Greasing the Wheel: Oil’s Role in the Global Crisis

This is a guest post by Lucas Chanel, Research Fellow in economics, and Thomas Spencer, Research Fellow in climate and energy policies, both at the Institute for Sustainable Development and International Relations. This article originally appeared on

Between January 2002 and August 2008, the nominal oil price rose from $19.7 to $133.4 a barrel. This led to a large increase in oil revenues for oil exporters and a deterioration of the current account for oil importers (Figure 1). Between 2002 and 2006, net capital outflows from oil exporters grew by 348%, becoming the largest global source of net capital outflows in 2006 (McKinsey 2007).

Capital outflows from oil exporters therefore played an important role in the global liquidity glut during the build-up to the US subprime crisis. Analysis of direct capital flows is hampered by the lack of reporting transparency and the use of foreign financial intermediaries. Indirect recycling also took place, i.e. direct oil-revenue investment in a given financial market led to corresponding knock-on flows towards the ultimate net borrower. Nonetheless, analysis from the US Federal Reserve suggests that “…most petrodollar investments [found] their way to the United States, indirectly if not directly” (Federal Reserve Bank of New York 2006). In short, the US was the ultimate net borrower, in order to finance its growing current account deficit.

Figure 1. Merchandise and fuel current account: US and major oil and gas exporters (MOGE) Source: UNCTAD.

Such capital flows were invested in US treasuries, corporate bonds, equities, and asset markets. In turn, this placed downward pressure on US interest rates and helped fuel further borrowing. Quantifying the specific contribution of oil-revenue inflows is difficult. Nonetheless, oil revenues do seem to have reduced US interest rates (see IMF 2006 for a discussion). In sum, the direct and indirect recycling of oil revenues was a factor in the global liquidity glut that helped to fuel the US subprime mortgage crisis.

Bursting the bubble

Oil prices also played a role in eventually bursting the US subprime bubble. As we document in a recent working paper (Spencer et al. 2012), this occurred via a number of channels which are difficult to disentangle. It is also next to impossible to identify the threshold of mortgage delinquencies, which led to the meltdown in the subprime market and then global financial markets. Nonetheless, one can examine the individual channels through which oil prices contributed:

  • Direct impacts on discretionary spending. Between 2002 and 2008, average household expenditure on gasoline rose 120%, from $1,235 to $2,715, or by 2 percentage points of overall household expenditure (CES 2011). For (poorer) suburban households this effect was even more pronounced. In 2003, the average suburban household spent $1,422 a year on gasoline, which rose to $3,196 in 2008 (Freilich et al. 2010). Kaufman et al. (2010) show, using VAR analysis, that rising household energy prices constrained household budgets and increased mortgage delinquency rates, once other factors are controlled for.
  • Indirect impacts of interest rate increases. The federal fund rate rose from 1% in May 2005 to 5.26% in March 2007. A quick read of the Fed’s Monetary Policy Reports shows the recurring importance of energy price concerns in the Fed’s decisions to raise the fund rate. Annual mortgage repayments for an average household increased by 33% between 2004 and 2007 (CES 2011).

A number of contextual factors also interacted with the oil price increase to potentially worsen vulnerabilities:

  • Labour market interactions. Peersman and Van Robays (2009) show that the inflationary impact of the oil price shock from 2004-8 was reduced in the US due to the structure of the labour market. Producers used a strong bargaining position to pass the cost burden onto consumers through a reduction in real wages. Thus, while second-round inflationary impacts were mitigated, this was at the expense of a decline in real wages. This had negative impacts on aggregate demand (see below), and constrained household budgets.
  • Distributional impact of energy prices. Energy price shocks have strong distributional effects, mostly impacting energy expenses of suburban households and low-income households spending a greater income share on energy. Subprime mortgage loans were also concentrated on poorer households, leading to a confluence of risk factors.
  • Maladapted urban planning. Between 1969 and 2001, the annual average distance driven per licensed driver increased 90%, from 5,411 to 10,244 miles per year (NHTS 2009). The heavy reliance on personalised vehicle transport increased oil price risk exposure among US households.
  • Fuel inefficiency of the vehicle fleet. Sivak and Tsimhoni (2009) show that the fuel efficiency of the US vehicle fleet barely improved from 1991 to 2006, increasing from 16.9 to 17.2 miles per gallon. The figures for Europe are 31.2 in 1991 and 35 in 2006.

Finally, increasing oil prices had an impact on aggregate demand. This operates via a number of channels – reduced discretionary income, increased precautionary savings, and operating cost effects, whereby consumers are deterred from purchasing energy-intensive goods, and reallocation effects. In particular, the auto sector played an important role in transmitting the shock. Between the peak in 2003 and the last pre-crisis year, 2007, household expenditure on vehicle purchases fell 13%. Expenditure on more energy-intensive, domestically produced autos likely fell further, as indicated by Edelstein and Kilian (2009). The decline of the US auto sector was an important contributing factor in tipping the US into recession in 2007Q4, although there was clearly a mutually reinforcing interaction between the recessionary slide, which began in 2007Q3, and the subsequent further decline of the auto sector in 2008.


Taking IEA (2011) projections, we calculate the size and distribution of oil revenues (petrodollars) from net oil trade to 2035 (Figure 2). The US starts the period in 2010 as the largest source of petrodollars, at -$296 billion using the average 2010 price of $79 a barrel. The EU27 is next with -$281 billion. The Middle East gains net oil revenues of $539 billion.

Figure 2. Average annual net oil revenues 2010-2035 Source: IEA 2011

US oil-import dependence declines towards 2035, due to improved energy efficiency particularly in the transport sector and increased domestic production, in particular from shale oil. The EU27 overtakes the US as the largest source of petrodollars by 2020. China and India become the largest and third largest source of petrodollars respectively by 2035; China assumes premier position by 2025. The figures are based on the IEA New Policies Scenario, which assumes further energy efficiency and oil substitution. The Current Policies Scenario sees oil prices 8% and 16% higher in 2020 and 2035 respectively, increasing petrodollar flows correspondingly. A more disaggregated picture, focusing on major oil-exporting countries within the Middle East and African region would show an even stronger concentration of oil revenues.


From this analysis we draw a number of suggestions for further consideration.

  • The oil price appears to have played a role in the subprime crisis. Understanding macro impacts of oil prices also requires considering in detail the exposure and interactions of micro channels, such as the housing or auto sector.
  • Oil prices played a key role in worsening the balance-of-payment imbalance leading up to the crisis. This will continue to strengthen, and China and India will play an increasing role as net exporters of petrodollars. The efficient intermediation of petrodollars represents a large challenge to the financial sector, and potentially economic stability in general.
  • Policies to address oil dependency via substitution, efficiency, and conservation can reduce micro- and macro-level exposure to oil price risks, and contribute to addressing global imbalances.


Consumer Expenditure Survey, US Bureau of Labour Statistics
Edelstein, P and L Kilian (2009), “How sensitive are consumer expenditures to retail energy prices?”, Journal of Monetary Economics 56(6).

Federal Reserve Bank of New York (2006), Current Issues in Economics and Finance 12(9).

Freilich, R, R Sitkowsky and S Mennillo (2010), From Sprawl to Sustainability: Smart Growth, New Urbanism, Green Development, and Renewable Energy, 2nd ed, Chicago: ABA Books.

International Monetary Fund (2006), "Oil Prices and Global Imbalances", World Economic Outlook, Chapter 2 .

Spencer, Thomas, Lucas Chancel, and Emmanuel Guérin (2012) “Exiting the EU crises in the right direction: towards a sustainable economy for all”, IDDRI Working Paper
09/ 12.

International Energy Agency (2011), World Energy Outlook, Paris: IEA.

Kaufman, R, N Gonzalez, T Nickerson and Y Nesbit (2010), “Do household energy expenditures affect mortgage delinquency rates?”, Energy Economics 33(2).

McKinsey (2007), The New Power Brokers: How Oil, Asia, Hedge Funds and Private Equity Are Shaping Global Capital Markets, McKinsey Global Institute.

Peersman, G and I Van Robays (2009), “Oil and the Euro area economy”, Economic Policy.

Sivak, M and O Tsimhoni (2009), “Fuel efficiency of vehicles on US roads: 1923–2006”, Energy Policy 37(8).

Thanks Rembrandt! It's good to see a solid macro-analysis of the interactions between oil prices, global capital flows, and the events leading up to the US Subprime crisis. I wonder if the current retrenchments to less risk and tighter capital will prevent this kind of crisis in the future? My thoughts are that so long as energy prices remain high, there will be trouble. Perhaps not the same trouble experienced in the Subprime crisis. But different manifestations of the same problem. Like what we are seeing now with the PIGS countries in Europe.

Oil prices are now in freefall. So I wonder what, exactly, is the cause? Is demand destruction in Europe and elsewhere popping the current price bubble? Or do we have actual supply relief? Still a very muddy picture given a boatload of intransparencies.

Have to agree wholeheartedly with your conclusions as well as those of Spencer. Substitution and increased efficiency should take top billing. In this case, more of both, especially non-fossil fuel substitution, will mean more prosperity and less trouble long-term IMHO. So thanks again for a fantastic article.

Just a last question for the board and more of a thought experiment than anything else... Based on the findings of this study, your own observations and thoughts on the world energy picture, and adding in a little bit of imaginative speculation, what do you think the next 5-10 years will bring as far as financial, energy, climate, and geopolitical crisis? Is there hope for a patch of smooth sailing? Or is another big crisis waiting in the wings?

These crises will increase in intensity going forward.

Oil prices are falling due to deflation fears. The ponzi scheme built upon fractional reserve lending and debt backed fiat money is crumbling. They can only fall so far though because of the high price floor below which much of the current oil being extracted is no longer profitable. So after a collapse expect a rebound in oil price, much like as happened after 2008.

My own thoughts going forward: Europe will spiral out of control, leading to its breakup. Individual currencies will be instituted and what's left of the Euro will likely hyperinflate, although possibly defaults will occur. A gold standard could prevent hyperinflation but I don't see the central banks leaning that direction.

The problems in Europe will strengthen the dollar but US debt is no better than Europe, it just has 0% interest rates on its side, being home base for the banker crime syndicate. This deflation will cause US debt to GDP ratios to spiral out of control and the only answer will be further money printing. Eventually the holders of US debt will decide to call it quits and sell their holdings before they get too devalued and the US dollar will hyperinflate (again, absent a gold standard which seems unlikely -- a gold standard would however imply a major devaluation of the dollar).

Oil price will go to infinity in $$ terms. This will be the end of the global financial system and oil imports to the US will end. All retirees and savers will lose their money. The US will open up all remaining off limits areas to oil production and go on a fossil fuel extraction bonanza to provide badly needed jobs. In a decade US oil production will be seriously waning and then, who knows exactly what will happen. Begin global Malthusian Collapse. Insert WW3 anywhere in that timeline you fancy.

Just your typical ponzi scheme collapse.

These crises will increase in intensity going forward.

I agree with that line Null and the progression towards hyper-inflation. Not really anyway around it. Developed economies generated growth while oil was cheap, but now its relatively expensive, growth only occurs from borrowing huge amounts to artificially generate at least a minor amount of growth to stay out of recession, at least here in the US. In Europe they are already in recession.

To show just how important all this govt. borrowing is to keep BAU, here's an article from yesterday - sorry, source is fox news:

The Congressional Budget Office report says that the economy would shrink by 1.3 percent in the first half of next year if the government is allowed to fall off this so-called "fiscal cliff" on Jan. 1 -- and that the higher tax rates and more than $100 billion in automatic cuts to the Pentagon and domestic agencies are kept in place.

Since US debt is now increasing north of 1 trillion a year, the above rationale seems to indicate we cannot even come close to balancing the budget and have a growing economy. That is unless oil got super cheap again, but the marginal cost of oil (tar sands etc.) just to maintain the current level of oil flow will not provide for a cheap enough price to do that. The world would need to cut oil needed by some hefty percentage and that's not happening. Chindia is growing and requiring more oil.

It seems inevitable, like you mentioned, that we are headed for hyper-inflation. What comes after that is anyone's guess but it ain't gonna be pretty.

It seems inevitable, like you mentioned, that we are headed for hyper-inflation.

I wouldn't be so certain of that (says the guy who is advocating inflation targeting at much higher levels). The Federal Reserve has been TRYING to create inflation and the results haven't been what everyone has expected. The results haven't been what the Fed has expected. I dare adherents of Friedman's idea that "inflation is always and everywhere a monetary phenomenon" to do a regression comparing the price of a basket of goods to the increases in excess reserves brought about by QE1 and QE2. Right now, the Fed is experiencing (and they've commented on this in a few papers) diminishing marginal returns to their monetary policy (read: quantitative easing).

People have been crying "INFLATION!" from the hills now for four years. Respectable economists have said that Weimar-Republic style hyper inflation is "right around the corner" numerous times in each of those four years... yet where is it? Better question: where is the deflationary talk? Let's consider a couple of scenarios:

1. Europe falls apart. Inflationary or deflationary? Deflationary. The dollar will become a safe-haven instrument. Commodity prices will collapse. Note that these are the immediate effects. How we respond to these effects may bring about a different reality.
2. Our government drives off the fiscal cliff. Inflationary or deflationary? Deflationary, plain and simple. I don't see the Fed intervening either. In my opinion they'll pull back from the table until they have a government that is willing to run deficits (and provide the Fed with an effective communication tool).
3. Someone, somehow, gets a gold standard instituted in the U.S. Inflationary or deflationary? Deflationary
4. Tax rates are allowed to reset without corresponding increases in government spending. Inflationary or deflationary? Deflationary. Under classical economics, the reduction in Federal debt outstanding (assuming there was a reduction) would lower interest rates which would offset the loss in buying power experienced by the consumer. However, it's tough to push interest rates down from where they are now!
5. Banks are forced by regulators to liquidate their inventories of foreclosed homes. Inflationary or deflationary?
6. The commercial real-estate bubble pops (possible IMO). Inflationary or deflationary?
7. The real-estate bubble in NYC pops. Inflationary or deflationary?
8. California, Illinois, et al default. Inflationary or deflationary?.... I'll concede that this one isn't so black and white

I wouldn't be so certain of that (says the guy who is advocating inflation targeting at much higher levels). The Federal Reserve has been TRYING to create inflation and the results haven't been what everyone has expected. The results haven't been what the Fed has expected.

That's true, however if govt's are in the position of having to borrow to keep the economy from going into recession, and revenue from taxes does not cover that borrowing, then greater debt will lead to more quantitative easing (adding money to the monetary system) to stimulate loans/economic activity. That will lead to currency devaluation and eventually hyper-inflation. There's really no way around it.

It's simply the end result of going from cheap energy to relatively expensive energy, that profits drop, revenue from taxes drop, but the expenses keep piling up, so govt's have to borrow more than they can repay in the short term, piling it up and eventually the currency loses value, hyper-inflation.

I know right now it doesn't look like it, but that is where we are headed, at least as I see it. You are not alone though, as most think hyper-inflation will not occur. Two schools of thought and we will see which one eventuates.

I am not fearful of hyperinflation either.

But I don't think that the Fed is trying to create inflation, but rather prevent deflation. As a result of the financial crisis I have heard that more than 40 trillion dollars disappeared from the US money supply in just a few years (money borrowed/leveraged against bad loans), and there probably is still some unwinding of bad debt which is happening as more homes are foreclosed. The Fed printed money (certainly over 10 trillion dollars worth, and perhaps over 20 trillion by now) which is designed to prevent massive deflation. As the large banks have increased their lending, this, of course, is also increasing the money supply. I believe that the balance that the Fed is trying to create is to print money to prevent deflation without leading to inflation.

If the Euro continues to sink, the price of crude oil will decrease since we will be purchasing it in stronger dollars, but the stronger dollar will also hurt exports (both because our exports are priced relatively higher and because if Europe is in recession demand will be down). I am not sure that there is any advantage here.

A year ago, I calculated that the crude oil price was costing the US about 2.4% of its GDP (this is "one way" losses, not accounting for increased exports of goods as people enrichened by oil dollars purchases US goods). Today, I estimate that crude oil prices is costing us 2.0% of GDP in "one way" losses. So why with higher crude oil prices is the crude oil cost to our economy decreasing? Demand is down, due to reduced trips (partially due to the high unemployment rate, but probably people are driving smarter) and increased vehicle efficiency, but also production is up due to fracking to produce oil and natural gas liquids from shale oil.

US is looking OK, partially because we waste so much transporation fuels, that we can cut back easily with little impact on GDP (fuel efficiency is regulated higher too). Also, the oil companies are using their ingenuity to develop more oil and natural gas liquids, and of course renewables are being produced at higher volumes. Also, we have very cheap natural gas and coal which helps our manufacturing base produce lower priced goods. We may start to export some of that natural gas and more of the coal, which could increase prices, but then we are exporting energy and improving our balance of trade.

Thus, I can envision continued modest growth over the medium term which could lead to lower unemployment and then allow us to rebalance our trade. The problem is that Washington is so disfunctional, so politically, this may not be allowed to happen.

The central bank has infinite firepower to prevent deflation. It's called a digital printing press. Or, if need be, a standard printing press.

Just because you don't want this to be true, doesn't mean it isn't. There is no limit to money creation...none at all. Do you understand?

It is quite possible that both the deflationists and hyperinflationists are wrong. Time will tell, we're still pretty early in this collapse.

If the government didn't run deficits what would the Federal Reserve's communication method be? An interesting little detail is the Fed has an unlimited "digital" press. It doesn't actually have the power to issue script. That falls to the Treasury. "Federal Reserve Note" is a bit misleading.

To get hyper-inflation, wages as well as prices must go up. That doesn't seem likely at the moment.

I'd like to point out that a rather elegant solution to the problem is for Germany to exit the EMU and for the ECB to adopt inflation targeting* with a target of 2% ex-energy ex-food (anything >0 would be better than what they're doing now). The ECB would buy government bonds to implement this policy. The problem with single-mandate central banks is that they lack discretion (you could write a bit of code to replace them) and this is especially troublesome when the mandate is for "price stability" which can be translated as "low or no inflation." The idea behind such a policy is to reduce menu costs in the economy, protect savers (silly), and to lower long-term interest rates**. The problem with such a policy is that the central bank looks at the average of prices. One group of prices might go up, another group might go down, etc. Generally, when prices move down it will be difficult to service debt and allow markets to clear***. If a central bank is going to pursue inflation targeting, it must set the inflation rate high enough to allow debt to be serviced and markets to clear.

*price stabilite is a form of inflation targeting, I just couldn't word this sentence any other way
**it's kind of ironic that Austrian economists, who abhor government deficits, would want to make it inexpensive for governments to run deficits! Of course, it's the real interest rate that determines the burden of debt service
***I just don't feel like giving a detailed explanation of this right now but consider the following: imagine where oil prices would be in dollars if the Federal Reserve targeted the median wage. Through the roof! The real buying power of the consumer at any instant under any monetary regime is unlikely to change significantly. If the Federal Reserve were to change to a price stabilite mandate, the buying power of the median wage would likely remain the same (lower wage, lower oil prices). You have to keep in mind, though, that prices carry information and that the human mind isn't symmetrical in how it processes that information. "My wages are rising so I'm doing a good job! But gas prices are also rising, there's a scandal somewhere!" Most people won't see the link. I've seen people educated in economics fail to make the link. If you had a regime of constantly rising oil prices it would send a very clear market signal to all market participants: consumers, oil producers, car manufacturers, governments, etc. Consumers would feel a lot better about buying a fuel efficient car or relocating closer to work, car manufacturers would feel confident in producing more fuel efficient vehicles, public transport would pencil out, etc. Nominal prices, for whatever reason, are better at communicating this information than real buying power.

We already have what is essentially a "gold standard". All of your U.S. dollar bills are 100% exchangeable for gold, today. It's called "buying gold". The rate of exchange varies every day.

But I'm guessing that what you advocate is a fixed, guaranteed relationship between the dollar and gold. However, a gold standard is not a panacea and most historical attempts to impose a gold standard have been failures for the national economies involved. The real, fundamental backing for any nation's currency is the value of everything that nation produces or adds value to, its GDP.

I don't actually advocate a gold standard, I just think it will inevitably happen when the system collapses and some monetary order is required, because it is yet another way for the banks to maintain control over the populace and steal wealth.

I advocate a government issued, non-debt backed fiat currency, with a constitutional ban on banking, fractional reserve lending and interest earnings. Since the economy won't be growing anymore because humanity has filled up (well, exceeded) the long term carrying capacity of the planet, credit will no longer be required. If you want to raise capital for a project then people who have some savings and want to make a return would lend you their money. Replace income tax with a wealth tax to prevent runaway wealth concentration.

You could use gold, silver, copper coins or whatever to store your wealth. Even government issued fiat currency if you so choose. All would be accepted as payment for goods, services, and taxes back to the government.

You are probably right, but your ideas are too utopian for the present day.

There are too many humans around with bad ideas in their heads. They won't lose these ideas, they've grown up with them, they're wired in.

Think of the struggle humanity endured to relegate religion to a cultural and not a state phenomenon!

It'll be the same with banking. It's going to take a long, long time to rid ourselves of it.

The herd must be culled.

Have you considered an energy backed currency? Such a currency would have a time-value which would basically do away with demand shocks. The "energy" side of it would also have the benefits of disciplining us to live within our ecological means (eventually) not to mention it would communicate a different message to the market (people would be much more energy aware). I advocate such a standard periodically here on TOD. I'm about two years into writing a thesis on a currency system backed by energy.

I agree that we should move to a wealth tax but for different reasons. It would help with AD shocks a lot IMO.

An energy backed currency---interesting.

On the one-hand, it takes energy to print a piece of paper money, to buy ink and cut down trees and so forth. In the end, a piece of money could be burned for heat, effectively giving the energy it contains.


Or how about rice? Long ago, rice was money in Japan. If they started that again, it could be good. People would get rid of all sorts of old empty cement buildings in order to grow some money they could use.

I don't actually advocate a gold standard, I just think it will inevitably happen when the system collapses and some monetary order is required, because it is yet another way for the banks to maintain control over the populace and steal wealth.

But why gold of all things? I've never really understood the argument.

Not a gold bug, but I understand the basic arguments in favor of a gold standard:

1. 5,000+ year history of being used as money, still recognized all over the world in every culture as money, or at least a valuable commodity.
2. Portable (at least in modest amounts).
3. Doesn't tarnish or corrode, malleable, infinitely recycleable.
4. Can be divided into units as small as required for transactions (unlike, say diamonds or other gemstones).
5. Less chance of supply-induced hyperinflation or deflation (production year-over-year is fairly steady and hard to rapidly increase or decrease new supply vs. fiat currency).
6. Hard to counterfeit (despite scattered reports of Tungsten filled bars, it's still pretty hard to fake gold).

Production isn't steady. Though there was a modest uptick in production between 2005-2009 and since production has resumed decline IIRC. The only argument I can make in favor of gold is that it is a workable currency if you're anti-growth. A fundamental problem with gold, however, is that it retains its buying power (it pains me to say that, there are exceptions). This will cause any economy that uses gold as a currency to be prone to demand shocks.

Oil prices are now in freefall. So I wonder what, exactly, is the cause?

My guess is that it's because of the lessening of the war drums over Iran. Speculators have, this year, added a premium to oil prices on the basis of fears of the consequences of a confrontation with Iran. Since the world started focusing on the crisis in Greece and the prospects of a failure of the Euro, however, Iran has fallen into the background. If Israel carries through with its threats, expect the 2008 high to be tested - especially when it is discovered that the additional "Saudi" Arabian supplies can't be sustained.

Policies to address oil dependency via substitution, efficiency, and conservation can reduce micro- and macro-level exposure to oil price risks, and contribute to addressing global imbalances.

This seems to be a very positive conclusion. In view of the much higher fuel efficiency in Europe it would seem that at least the US has a lot of room to reduce oil dependency even without replacing ICE with EV. For Europe replacing ICE with EV would seem to be essential to make further significant reductions in oil dependency.

IMO, there's a lot of discretionary driving in the U.S. as well.

This was the bit that caught my eye too - a very positive conclusion. If this article and the IMF review are correct and oil prices do increase, than it will surely act as a pseudo trade tariff.. at some point, probably soon given Chinese inflation rates, it will be cheaper to manufacturer the 'stuff' people still buy today back in the OECD rather than China.. all needing energy inputs and oil based materials. The question is in my opinion is that when this threshold is reached, will manufacturing relocate closer to the consumer (back in the US/OECD) in a rush, or in a lame stroll ?

Perhaps less effort should be made in electric car vehicles and more on cheap energy sources for global shipping ?

The US (California in particular) needs to encourage small diesels to really increase fuel efficiency. Europe is over 50% diesels now.

Diesel and gasoline (petrol) are two separate fractions of the same barrel of oil. Every barrel of oil contains some diesel and some petrol. Although the ratio can be tweaked using more expensive refineries, there will always be both end products. We are already facing diesel shortages in Europe because diesel has traditionally been cheaper (partly as a result of different tax policies) and in the last 10 -20 years diesel engines have become much more efficient than petrol engines, Rationing is only a matter of time fore diesel.

Car makers have recognised this and are now making more efficient petrol engines as well, but they still have some way to catch up.

Stick with petrol. We will buy all your spare diesel and more (at $10 / gallon US) .

I struggle to understand all this capital flow stuff to be honest.

for me the price is not a issue because ATEOTD the total sum of money spent on energy, even expensive energy is only a small fraction of GDP.

It has to be because in highly simplistic terms the energy portion generates the rest .

For me the role of oil is not so much the price as much as the lack of oil itself especially cheap oil. when oil supply it self did not grow the multiplicity of wealth [in monetary terms]that oil represented could not grow.

In a debt based environment lack of [real as opposed to bubble] growth will out.

from may 2005 to 2008 it took three yrs.

Fractions of GDP add up quite quickly. Oil costs about $70 more per barrel than it did 10 years ago. At a world consumption of 75 million barrels per day, oil now costs us an extra $2 trillion per year, or 3% of world GDP.

well no doubt.... one way of looking at it is that the price will represent a greater share of GDP if the EROI declines

its that simple

It seems inevitable, like you mentioned, that we are headed for hyper-inflation.

Spot on. Sadly, our politicians will probably see oil as a "jobs engine" rather than seeing the need to invest in the education, infrastructure, and technology that will allow us to move away from oil in a somewhat civilized manner.

Sadly, our politicians will probably see oil as a "jobs engine" rather than seeing the need to invest in the education, infrastructure, and technology that will allow us to move away from oil in a somewhat civilized manner.

Yes, unfortunately there is a myopic political viewpoint of continuing BAU, to placate the masses that want their big toys with as much oil and associated jobs, instead of being true LEADERS and leading the people to a new way of life, if that is still even possible.

I often wonder if the opportunity Carter was trying to open the country up to in that time period was our great opportunity to sensibly begin the long concerted effort needed to shift away from FF. However, people like Newt even to this day are still railing against algae oil, ignorant of the fact the oil we extract was once algae.

My above comment contained the wrong block quote. Sorry. I intended this:

one way of looking at it is that the price will represent a greater share of GDP if the EROI declines

Isn't 2035 right about the time we hit zero Available Net Exports (ANE = Global Net Exports - Chindia consumption)? Something tells me the behavior of the global energy markets will be far more non-linear than that shown in the simple extrapolation of Fig. 2.

In fact I would hazard to guess, based on the recent past as shown in Fig 1, that we already hit one inflection point in 2008, with a high probability of more soon to follow.


Another thing to keep in mind is that cars purchased today in China and India have a much higher fuel economy than the U.S. fleet. Ceteris paribus, they'll be able to afford to pay more for oil as a result.

The author, Lucas Chanel, does not clearly specify which IEA projections he used for his outlook. He might have used the projection for liquid fuels, instead of crude oil, which I think is projected to increase to about 100 Mb/d by 2035.

IEA: World Energy Outlook 2011 (Released - 9 November 2011)

Figure 3.17 in Key Graphs has Saudi Arabia increasing crude oil production by 3 Mb/d between 2011 and 2035 without any regard for changes in domestic consumption and subsidies (i.e. no profit) for domestic sales of gasoline. I think it far more likely that Saudi crude oil production will decline over the next 23 years instead of increasing to 12 Mb/d. The IEA's projection of oil price increasing 8% and 16% by 2020 and 2035 relative to $79/barrel in 2010 is a bit dubious. I think the average for Brent is over $100 / barrel so far for 2012 which already leaves their projection in the dust. I think Chanel's figure 2 is ridiculous because it is based on a ridiculously optimistic IEA production forecast.

The IEA's oil price projections have been found to be too low by a recent IMF study:

IMF team warns of global economy entering uncharted territory with US$ 180 a barrel in 2021

Increasing Global Public Debt Vs. (My Estimate) of Post-2005 Declining Cumulative Net Exports (CNE)

First the debt clock (which I think considerably underestimates total obligations like Social Security):

They show total global public debt increasing from about $27 trillion in 2005 to $40 trillion in 2010.

Following are my estimates of post-2005 CNE (Cumulative Net Exports) for key countries and regions:

(C/P = Consumption/Production, for ANE, C/P = Chindia's net oil imports divided by GNE)

I show post-2005 Global CNE at 357 Gb at the end of 2005 and post-2010 Global CNE at 277 GB at the end of 2010.

I show post-2005 Available CNE (GNE, or Global Net Exports, less Chindia's net imports) at 168 Gb at the end of 2005 and post-2010 Available GNE at 100 Gb at the end of 2010.

So, total global public debt per barrel of estimated remaining cumulative (net) exported oil would be:


GNE: $76/barrel

ANE: $161/barrel


GNE: $144/barrel

ANE: $400/barrel

Total Global Public debt per barrel of remaining Global CNE increased at 13% per year from 2005 to 2010.

Total Global Public debt per barrel of remaining Available CNE increased at 18% per year from 2005 to 2010*.

*At this rate of increase, the debt to Available CNE ratio would be $2,400 per barrel of oil in 2020.

On a related note:

Another reason Europe’s in crisis? A high oil bill

Why did Europe go from bad to total horrific panic in the last year? There are all sorts of theories: weak growth, the impact of austerity, missteps by central bank bureaucrats. But here’s another scapegoat offered up by the International Energy Agency: Europe’s soaring oil bill.

The IEA laid out some eye-catching numbers on Thursday: Between 2000 and 2010, Europe spent an average of $182 billion per year on oil. Then, in 2011, due in part to a civil war in Libya, Europe spent a record $488 billion on crude. In 2012, thanks to tight global supplies in the first half of the year and tensions with Iran, the continent is expected to spend well over $500 billion. To put that in context, the total debt of Greece, which has everyone sweating, is about $370 billion.


1. One factor which I believe connects the onset of the GFC with Peak Oil is that the rising price of oil in 2007 & part of 2008 would have led to households becoming less inclined to buy real estate, particularly housing situated on the outer edge of large cities. Buying a house in this sort of area typically cements that household into many years of high oil consumption because of the necessary driving - to work and back, to do the shopping and to transport the kids places. The fall-off in demand led to the end of price increases, and since the economics of the sub-prime real estate bubble depended on continual price increases well above and beyond CPI, the bubble promptly burst. It was unsustainable and would have popped eventually whatever the proximate cause, but I think Peak Oil provided the trigger. Economic bubbles are like uni student parties - the longer the merrymaking, the worse the hangover. If I am correct, therefore, that Peak Oil provided the trigger through slowing housing purchases, it prevented a bigger bust happening at some later point.

2. Due to the extreme wastfulness of oil use in the US (and the somewhat less extreme wastefulness elsewhere in the developed world), there is much scope to reduce oil dependency. It can't be done immediately, but once it is generally agreed that cheap oil is gone forever and the price has nowhere to go but up, effective adaptation can be made. Just getting the US vehicle fleet up to current European fuel economy standards, for example, would lead to a major reduction in total oil consumption (since Jeavon's Paradox doesn't apply when efficiency gains are driven by price increases). Political support for real improvment to public transport would also be unstoppable, too. The world has time to adapt to Peak Oil and get off the drug, but it will only happen if the public are convinced of the facts.