which all the rest hangs. But I think you've not shown sufficiently any link between oil price rise and being unable to pay high mortgages. Peak oil isn't the cause of every problem in the world.

To show the connection between peak oil and the financial crisis, since your connecting point is household spending, you would have to show some typical household budgets, and show that when the price of one thing rises, people are unable to reduce consumption of it or of some other item in the budget to compensate; or else show that people are stupid and can't adjust their spending to changing expenses or income.

That is, does the price of oil matter that much? Are people unable to use less petrol, or unwilling?

People buy petrol, not oil
It's worth noting that homeowners don't buy oil, they buy petrol (gasoline), and petrol price doesn't rise and fall at the same rate as oil does. Thus the impact of rising oil prices isn't as severe as it seems at first look, and in any case households can adjust their spending, dropping it in some areas to make up for the higher cost of fuel.

For example, in January 2008 oil was $65/bbl, and petrol A$1/lt. In July 2008 oil was $145/bbl, and petrol A$1.50/lt. Now oil is around $50/bbl, and petrol some A$1.20/lt.

In Australia, the average household has two vehicles, each of which uses about 1,000lt/year. So that oil's ups and downs make the difference of A$1,000/year per household, or A$20 weekly in actual petrol price paid.

People can adjust their budgets
Now, that's not nothing, but is a small amount compared to overall household spending of A$893 weekly, with for example A$42 on meals out, A$35 on clothing and footwear, and so on. That is, the extra cost was for an average household easily absorbed by cutting back in other areas.

Of course, you may contend that people cannot lower their fuel consumption, it's all essential. Often the image presented in these sorts of articles is of cars brought out only to drive to and from work. But as I note in this article, when you look at people's actual driving patterns, around two-thirds of all car trips are discretionary; that is, they could not be taken at all, taken by non-car methods, or several trips could be rolled into one with planning. So if fuel rises by 20%, you cut your car travel by 25% and spend not a cent more on fuel.

Of course there will be a minority of drivers whose only driving is to and from work and other essential trips, but you'd have to show that these make up a significant enough number of households to significantly impact the economy as a whole.

Why the USA? Why not Australia?
Australia also had a rise in fuel prices, and at the same time a plateauing and even in some areas a drop in housing values; but no general credit crisis. What makes Australia different? Are we able to adjust our spending, but Americans can't? I don't think so.

It's worth noting that while the whole Western world has had real estate booms, and paid the same price for oil, it's the US, UK and Spain which have suffered the most in the financial crisis. Australia, Germany, Taiwan and so on have suffered comparably much less.

Now, what's different between the countries? Some had well-regulated finance sectors, others were essentially unregulated. For example, in Australia we have the APRA; that is, our major financial institutions are regulated. We have also the ACCC, and ASIC. These have their faults, but are generally good, especially in comparison to many other countries.

Thus the connection between the price of oil, its peaking, and the financial crisis, that connecting point of household spending, you've left unproven. You've not shown that oil's price has a great impact on people's overall budget. And even if we take that as given, you've not shown that people are unable to spend less on fuel. And so we're left with their being unwilling to truck around less.

And this really is a key assumption underlying many of the more doomerish articles out there, that when faced with changing conditions people freeze like a deer in the headlights and let the big old truck of change roll over them. Some do, of course; but the continued survival of the human race suggests that most don't. Most people adjust their spending and lifestyles.

Economic booms and busts have existed long before peak oil was an issue, indeed even before oil was consumed at all. This may be TheOilDrum, but that does not mean we have to attribute everything bad happening in the world to peak oil.

Australia is no different. The recent Government incentive to give new homeowners a boost is the new subprime down under.


Australians in general, and the property market commentariat in particular, are in denial about the extent to which Australian house prices are overvalued–and therefore overdue for a fall that The Boost is only temporarily delaying. Even a simple comparison of the ABS House Price Index for Australia to the US Case-Shiller Index, when both are deflated by the CPI, shows that the Australian house prices bubble was substantially larger than America’s

Australia is not going to escape a depression. Too much debt, current account deficits, major trade partners all in recession (soon to be depression). The charts at the above link are worth having a look at.

The current Australian house price bubble is about 75% more extreme than the USA’s, which is now clearly in free-fall. A fall in Australian house prices is inevitable, and it will be driven by the household sector’s attempt to de-lever from its currently unprecedented level of debt.

This de-leveraging will drive the economy down, taking employment with it–and especially the jobs of First Home Buyers, who are definition have less secure employment than older, established home owners.

ps - Germany is contracting faster than the US and Taiwan's exports have collapsed sharply and unemployment recently hit a record I believe. TSHTF globally and how will households adjust down under when you're going to have more than 25% unemployment?

One of the differences in Australia has been the very rapid increase in population both due to new immigrants and a recent rise in birth rates, so population increased by >400,000 last year. Although out economy has slowed, and unemployment has risen so has employment, although full and part-time has jumped around month to month. Interest rates on home mortgages have dropped from 8-10% to 5-6% ( 80-90% of mortgages are floating rates not fixed 30 year ),so this is a big increase in disposable household income for those with mortgages!! Not many new homes being built.

Net result, no overhang of vacant unsold houses, only a very small drop in prices, rents are now higher than mortgage payments for some homes, saving rate has risen dramatically and inventories have dropped; in other words everyone is cutting back, but actually much better off except for reductions in superannuation. Thus, only a few have to sell, and lots of employed waiting and able to buy.
Sydney is the worse off of the capital cities, shopping malls are difficult to find parking spaces on weekends, restaurants are still full, traffic density is worse than in 2007, we are doing the same things but probably not buying as many big items ( cars, boats, caravans, or traveling overseas).

The Commonwealth and state grants apply to first home owners only, and amount to an average of $14,000, compared to the purchase price of $200,000-$500,000 (flat in grubby part of major city vs house in decent part of it).

The state stamp duty in many states is basically the same size, so in effect the First Home Owner's grant simply pays the stamp duty; this is not hugely inflationary.

Even absent stamp duty, we're talking about 2-7% of the purchase price of the home. Factor in that less than half of purchases of housing at any time are first home buyers, and we get 1-3% of all spending on housing being due to the first home buyer's grants. 1-3% is hardly a "bubble" on the scale of the subprime mortgages which inflated prices 100% or so. We do indeed have a housing bubble, but it's on a much smaller scale than those in the US, UK and Spain.

Blanket statements without any factual backing or reasoning that Australia will suffer a depression (or have a boom, whatever) can safely be ignored in our discussion, I think.

The point remains: if peak oil caused the financial crisis, why did the US suffer it but not Australia? It's not like Australians are all tooling around in solar-powered electric cars or something.

You may want to ask a Canadian this question. I believe they are starting to glimpse the answer. To be perfectly honest one of the few things I do gloat on are when these arguments that its different here and we are special come crashing down on people.

Australia is different, but we are not special - and I never said we were. I think it's always best to contend with what someone is actually saying, rather than some vaguely similar thing someone else once said in some other discussion you had years ago.

I didn't say Australia was "special". I said that we'd not suffered the same financial crisis as the USA, and that therefore "peak oil caused the financial crisis" does not look good as an explanation.

Australia has other problems, such as,

- we deliberately exclude a significant part of our population from productive work and active participation in democracy (Aboriginals and the poor)
- we have an export-driven economy, but our exports are mainly commodities, which are generally cheap and so can't cover our imports, and anyway their price is volatile which makes corporate and government budgeting difficult
- this attachment to "dig it up and sell it overseas" also makes us too attached to fossil fuels, especially coal; a problem in a world of depleting fossil fuels and climate change
- corporations and government are conservative and avoid innovation, so that Aussie inventions end up being produced overseas and sold back to us
- we believe in endless economic growth, and are fond of the idea of getting something for nothing, which leads to economic booms and busts

There are many other problems, but those are the major ones which are relevant to a peak oil/financial problem discussion.

The Swedish government financial stimulation for home owners is a tax deduction for the contractor cost when maintaining, renovationg or making your home more energy efficient. It does not include the material cost. It is intended to become a permanent policy and it has already activated a lot of the laid off carpenters, plumbers, etc.

The expensive part is the infrastructure investment and there are more money being spent on maintainance and starting up rail and road investments where all the planning and permits are ready.

Hate to agree with Kiashu, but Australia's house prices are unlikely to crash anytime soon. We've got the lowest interest rates in 40 years, no 18 month overhang of unsold spec houses on the fringes of nowhere, and record low vacancy rates for rental properties. The real average suburb prices have been essentially on a plateau for about 4 years now.
As for the GFC outcomes, our destiny is tied to Asia not the aging Anglo Saxon economies.
I know this site has to USA centric , but I'm not. There are 2 Billion young, energetic, intelligent, aspirational Asians who desire only one quarter of the wasteful living standard of the average American. They'll burn oil,gas,coal and ever increasing amounts of uranium in their efforts to get there. Australia is tied more and more to their coat tails as they'll buy every commodity we can supply in ever increasing quantities.
India just launched the $3000 Nano " peoples car". China's annualised car sales exceeded the USA's for the first time in January 2009.
The East may yet rise again as the West declines. Peak energy has a while to run yet!

I'm am so sick and tired of this post-game retconning to make it looks like peak oil caused the credit crisis. This despite Matt Simmons and others expecting $300 oil before the credit crisis hit and looking like complete idiots afterwards. This chart and this chart alone tells you all you need to know about the main trigger of the credit crisis. High oil prices were an irritant but the bubble was going to pop pretty much when it did ANYWAY and will continue to pop with cheap oil as Alt-A and Option-ARMs reset. End of story.

I agree with you on that time scale - but if you widen it to 30-40 years - why did we need all that leverage/borrowing/home equity to begin with? Decline in cheap resources per capita caused the leverage to maintain semblance of equality. In any case, those that argue over whatever the actual pin that pricked the bubble in order to be right are missing the larger question - what are we going to do about it? Gail might not be right by flatly stating peak oil caused the credit crisis, but she is assuredly right that without debt we can't grow energy, and without energy we can't have debt, and without debt, we can't have growth, etc. So, irrespective of where the original straws came from, or which straw broke the camels back, the camel is in some serious camel dung right now. What to do?

What to do?

Start a business, even if it's just one person.

I'm not joking.

Every business takes some time to get its footing, to figure out exactly what the offer is, how to describe it and what people are willing to pay for. And there are many things we are going to need so that won't be coming from China and other far off lands anymore.

But be ready to switch from accepting dollars to accepting food at a moment's notice.

So, irrespective of where the original straws came from, or which straw broke the camels back, the camel is in some serious camel dung right now.


What to do?

What are we willing to do? I don't intend this as a rhetorical question.

why did we need all that leverage/borrowing/home equity to begin with?

We didn't.

But if easy money is available, then a lot of people are going to be tempted to use it, and I would argue that recent years have seen more widely available credit than ever before.

I don't think there's any need to imagine some kind of "pacify the masses" conspiracy to explain the surge of credit; simple greed is more than sufficient. People were greedily using credit to buy big houses and fun toys, while companies were greedily supplying that credit to rack up enormous profits.

As they say, never attribute to malice that which can be adequately explained by incompetence. Or, in this case, greed.

I respectfully disagree with the "peak oil caused the financial crisis" meme. I suggest taking a step farther back, and noting that a fundamental discontinuity in global energy trends occured in the 1970s, and that the failure of governmental and financial elites to respond to this signal in an appropriate way is ultimately what led to today's financial crisis. In other words, the financial crisis isn't something that just happened over the past couple of years, it was decades in the making.

Looking at this graph it would appear that most of the 'damage' has been done if the problem was Subprime.

I live in the UK and a large number of people have what I guess would be called Prime rollover of 2 year fixes (usually at a small discount to variable). I rolled these over for 10 years no problemo.

What's an Option Adjustable / Alt A? Looks like quite a bit of that coming up but as above might not be an issue especially if they get new much lower rates...



When I read articles about the connection between peak oil and the financial crisis, I always feel there is an important piece of this puzzle left out. So many people correctly point out how the derivatives bubble began long before oil prices started rising, and make a good case that this bubble was destined to burst even if oil prices stayed low. There was simply no way around it given the vast disproportion between real and financial value.

I agree with this, yet at the same time I agree with you that peak oil was still the primary cause. This is because I believe peak oil was the cause of the derivatives bubble--something not discussed here often. I believe that the FED encouraged the derivatives bubble to grow with it's "easy money policy" beginning in 2000. This was the year of Cheney's energy task force meeting, the minutes of which have never been made public. I believe it was during this meeting when the reality of peak oil was fully acknowledged by "TPTB," and they started preparing. And the easy money policy was a direct response. Essentially, they said to themselves, "the game is going to be over soon because of peak oil, so let's pump the system as much as we can now and make as much money as possible before it collapses on its own."

The bailouts are just more added insult to injury.

In other words, the international banking cartel (I hate that phrase but I do believe investment banking is the most powerful industry in the world) expediated the financial collapse by intentionally increasing debt, because they knew peak oil was on the horizon and was going to end the whole debt-interest game anyway.

I think it's important to point out this *political* relationship between peak oil (or the early awareness of its immanent arrival) and the derivatives bubble that began in 2000, if we are going to convince people that peak oil was the primary cause of the current economic collapse.


Basically, we have infinite growth colliding with finite resources. It is pretty clear there is going to be a conflict.

There are so many interconnections that we are probably not going to convince people of the cause and effect. Politics is involved with this as well. I am not sure whether bankers knew that there was going to be collapse and intentionally raised debt--I am more inclined to think that they thought everything would get better and better, and there would be no problems. Or perhaps, the problems would come long after they had left the arena.

Our economy is very much a one way economy--because of its heavy reliance on debt, it needs to grow.

This is only the case in situations of extreme debt. The recent credit bubble is a great example since we would have needed to increase GDP by ~50% to keep up with our increase in debt compared to current spending habits. Right now savings and paying off debt is the focus as opposed to spending and the economy is slowing down as a result. In general, our debts are coming due and we have to pay them.

That said, just because an economy relies on debt does not mean it needs to grow. As a general statement that is false. Whether or not it needs to grow depends on the magnitude of the debt. Lets say for instance we have an economy that's declining at 1% per year for twenty years and is flat in the long run after than. On average people and businesses can still have debt, the only thing they need to account for in the above case is scaling that debt proportional to the drop in economic activity and eventually reaching some relatively steady level of debt. Arguably, people and businesses can incorrectly predict how much of an increase or decrease we'll see in the economy, but there is nothing about having debt that requires the economy to grow. What matters is how much debt compared to how much economic activity.

Companies by and large didn't "shut in" existing production, because much of the cost for existing production had already been incurred, and the marginal cost for maintaining production was quite low.

Companies may not have shut in production, but OPEC did AFAIK, after they announced they would of course. They've shaved off ~3mbpd of production during oil's high in order to keep prices out of the gutter, so to speak. When oil was $100-140, they pumped out ~31.5mbpd give or take (for ~8+ months IIRC), but after it dropped into the $60/bbl range and continued to fall, they slowly and steadily cut production rates by ~.5-1mbpd per month.

All commodities and not just oil were at very high prices at the end of the last business expansion. This is typical of the business cycle and oil is usually one of the last commodities to peak in price.
The past severe recessions of 1973-74 and 1979-82 were characterized by high oil prices.

The 1930’s Depression was characterized by the greatest debt binge until our current time. People went into debt to buy all of the wonderful technologies of the day: automobiles, refrigerators, small appliances and radios. The collapse in oil prices made possible by the use of newly developed geophysical surveying instruments to discover massive amounts of oil did not immediately end the depression.

Productivity has continued to increase, but at decreasing rates because of the exhaustion of new transformational technologies. The last great technological revolution was the personal computer and Internet, but it had far less impact than electrification, petroleum, the highway system, municipal water and waste systems and the previous engineering achievements of the 20th Century:


Wages eroded despite the meager productivity gains because of government spending, particularly transfer payments like Social Security and Medicare.

The depletion of the U.S. oil and other resources and imported oil were behind the scenes factor factors in Nixon ending the gold standard. Another factor was the growth of non-U.S. manufacturing.

The developed countries lost their manufacturing to developing countries with cheaper labor. To counter the loss the system tried artificial stimulus in the form of cheap credit. Now we will have economic stimulus spending that will do little to improve productivity but will bankrupt the U.S.

We do have an under-exploited technology that can help, namely, nuclear energy. The other thing we will have to do is economic lifestyle restructuring, as we discuss here at TOD.

In summary, the current depression was caused by structural factors, only one of which is oil. However, peak oil will prevent the U.S. from making an easy recovery. We will most likely go through a collapse like the Soviet Union before we restructure to a 21st Century economy.

I agree with your thesis, but you also need to look at the trade deficit. There are actually two ways that oil is being imported into this country, one way, is the traditional way, in oil tankers, the other way, it is sent to foreign countries where it is made into goods and then sent here. We were paying for this second route of oil imports by borrowing against our houses. When the CDO market imploded, we lost a lot of our indirect oil imports and this probably sent shockwaves down the production pipeline resulting in lower oil prices. What I don't think people realize is how many of the goods, that we consume are actually made of oil or with it's help, in foreign countries. That flow of low entropy carbon, has now dried up, but the $10 trillion in mortgage debt remains.

I wonder what the 'oil multiplier' is on that low entropy carbon base that has dried up? (i.e. for every 1 barrel that we don't import due to debt/credit crisis, how many fewer barrels get consumed globally that grew from that 1 barrel in consumption?)