A major spike in the oil price is recessionary not only because of its direct effects on the global economy, but also because it is likely to cause stock markets around the world to crash, further reinforcing the recessionary pressures. This in turn will lead to second order effects, such as the deepening insolvency of many pension funds, which hold the bulk of their investments in stocks and shares… As the crisis deepens, pension payments may be slashed to derisory levels in both money purchase and the supposedly more secure final salary schemes. The value of endowment policies will collapse too, with devastating effect on the borrowers who were counting on them to repay their mortgage, and the housing market as a whole. The banking sector will also act as a multiplier: since so much lending is “secured” against future economic growth, as the outlook worsens lending will fall, leading to further contraction.
That quote is from page 182 of the book: The Last Oil Shock – A Survival Guide To The Imminent Extinction Of Petroleum Man. The moment I read that I quickly flicked to the front of the book to see what year it was printed, my eyes popped out of my head – 2007. David Strahan, the author, had picked the Global Financial Crisis (GFC) before it happened and stated its cause was peak oil. This is backed up quite nicely by an earlier video I linked to of Canadian right-wing economist Jeff Rubin who stated, “The GFC caused by the sub-prime mortgage market? Gee, I never knew Cleveland was that big!”.
The next year will be interesting because, due to a number of factors, oil production has not topped 85 million barrels a day (I don’t think it ever will) and now that we are in “recovery” (despite every Western Government bleeding red ink) we are seeing oil demand and price creep up. What level will price have to reach to tip the world back into recession to depress the oil demand again, as we bump into the production ceiling? Anybody’s guess. How many of these booms and busts will we have to go through before the realisation sets in (hopefully without the depression-causing panic) that the economists are wrong and supply will not always meet demand? Anybody’s guess. How much precious Government debt will we waste on trying to grow GDP through increasing energy use rather than investing in infrastructure that will allow us to delink GDP growth and energy use growth? Again anybody’s guess, but with Joyce in charge of Transport it is seemingly going to be all the cookies in the cookie jar over the next, most crucial, decade.
I plan to post more about this fascinating book over the next few weeks but on page 99 is a vision for the future for the poorest people on the planet, one I hope doesn’t come true, as I hope Energy Descent brings out the best in us – not the worst:
The IEA figures also imply that even if devoted all our cropland to biofuel production we would only produce a quarter of our current fuel consumption. We could all starve to death in a traffic jam… And it’s not like the world has any food production to spare. The veteran environmental campaigner Lester Brown reported in 2006 that the world grain harvest had failed to match consumption in six out of the last seven years, and that stocks are dwindling to dangerously low levels. In this context the increasing diversion of maize for ethanol production will create ‘an epic competition between the 800 million motorists who want to protect their mobility and the two billion poorest people who simply want to survive’.
Worrying indeed and when we realise the Green Revolution, that has supported billions of extra people over the last 50 years, is almost completely based on using petrochemicals to add atmospheric nitrogen to fertiliser, as well as using diesel to drive farming machinery and irrigation pumps, we can see that GDP growth is not the only thing linked to energy growth – food production is too. In fact for every calorie we consume worldwide, ten calories of petrochemical energy has been invested. For the entirety of human history before 150 years ago humans (or our animals or sadly slaves) had to put in less energy than we consumed and a full third of our productive land was used to grow feed for our beasts of burden – now used for food for us. All quite depressing stuff. Personally I’m quite hopeful that Energy Descent will mean that we rediscover that participation is society is the key to happiness, rather than consumption of the products made by “professionals” and we will rediscover self-reliance – how to produce our own food, recycle everything and to fix, rather than throw away, broken resources.
It’ll be an interesting next few years, that’s for sure.
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I’m all for decreasing dependance on oil, but this latest theory that oil prices brought about the GFC doesn’t wash much with me.
The GFC was about debt and risk. High risk individuals were encouraged to get into debt (housing debt), which were then converted into debt securities to cover that risk. Those debt securities were, as a result, high risk themselves, though no-one seemed to really think about that due to the belief that the underlying security (housing) would almost always appreciate in value. When the mortgagee couldn’t pay the mortgage and (and its an “and”) the underlying asset fell over, it triggered a domino-effect and hit those that invested in the high-risk securities. E.g. Iceland financial institutions and the funds that invested with them.
True, oil prices skyrocketed and no doubt those on the urban fringes found it more of a hit to fill up the gas guzzler to drive into work and that hurt their mortgage repayment ability. But I’d suggest that if it wasn’t oil, it would have been something else that caught them out, as the loans were structured so it was easy to get into the market, how you coped later didn’t seem to be as much of a concern, scarily.
I reckon there is an equivalent argument that the GFC impacted the oil price first, not the other way around. But who is to know.
I’ve read this theory before, and I think a couple of the big proponents are very pro-alternative fuels. Nothing wrong with that, but its probably worthwhile knowing where their influences lie.
I think the idea is that the huge increase in oil prices sucked a huge amount of money out of the USA at a very critical time (June-September 2008) and contributed to the GFC.
On previous occasions when oil prices have spiked (1973, 1980, 1990) there have been recessions following fairly close behind, so it’s not an outrageous theory at all.
I just recently read that in the US, the “white flight” seems to be reversing after decades, i.e. the richer parts of society (which are predominantly white, still) are moving back out of the suburbs into the urban areas. For, among other reasons, easier commutes.
An interesting pattern – and an early warning about what will happen to the poor (in Auckland more so than in many other places worldwide) in case of a oil shock: they, most of all, will be stuck outside of town with no good way to get to work or even education. Fuel will gobble up their salaries, while buses and trains will be full.
@KLK, admin is right, in a later post I will see if I can post a graph showing what happened to oil prices (in today’s dollars) that caused recessions solely atributed to oil prices in ’73 and ’79, the graph then compares the oil prices on those occasions with the inflation adjusted prices when it hit $147 a couple of years ago, much, much higher in relative terms… It become hard to deny it was the trigger after that I found…
@ingolfson, another issue is that house prices can be expected to plummet on Auckland’s fringes, these new suburbs sit on rich farmland… Spiralling down house prices, the need to produce food locally, and productive farmland concreted over..? Doesn’t take a genius to see what might happen…
You need to compare apples with apples regarding the economy at those times. I’m no expert, but I doubt the booming economies of many countries around the world in previous years prior to those recessions was debt and housing based as it was prior to the GFC.
I don’t deny that recessions follow high oil prices, but this latest GFC was a different beast. I would imagine that the GFC would have eventually occurred whether oil was $50 or $100 a barrell. The growth of many countries was a house of cards and oil at $147 a barrell just made it happen sooner rather than later.