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Personal debt and peak oil

For those of us that think that the UK government isn’t aware of the issue of peak oil, I would ask to think again and read the newspapers more closely. Oil depletion isn’t a conspiracy theory, like some UFO on the horizon, where believers speculate whether there is some sort of cover up. Oil depletion is a known measurable that has been proven, around the world. The markers for the future are here in the news now and it doesn’t take too much of an imagination to understand them.

National identity cards, a national road toll system that will charge car users large sums of money for driving at peak times by 2014. The government has already given warning that the current pension system, is not in the long term affordable. In the summer of 2004 the UK government announced that it was prudent that people should put three weeks worth of food aside for emergencies (the BBC ran several pieces on this), mainly terrorist attack. Along with plans to base the army at food depots during the next fuel strike and you begin to understand that we have all quietly been put on notice.

For the majority of us, our standard of living is better than it has ever been. You just have to look around to see all this newfound wealth - although with the UK consumer debt having topped the £1 trillion mark last summer (including mortgage debt), you begin to wonder. Many homeowners discovered in the last few years that their homes are worth so much more than they paid for them, so they have borrowed extra, to finance home improvements or a new car and holidays. This new wealth is in reality huge debt running on borrowed time.

With the consensus among independent petroleum geologists that world oil production will peak by the end of the decade and the North Sea having already peaked in 1999, Britain is set to become poorer. With the loss of revenue from a dwindling North Sea and higher oil prices than we currently have, the economy is going to suffer. It is very difficult trying to predict future events and many people have ideas on what peak oil and beyond will bring us. Although it seems to make sense that, since oil is the precursor to everything that we do and underpins our material wealth, a shortage or higher price will affect everything that we do.

In a market economy a shortage or threat of a shortage, will raise the price of a commodity that is in demand. This is what is happening at the moment. Although there is no actual shortage of oil, the market is tight and demand is high. With bad weather and terrorism shutting off production in some countries, we now have the threat of a shortage raising the price of oil. If we can have $55 a barrel of oil on the speculation of a shortage, imagine then what the price per barrel might be when we do have real shortages.

It is interesting that economists tell us, that we are much less reliant on oil since the last oil crisis in the 1970s and therefore higher oil prices will affect the economy much less. Per pound or dollar of national output, we do indeed use less oil than we did then, but if we are really less reliant on oil, why are we using so much more of the stuff? The volume of transport in the UK that relies on oil has doubled since the 70s.

The 70s oil crisis showed that very high oil prices will cripple economic growth and this is not necessarily instant. Sudden actual shortage, brought on by a large terrorist attack on an oil installation has the possibility to create a huge economic crisis that would be felt in all areas of our lives. Peak oil threatens to be somewhat more insidious though. The person in the street would possibly become aware of peak oil through higher prices for all goods and food, a weak economy and higher unemployment. Who is to say how long "business as usual" could last for, before major shortages surpassed our ability to conserve and save? It is likely that much higher prices for crude oil will be seen for a while, before we have an issue with shortages.

Most of our recent increased personal wealth, seen as new cars, home improvements, bigger homes, two holidays a year and expensive electrical goods, has been funded by personal borrowing. One of the most popular forms of borrowing has been to extend mortgages, as the UK has over the past few years seen a huge housing boom. Increased borrowing on a mortgage is the most expensive form of borrowing. The interest is paid over a very long period and unfortunately the housing bubble will be the first to burst in an economic down turn, leaving many people out in the cold so to speak.

You are probably thinking this is all very interesting and you have probably heard some of it before, "so what has this got to do with me?"

Since we have done nothing to prepare for the coming oil shocks, we are completely reliant on increasing our supply of oil to power all of our transport needs, our food production, our manufacturing of goods and 40% of our total energy needs. With an economy that is based on perpetual growth, this is very bad news. As a lack of surplus energy, means a lack of economic growth.

It is generally given in simple terms, that a shrinking oil supply will mean a recession and high prices for all goods. In a recession, people tend to lose their jobs and spend less money. Thus the spending of less money - a consumer downturn - makes the spiral even worse and more people lose their jobs.

I had a conversation with a friend who works in the airline business the other day. He has known about the basics of peak oil for a while and could see the price of oil continuing to rise into the future. He suggested that as the price of crude oil increases and thus the price of holidays and flights, people would just pay more as they wouldn’t stop travelling to go on holiday.

This idea is very common, put completely incorrect. In the short term this might happen. Although as many people lose their jobs and there is less money around as the economy enters into a crisis, the majority of us will not be going on holidays abroad whatever the cost. Many companies will go to the wall. Not only will there be less money available, but also less goods. It’s a spiralling down effect that will continue, even if we manage to find a miracle that can replace oil, for many years.

If I could offer you three pieces of advice that would make your life easier in the future, it would be the following;

-Get out of debt

-Reduce your debt base

-Pay of your debts

The future is likely going to be tough. Many changes will happen and we will have to change our very ideals and ways we live. Governments have known about this for years, but the changes that are needed to secure our futures are unpopular and not vote winners. So nothing will be done, until it becomes complete obvious to all that we really are in trouble and most of our beliefs about our lives and prosperity come crashing down around us.

If you are up to your eyes in debt, with a mortgage, loan(s) and credit card(s), what will happen when you lose your job or are forced to take a job paying substantially less then you need to service these debts. "Your house is at risk, if you are unable to keep up the repayments on it". This well-known phrase should give you an idea of what is likely to come. The economic downturn that brought on the last housing market crash in the early 90s was small, compared to the possible energy crisis ahead. Many people lost their homes and were left with huge debts. The current housing boom has taken personal debt to new highs and left many families very vulnerable.

I can’t stress the importance of this. Having excessive debt is going to make things very difficult. Although, I do think it is important to have some sort of balance, between this and things that you want to do in your life. What I mean by this is, if you have always wanted to travel the Far East or back pack round the world, now is the time to do it. It’s a balancing act, between getting your life in order and enjoying the party, whilst we are still living through it.

Try to clear loans and credit cards and reduce your mortgage. This is far more important in the long term to your well being, than buying a new car (or the latest plasma screen, dishwasher etc), when a cheaper second hand model is adequate. You could also sell expensive assets to help pay off your debts or mortgage quicker, i.e. downgrade from a prestige car to a more economical cheaper model. You might decide that this is the right time to sell your house/flat in London and move to a house in the country or a small town, thus reducing your mortgage.

Try to live without the expectation that tomorrow will always be better than today and do not rely on the government to support or supply your future.

I will leave you with one last thought. The CIA publishes its own report on world oil resources, which stated that as of 2002, proved world oil reserves stood at 1025 million barrels. If you divide this by current yearly consumption we have just over 34years (as of 2002) worth of oil left. This does not take into account that world oil consumption is increasing and in real terms this figure is more like 25 years worth. With a little imagination you can understand having read about oil depletion that we will be in a major crisis long before the 25years are up. We are doing nothing to prevent this other than going to war and preparing for other wars with countries that have resources that we need. Time is short to get your lives in order and the quicker people wake up to this fact, the happy we will all be.

Sources

www.energybulletin.net/308.html

www.cia.gov/cia/publications/factbook/fields/2178.html

news.bbc.co.uk/1/hi/uk/3907941.stm

news.bbc.co.uk/1/hi/uk/3906187.stm

www.timesonline.co.uk/printFriendly/0,,1-523-1302571-523,00.html

www.guardian.co.uk/oil/story/0,11319,1232445,00.html

www.energybulletin.net/3690.html

news.bbc.co.uk/1/hi/world/middle_east/4101021.stm

www.livescience.com/environment/end_oil_041214.html

www.energybulletin.net/3506.html

news.nationalgeographic.com/news/2004/11/1129_041129_global_oil_supply.html

www.guardian.co.uk/oil/story/0,11319,1361836,00.html

www.energybulletin.net/3283.html

www.pbs.org/wgbh/amex/carter/filmmore/ps_energy.html

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