Economic Meltdown in America Saves the World from Peak Oil
Introduction and historical context
It had seemed abundantly clear over the year beginning mid 2007 that rampant economic development in less developed countries, along with the maintenance of economic development in more developed countries, spooked the oil markets. After all both China and India were growing economically at around 10% level.
The escalating rise in demand and the dramatic spikes in oil price to almost $150 a barrel in July 2008, doubled the price from mid 2007. It seemed this was all a manifestation of peak oil playing out on the world stage of oil markets confronting rising demand producing dramatic oil scarcity.
Why is the oil price dropping?
However, that may be changing. At present in early October, 2008, crude oil prices have dramatically declined to a “low” of around $89 a barrel – a hefty drop of 39% from July 2008.
Why would the price of oil be dropping when supply is in an overall trend of decline if demand is robustly rising?
Well, the world is rapidly changing, and it may be that the economic decline of the US, with the accompanying decline in consumption, and therefore lowering of the demand for oil and its products, is impacting on the world oil markets. Declining demand may be lowering the level of oil scarcity and so allowing the crude prices to fall (Reuters, 2008).
The subprime mortgage industry meltdown, and its knock-on effects, may yet prove to be titanic in their full implications. The full debt problem in the US is so vast and huge, it is almost beyond comprehension. For example, in the following table the scale of US debt is shown:
Many financial analysts and pundits are commenting that the subprime mortgage sector is miniscule compared to financial derivatives industry, but the knock-on effects could, like dominoes, begin to topple this US sector of gigantic scale - $520 trillion – again like the subprime, derivatives are largely financed on credit.
If lack of confidence and rising panic, from within the US and from abroad, exacerbates the declining situation, the US could see total debt of over $600 trillion begin to unwind like an enraged Brahman rodeo bull. Grand total US debt of $637 trillion amounts to a staggering $2,102,100 for every man woman and child in the nation! An astronomical figure!
Imagine what this dramatic decline scenario would do to the New York Stock Exchange and the value of the US dollar exchange rates internationally – as all this ultimately depends on confidence of investors and users to sustain its viability.
Very few predicted the fall of the other post Second World War superpower – the Soviet Union – and yet it did happen about two decades ago. However, conversely quite a few pundits and intelligentsia are beginning to herald the comprehensive fall of the US as an economic superpower – it is becoming evident. This could be a very hard fall with critical economic and societal repercussions, as the nation becomes unworkable and chaotic with much strife.
Imagine the New York Stock Exchange dropping from 11,000 to 3,000 or so. Imagine concurrent with that, the US dollar losing 60% of its present value on the international exchange rate, and even possibly not accepted at all for international trade. And this could happen as many, and an increasing number of voices, now warn us. Rampant breakdown of infrastructures and society, with drastic food shortages, would lead to hostile levels of civil strife and violence.
American decline – a new worldwide opportunity
World oil consumption is around 85 mbpd, and the USA consumes 24% of the world oil, amounting to over 20 mbpd. Also the US has imports of 13 mbpd of the world’s oil exports, or 15% of total world oil production.
Economic decline in the US would lead to a drop in oil consumption in the US and therefore free up a lot of oil on the international markets – 13 mbpd. This would likely postpone the effects of worldwide peak oil for a several years – oil having reached peak production in 2005 and since then declining in production. But with less oil demand, as the US would be in decline, oil would cease to be scarce on world markets and the price would obviously drop significantly, making it possible for economic development to continue on a world scale, outside the US.
It may be that the financial problems diffusing from the US around the globe will be unsettling for many nations, but not as severe or so comprehensively threatening in many of these nations, as in the US. One of the German leaders has recently said that “casino style” financial behaviour had not been rampant in Germany, which had not experienced a pseudo property or economic boom, based on the reckless financial risk of extreme speculation. Indeed, German leaders, along with several others, have been vocal in putting the blame for the world global financial crisis on America as the instigator.
A new world status quo
These dynamics would suggest there are great shifts in the world balance of power as America declines and other nations or groups of nations take their place on the world scene.
Huntington (1996) suggests that the emerging world will be made up of continent wide civilization superpowers, and it may be that this new status quo will be in a post-globalization and post-AngloSaxon world. This could be a world of looming superpowers which may be helped in their economic development with cheaper oil made possible by the American decline.
Hodges, M. (2009), Grandfather Economic Reports, Americas Total Debt Report, March, http://mwhodges.home.att.net/nat-debt/debt-nat-a.htm
Huntington, S. (1996) The Clash of Civilizations and the Remaking of World Order, New York: Simon and Schuster.
Reuters, (2008), Oil Falls to 8-month low below $90 a barrel, 6 October, http://www.reuters.com/article/businessNews/idUSTRE49439X20081006?rpc=77&pageNumber=1&virtualBrandChannel=10341
James Leigh, PhD. CGeog. FRGS.
Assistant Professor Cultural Geography
University of Nicosia, Cyprus
Personal webpage: http://www.freewebs.com/jas4
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