Peak Oil and the Global Financial Crisis

I am not an economist, nor do I play one on television. Nor would I want to be one. How limiting and depressing it must be to constrain oneself to constantly viewing the beauty and wonders of this magnificent living planet through the lens of cold, hard, lifeless money, seeking nothing more from it than profit.

Economist preach the faith that money makes the world go round. And they have the charts and graphs to prove it. And therein lies the problem. We can not solve our problems, including the serious global financial crisis, by looking at the world through a dollar sign, through the same economic lens that has contributed so largely to creating that crisis.

The environment is not a part of the economy to be bought and sold for a profit. It does not conform neatly to human economic rules and laws. The economy, conversely, is just one subset of the environment. We need to look at economics through a worldview that is broad and all-encompassing, need to put it in a more realistic perspective in tune with the realities of the planet itself.

We have pushed this planet and its environment to the brink and must now place human economy in the service of protecting and preserving what is left while there is still something of it left to protect and preserve. Because sooner or later that chance will be lost. We will at some point pass the tipping point, all for the sake of profit. In fact, if we continue with the same economic mindset we will probably try to make even more profit out of the terminal scarcity that our pursuit of profit has created.

Climbing back out of any recession means increasing energy consumption. Period. Recession recovery means increasing manufacturing production, transportation, increasing mobility, increased credit, increased shipping and trade. All of this involves increases in the use of energy.

In the five years from 1930-35 U.S. energy consumption dropped by nearly 14%. In the next five years, with the onset of war manufacturing and increased trans-Atlantic trade with the western European nations who would soon be pitted against Germany in WWII, it rose by 23.3% and another 29.5% during the war years to 1945. In fact, as Michael T. Klare points out in his excellent video, Blood and Oil, "The U.S. consumed more than one third of its total oil reserves during WWII." Other periods of recovery following recessions have also been accompanied by similar measurable peaks in increased energy consumption.

But how do we know if/when we are in a recession/depression? As they unfold there is invariably a serious and increasing disconnect between the Rosy and optimistic pronouncements - as if trying to wish it away - of leading politicians and industry leaders measured against the increasingly painful realities seen and felt by people on the street, whether that be Main Street or the workers and stock-hawkers in the pits on Wall Street. This is not unlike John McCain's confident campaign-trail assertion that "The fundamentals of the economy are strong," just hours before Treasury Secretary Paulson started the ball rolling on the $700-billion financial system bailout package.

In November, 1930 Alfred P. Sloan Jr. of General Motors confidently proclaimed, "I see no reason why 1931 should not be an extremely good year." Compare that to similar "public" optimism of today's GM leaders as the company implodes and seeks merger with Chrysler, itself currently struggling and a phoenix recently arisen from the ashes of near bankruptcy. On June 9, 1931, eight years before the depression was finally ended by WWII, Dr. Julius Klein, then U.S. Assistant Secretary of Commerce, announced "The depression has ended."

We, of course, have a very different reality to deal with today than what existed in 1929. If lack of energy or the high cost of energy in any way contributes to a recession, as it very clearly has in the 2008 global recession (depression?), then climbing back out of the recession will now be very much constrained by the same factors that caused it. That energy scarcity or high energy cost will increase right along with the increase in activity in the attempted economic recovery.

In the few weeks following the first admission of a global financial crisis, spotlighted by the U.S. Treasury's request for its first $700-billion bailout package, oil prices on the world's commodity exchanges began to move uncharacteristically in lockstep with the wild swings on global stock markets. Over the previous couple of years the stock markets and oil prices had more often gone in opposite directions as investors moved their money back and forth between equities and commodities in search of the highest profits. This new tandem pattern was the clearest signal that investors were simply removing their money from the investment arena, both equities and commodities, as profit opportunities dwindled and moving it into cash or gold.

If it's not this recession it will be the next one. There isn't time (historically 10-20 years to fully recover from a deep recession) to climb back out of this recession before the next one hits (bull periods tend to be 8-15 years duration). Peak oil is either already upon us or about to hit within the next 5-10 years, depending on who you listen to.

Suddenly real people, and economists, will come to realize that it is a serious liability, not an asset, that we have a credit/debt driven economy. The proposed solutions to this crisis thus far have been to throw more credit/debt at it. Our current global economy is critically dependent on growth. That growth is critical to support the U.S. Federal Reserve's policy (now essentially practiced globally by all national reserve banks) of growing the money supply through Fractional Reserve Banking. Through fractional reserve banking each dollar on loan (debt) is treated as an asset which the bank uses as the asset base to issue up to ten more dollars of loans out of money that does not exist, and can never, in a shrinking economy, be paid back.

Growth is also critically dependent on never-ending expansion of the energy supply tp support the social activity to generate the money to repay the debts incurred under the fractional reserve banking system. If you can't increase the energy supply growth stops. If growth stops the credit/debt economy dies. A debt-based economic system ultimately incorporates the assumption of its own eventual bankruptcy.

This recession, as has become painfully clear, is global. The recovery, likewise, must be global. For one nation to try to pull itself out of the recession at the cost of other nations cannot work, or at least will not be tolerated by other nations. There is considerable fear, however, that that is exactly what will happen. There is even greater fear in the U.S. that not one but many nations will decide to take advantage of the situation and use it to destroy U.S. hegemony by taking the U.S. dollar down the toilet.

There are many side effects to the growing global financial crisis. One of the most dangerous for the industrial nations is that the JIT (Just In Time) theology is breaking down. There is no credit available to finance shipping costs, to finance an inventory buildup, especially the large retail build-up for the Christmas season. Shelves will become bare so much more quickly than in the Great Depression because nobody holds an inventory. The inventory is in the pipeline. If the pipeline is shutdown the only inventory to draw on is what is on the shelves, generally a few days or weeks of product. The financial system will not free up massive amounts of money to allow for the building up of inventory, something manufacturers and producers would clearly love. What better solution to the woes of the manufacturing sector than to suddenly have retailers abandon JIT and suddenly start stocking their shelves and backrooms with inventory.

Since oil and other energy forms are such a crucial and costly input to the exploitation of all energy sources those other forms of energy have risen in cost in tandem with the price of oil (and do not, as we constantly observe, do not drop as quickly as oil when it drops). This has, however, had an odd and now clearly unfortunate side effect.

The higher selling price of energy has encouraged the development of many higher cost alternatives necessitated by the declining availability of the preferred and less costly primary sources such as crude oil, natural gas and black coal. The Canadian tar sands, deepwater offshore oil extraction and oil extraction in landlocked countries like Azerbaijan are prime examples. If and when the price of oil declines due to demand destruction, and other forms of energy with it, financially over-extended energy projects like those mentioned, which were viable only because of the high selling price of the energy those projects produced, begin to fall on serious financial difficulties. The energy they produce no longer brings the selling price that their much higher production costs require to remain viable.

The global oil production and demand figures show very clearly that we hit a peak in global oil production in May, 2005. We may still have times over the next few years where that peak is surpassed as we bounce along on the peak oil plateau. The trend, however, shows that growth in global oil production has ceased though the terminal decline has not yet begun.

Growth in liquid fuels since that peak has come not from conventional crude but from alternatives such as tar sands, oil sands, oil shale, coal-to-liquid, natural gas to liquid, synthetics and biofuels, primarily from sugar cane, corn and wheat. This latter, in fact, is contributing to a serious rise in world food prices that is raising the specter of a new round of mass starvation such as we have not seen since the beginning of the green revolution.

If this recession is prolonged, which there is every indication it will be, it is unlikely, considering the global energy production statistics, that we will have the energy required to support the growth in industrial and economic activity it will take to bring it to an end. If it does end it will not be for long. We will quickly run up against the limits in the energy supply and slip yet again into a global recession, that one terminal.

Governments of the major economic nations, and their economists, are beginning to make noises about redesigning the global financial system. If that redesign does not properly take into the account the current energy limitations and future energy declines it will be very short-lived.