National Commentary

The Peak Oil Crisis: The Economic Rebound

A few years ago, peak oil was relatively easy to understand. At some point in the future, and estimates varied as to exactly when, oil production was going to start declining due to a combination of geologic and geopolitical factors, prices were going to rise precipitously and a massive civilization-wrenching paradigm shift would start as the world transitioned from oil to other forms of energy.

Those who understood that oil was going to start running out one day spread themselves along a spectrum of just when this unhappy event would happen. Pessimists saw the decline of oil production beginning in 3 to 5 years, optimists said 10, 20 or 30 years, and most of the world’s peoples did not have the faintest clue that the oil was ever going to run out. Things were so simple 18 months ago.

In 2007, however, it was revealed that a collection of realtors, appraisers, mortgage brokers, bankers, builders, financiers, insurers, securities raters and assorted others had been making lots of money by selling houses to people who could not afford them and then dumping the tainted mortgages on the world’s banking system. When all the dust from these revelations settled, it looked as if many of the world’s banks had suffered grievous if not fatal damage and what could turn out to be the greatest economic downturn of modern times had been set loose. So where does oil fit into all this?

Oil of course, is the life blood of modern economies. Without increasing amounts of it there can be little or no economic growth until substitutes are found in quantity, and if it is withdrawn there will be economic contraction. One of numerous and ill-understood issues in our economic future is the relation of oil –production, consumption and price — to our economic downturn. The interrelation is a complex one.

The onset of the economic troubles and reduced demand for oil last year not only crashed oil prices to the relief of many, but has led to a precipitous decline in oil exploration, drilling and alternative energy projects. Although it will be months or years before the effects of these reduced expenditures are felt, some are forecasting serious consequences three to five years ahead.

The overriding issue, however, is just how long the economic downturn will last. Historical precedent and conventional wisdom from Wall Street seems to be saying that by the middle of 2009 we will hit bottom and things will start to improve. Some, however, are not so sure and are making cases for a downturn of many months, quarters, years, or in extreme cases decades. Sorting this out is obviously impossible for we seem to be entering an era unique in history. The U.S. administration currently is intent on instituting a $3+ trillion economic stimulus and financial bailout using borrowed money that might do some good, have a negligible effect, or as some fear crash the dollar, the U.S. financial system, and God knows what else.

One of the problems is that there are many feedbacks implicit in all this. Should these government bailout plans start to work, there is likely to be an increased demand for oil. While OPEC which is currently cutting production as quickly as it can get its act together should have spare capacity to respond for a while, demand could get out of hand and oil prices could easily surpass those of last summer thereby dampening or destroying any recovery.

Should the stimulus and financial bailouts have little or no effect in the next year or two and the economic situation continues to spiral downward, then the demand for oil will continue to decline. At some point, however, demand in the U.S., Europe and parts of Asia will run into the limits imposed by our motorized societies. Particularly here in the U.S. the economy simply cannot function without a certain amount of transportation fuel or economic activity will take another major hit. Demand for oil in North America, Europe, and oil producing states is likely to continue at a fairly high level until either it is no longer available or prices become absurdly high in relation to incomes. It is clear the future is going to become a very complicated place with all kinds of forces pushing in all sorts of directions.

A lot of what happens depends on whether our current economic troubles turn out to be only a deep, but run-of-the-mill recession that lasts only two or three years, or whether the damage to the financial system coupled with falling oil supplies have created a new and previously unknown economic phenomenon from which there is no quick recovery. If the downturn continues for the next four or five years the world will be entering oil depletion territory where the fall of production is likely to simply overwhelm any efforts to stem the decline through increased drilling or establishing alternative sources of energy.

If there were still cheap, readily available sources of fossil fuels available then there might be some hope of working our way out the current recession. New sources of oil from deepwater wells, tar sands and heavy oil deposits are very expensive to exploit. While some drilling continues, this is because oil companies are locked into long term obligations which have to be paid anyway so they continue on in the hope that prices again will reach $100 a barrel. OPEC remains committed to cutting production until they can drive oil prices high enough to ensure economic and political stability.

These factors alone suggest that while cheap, plentiful energy is available today, it will not remain either cheap or plentiful much longer.

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