From Subprime to Meltdown: Is Peak Oil Responsible? 23 comments
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In a recent article, Joseph Stiglitz, Nobel Prize laureate in Economics, argued that the current financial crisis was caused both by “dishonesty on the part of financial institutions, and incompetence on the part of policymakers”. Others, like the Australian Prime Minister, add that widespread greed is to blame for the current events.
While these explanations manage to explain the evident excesses of our financial system, they do not say how the system, which used to run fairly well, suddenly stopped working. Everyone would agree that the financial crisis started once the banking sector got into troubles. The banking sector, for its part, finds the causes of its difficulties in the subprime crisis. To go back further in the events timeline, we acknowledge that the subprime crisis happened once borrowers became unable to pay back their mortgages.
So yes, it was a serious mistake to lend money to people who could not afford it, but why did these people abruptly become unable to pay? The reason is most important and commentators of the crisis systematically fail to discuss and analyze it. In 2006, interest rates were raised in the USA, so the monthly bill, usually poor borrowers of subprime mortgages had to pay, rose dramatically, until they could no longer pay it and saw their houses confiscated; thus contributing to the housing market plunge. Finally, interest rates were increased in order to fight rising inflation, which started with the dramatic surge in oil prices the world faced over the past few years.
So yes, the financial crisis finds its roots in the oil crisis and nobody seems to care about it. The current events that nobody saw coming, were already announced as early as 2006 by Dr. Colin Campbell, a geologist, former Vice-President of Fina Oil Company and founder of the nowadays respected ASPO (Association for the Study of Peak Oil).
On a video interview available on YouTube, he declared:
Expansion becomes impossible without abundant cheap energy. So I think that the debt of the world is going bad. That speaks of a financial crisis, unseen, probably equalling the Great Depression of 1930; it’s probable we face the Second Great Depression. It would be a chain reaction, one bank would fail, and another one would fail, industries will close…
For people who are not aware of the Peak Oil theory, and sadly they are still the vast majority today, this theory advanced by a wide range of energy experts argues the world is going to face, in the near future, a permanent and irreversible decline in global oil production. While it would be too long to present in details the theory, the following quote from Dr. Schlesinger, the former US Secretary of Energy, Secretary of Defence and CIA Director tells us how seriously the theory is taken at the highest levels of decision-making:
It’s no longer the case that we have a few voices crying in the wilderness. The battle is over. The peakists have won.
Nowadays, we only found three leading and loud opposing voices to Peak Oil in the energy market, namely the OPEC, ExxonMobil and the CERA consulting group. As we can see, neither OPEC nor ExxonMobil are renowned for their scientific integrity and objectivity. Regarding CERA, their predictions in the evolution of oil prices made since 2002, were wrong seven times in a row. In light of these appalling projections, the legitimacy and strength of CERA’s denial of an imminent peak are at best mistrustful.
Before going further, aren’t there any alternatives? Hydrogen, ethanol or electric cars? Well here the problem comes from timing, as the decline in oil production is expected to happen in 2008 according to the ASPO. A report requested by the US Department of Energy, known as the “Hirsch Report”, concludes (pdf warning):
Over the past century, world economic development has been fundamentally shaped by the availability of abundant, low-cost oil. Previous energy transitions (wood to coal, coal to oil, etc.) were gradual and evolutionary; oil peaking will be abrupt and revolutionary… The world has never faced a problem like this. Without massive mitigation at least a decade before the fact, the problem will be pervasive and long lasting.
Unfortunately, we don’t have ten years and world leaders do not even understand the crisis. From this point how is the situation going to evolve? Michael Meacher, a Labour MP and former Environment Minister, identifies the Peak Oil crisis as “an apocalyptic scenario”. A Deutsche Bank paper on oil depletion goes in the same direction:
The end-of-the-fossil-hydrocarbons scenario is not a doom-and-gloom picture painted by pessimistic end-of-the-world prophets, but a view of scarcity in the coming years and decades that must be taken seriously.
To come back to the financial crisis, we have witnessed an impressive fall in oil prices over recent weeks under fears of an imminent global recession.
However, the massive US bailout plan and similar European supports to the banking sector are likely to maintain an artificial growth at high costs and to the detriment of states’ debts. Once we realize oil demand will not decline and will even continue to grow, as mentioned last week by the IEA, oil prices will once again surge.
Regrettably, when facing the next crisis which is likely to be unprecedented, the world will no longer afford an emergency plan. In fact, the US bailout makes an emergency plan to develop alternatives to oil improbable. We have used our last bullets, and missed the target. Recent events have showed us how officials and mainstream commentators failed to forecast the current crisis. It is time to finally take the Peak Oil movement seriously, failing to do so would result in a nightmare scenario, Dr. Campbell and others have been desperately warning for too long.
This article is based on arguments developed in my degree's dissertation: "The Peaking of Global Oil Production and the New World Order" (BA International Relations, University of Exeter, UK)
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This article has 23 comments:
It would have happened no matter what the source of inflation was. In this respect, the current de-leveraging crisis is no different from that of 1929 or 1990 Japan.
The major source of tension results from unsustainable housing price appreciation which triggered voodoo finance to keep the party going. Oil prices were certainly not central to this, just one of the causes of interest rate hikes.
As to Peak oil, with prices falling from $147 to $75 in 3 months, it starts looking more and more like the Y2K bug and avian flu to me. (Whatever happened to the avian pandemic, by the way?)
JMHO, of course.
The infusion of all the liquidity because of the mess we have gotten ourselves into is going to make the Jimmy Carter inflation seem like a sunday school picnic before this is over.
Remember, the more things change the more they stay the same and in the end we are all dead. Go outside, take a deep breath and thank God you are alive...lol
And so, for the time being, the peak is of secondary importance. Moreover, one of my very smart e-mail acquaintences in the US says that it may be the case that that country is not prepared to accept a peak. Maybe so, but I'm curious as to how long they could have accepted a price of $150/b or higher.. Yes, eventually "human ingenuity" will solve the peak oil and high price dilemmas, but does anybody have an approximate date for when "eventually" begins. Thus, maybe it is a good idea to talk to the oil exporters, which is what they proposed about a decade ago, and try to put some sort of production scheme together that will prevent the kind of ugliness that nobody really wants.
question - is it now too late to start doing what we should have been doing in 1981. ? thank you ronald r.
> jack
Anyway, I'm one of those people who believes that in a pinch it's possible to get some synthetic oil from coal, but if you want enough to replace a sizable fraction of conventional oil, make sure that you arn't short of cash..
How come no one talks about "over population" anymore? It was an issue in the sixties. Are there less people today?
Or "values"? Like paying our debts, living within our means, saving, etc.
When existing light crude oil gets too expensive to make gasoline to burn, we will be forced to use the only resource that we have, that can satisfy the transportation gap. Coal (made in the USA to diesel (made in the USA).
Famos
Fortunately for us, the U.S. is AWASH with potentially cheap energy sources other than oil. So far, however, artificial controls mandated by our government have restricted their use.
The question now is how long will we allow our economy to falter before we decide to utilize these God given resources to reverse our fortunes?
I'm afraid we'll have to rid ourselves of those people now running our government first.
Clearly, then, our economic renaissance is some years away. But, of course, it will come eventually. We'll just have to get POORER first.
As the economist Josef Schumpeter so prophetically put it, "Profit is a penalty." Unfortunately, this is a lesson that must be periodically re-learned!
peakoildebunked.blogsp.../
peakoildebunked.blogsp.../
Living within our means hasn't been real popular either but that will likely change in the future if only by necessity.
Great article. I've been observing your work along with another two of three writers of late and I commend you on your courage to make the connections you are. The only thing I would like to point out is this: Peak Oil is not a theory. It already happened in the U.S, the U.K and Australia. It's not a matter of "if" but "when."
Keep up the good work, mate.
famos - colorado shale to diesel is a better bet, the kerogen yields straight chains which have better cetane number,
> jack
Looking at history, war related expenses allways created an inflationary preassure on the monetary system. - The US allmost defaulted on its cost for its wars in Indochina and forced it to abandon its Gold back currency. Since 1971, she only relies on a faith based currency system and keeps increasing is debt towards infinity.
Understanding the mathematical term of exponential growth and linking it to the moneytory fractional reserve system could shed a different light to today's crisis.
Rainer
Without that there would not have been the money available to the investors and unqualified people buying real estate only because it could only go up. When property quit going up it was all over.
People can only learn by going bankrupt.
I like and agree with most of your comments, i.e.. "Debt and not Peak Oil was responsible for the Meltdown". But, ....
I wish/hope you'd be a little more optimistic about young people (The Me First Generation). I agree with you that the people that were around in the 30's (meaning they grew up in the 40's & 50's) were not prone to over-borrow and were more inclined to save then the current middle aged and young people but I believe they are going to learn, albeit the hard way. I've always said, "Practicability always win's out in the end." Examples of what need's to be learned, as follows"
Loving parent's taking the time and responsibility for their children and teaching them discipline and respect before they enter school.
Parents living within their means, not being sheep and taking on unpayable debt, e.g. the ostentatious house (and not a home), the big, gas guzzling, needless pickups (toys) & van's, the regular expensive restaurant eat-outs because they don't know how to cook a meal.
High Schools where every kid (is over-weight) requires a car and school parking lot's (and budget cost's) are as big as shopping mall's.
Business where banks push credit cards onto kid's and any unqualified borrower (who have yet to learn responsibility) and CEO's who have no shame from stealing obscene so called compensation.
I'm sorry CLH, it appears that I'm even less optimistic than you. Our "values" really need to change.
Sorry,
Famos
This is a well known report against Peak Oil, written by CERA: www.cera.com/aspx/cda/...
Here is a response from Chris Skrebowski (former long-term planner for BP, previous senior analyst for the Saudi Oil Ministry and Editor of the influential Petroleum Review) to the arguments CERA develops in the report:
globalpublicmedia.com/...
There was a debate about the danger of smoking (companies refuted this claim for many decades before conceding their mistake), there has been one on climate change since the 1970s, which is almost over (not surprisingly ExxonMobil who argues Peak Oil is not an issue, was an active voice against human climate change) and today there is one on Peak Oil (unfortunately it may have started too late). Instinctively I would rather trust independent geologists than corrupt and autocratic countries of the OPEC or a company like ExxonMobil.
In recent years “Peakists” have gained ground, in light with indisputable facts, namely the increase in oil prices (from 18dollars in 1998 to 147 in July 2008, around 800% while demand has kept rising-total inelastic commodity) and the stagnation of oil production. In fact if you check the numbers available on the webpage of the EIA, they even show a small decline in global oil production since 2005, 84.58 Million Barrels per Day (in 2006, 84.54 and 2007, 84.44; 2008 is not yet available obviously) a decline while oil prices were skyrocketing. And yes, Peak Oil may have already happened, but we’ll have to wait a few more years to be sure.
However, during my interview with Dr. Campbell, he added on this issue, “a debate rages as to the date and height of peak, which I think rather misses the point when what matters - and matters greatly - is the vision of the long decline that comes into sight on the other side of it”. I can only agree with him.
And to answer Michael Pinilla, you are right, Peak Oil is no longer a theory but a reality; I will correct it in the future.
Thanks for all your comments.
Peak oil is a theory - - like relativity and evolution - - in the scientific sense of "the consensus of informed opinion." For your masters thesis, you need to go that extra step and write on the additional issue of declining net oil exports - - what Jeffrey Brown calls the Export Land Model.
Peak oil is about flows (current production) not resources (oil in the ground that can be develped for production under current economic conditions) and ELM is about flows available (from "export land") to be imported (by "import land"). The model says that, typically, exporting countries continue to increase their internal consumption even while they reduce their exports. The WSJ recently reported that world oil exports have declined in 2006 and 2007, and look to do so in 2008 (the Saudi oil production burst this summer notwithstanding).
This happened in the US even before the US peaked in 1970. The North Sea peaked in 1999 and UK exports then declined to -0- (happening about now). Mexico peaked in 2004 and their exports are now crashing. It looks like this is just beginning to happen for Russia.
So for all you investors out there, look to ELM as your leading indicator on what is to come... As for peak oil being "the cause" of the financial crisis, of course not. But it has been a contributing factor (along with the rising price of other commodities), as has the drain caused by needlessly exporting organized violence in the main oil producing region of the world.
This has been going on since the early 1970's. If you look at graphs of household debt relative to GDP, it has not gone significantly down for any significant period of time for more than 30 years.
The recent spree of subprime lending was just the proverbial straw that broke the camel's back. Thus, it seems like it caused an oversized disturbance. But really, the load has been very heavy for a very long time.
So the current economic crisis is only partially caused by the Peak. It was exacerbated by stratification (known to previous generations as class war).