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.

http://graphoilogy.blogspot.com/2008/12/simple-explanation-for-rising-oi...

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.

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.

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.

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.

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

http://www.census.gov/foreign-trade/Press-Release/current_press_release/...

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?

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...

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.

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.

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

Gail,
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.

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'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.

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

Resources
North American Natural Gas Supply Assessment

http://www.greencarcongress.com/2008/08/study-unconvent.html

http://www.cleanskies.org/~/media/Files/Navigant_Study/final_nci_study2....

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)

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.

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?

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 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

http://market-ticker.denninger.net/authors/2-Karl-Denninger

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!

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:

http://bp3.blogger.com/_pMscxxELHEg/RxzD0s_7EYI/AAAAAAAABB4/ljDSXZhMG3o/...

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.
http://4.bp.blogspot.com/_pMscxxELHEg/ScJqldiSSCI/AAAAAAAAE1w/3q1NLufa59...

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.

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

is found at the following URL:
http://www.imf.org/external/pubs/ft/gfsr/2007/02/pdf/chap1.pdf

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.

'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.

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.

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.

http://finance.yahoo.com/news/Stocks-slide-after-weak-apf-14744414.html

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.

http://online.wsj.com/article/SB123798759572638161.html

Curious.

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:

http://market-ticker.denninger.net/archives/2009/03/25.html

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...

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.

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!

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 ?

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

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.

Conclusion
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.

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.

Gail,

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.

Emanuel

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:

http://www.greatachievements.org/

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.

Gail,
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.