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The Magic Market

Richard Heinberg, Post Carbon Institute
As the world finance system disintegrates and the price of oil wafts below $80 a barrel, we are about to see yet another instance of Market Magic.

Demand for oil is falling as world economic activity sputters. Many analysts are now forecasting that the barrel price could go as low as $50 to $60 in the next few weeks.

Meanwhile, however, the marginal cost of bringing a new barrel of oil into production has been rising in recent years, and now stands in the range of $80 to $100. Therefore, as the spot price and futures prices weaken, efforts to develop new oil sources will be mothballed.

At the same time, some recent adaptive efforts to develop renewable energy and energy efficiency, spurred by $150 oil, are getting slammed by lower oil prices and the drying up of investment capital.

Once petroleum supply levels have fallen sufficiently (OPEC is now trying to decide how much production to take off-line), oil prices will start to recover and will eventually soar. But the response this time (by way of investments both in new oil production capacity and alternative energy sources) will be weaker.

Price volatility discourages helpful societal responses.
(13 October 2008)

Worthwhile Videos

Gail the Actuary, The Oil Drum
What videos have you seen that you think others might be interested in? Here are a few I found:

From Peak Moment Television, this is Matt Simmons’ 26 minute talk at the ASPO convention called, “Oil and Gas–The Next Meltdown:” …
(12 October 2008)
ASPO-USA has just announced that DVDs from the Sacramento peak oil conference are available.

From the Subprime Crisis to the Financial Meltdown, Peak Oil the Hidden Responsible

Lionel Badal, University of Exeter via by CNN I-report
In a recent article Joseph Stiglitz, Nobel Prize laureate in Economics, argued the current financial crisis was caused both by “dishonesty on the part of financial institutions, and incompetence on the part of policymakers” . Others like the Australian Prime-Minister add that widespread greed is to blame for the current events . While these explanations manage to explain the evident excesses of our financial system, they do not say how the system which used to run roughly well suddenly stopped working.

Everyone would agree that the financial crisis started once the banking sector got into troubles. The banking sector for its part, finds the causes of its difficulties in the subprime crisis. To go back further in the events timeline, we acknowledge that the subprime crisis happened once borrowers became unable to pay back their mortgages.

So yes, it was a serious mistake to lend money to people who could not afford it, but why did these people abruptly become unable to pay? The reason is most important and commentators of the crisis systematically fail to discuss and analyze it. In 2006, interest rates were raised in the USA, so the monthly bill, usually poor borrowers of subprime mortgages had to pay, rose dramatically, until they could no longer pay it and saw their houses confiscated; thus contributing to the housing market plunge.

Finally, interest rates were increased in order to fight rising inflation, which started with the dramatic surge in oil prices the world faced over the past few years. So yes, the financial crisis finds its roots in the oil crisis and nobody seems to care about it.

The current events that nobody saw coming, were already announced in as early as 2006 by Dr. Colin Campbell, a geologist, former Vice-President of Fina Oil Company and founder of the nowadays respected ASPO (Association for the Study of Peak Oil). On a video interview available on YouTube, he declared:

“Expansion becomes impossible without abundant cheap energy. So I think that the debt of the world is going bad. That speaks of a financial crisis, unseen, probably equalling the Great Depression of 1930; it’s probable we face the Second Great Depression. It would be a chain reaction, one bank would fail, and another one would fail, industries will close…”

For people who are not aware of the Peak Oil theory, and sadly they are still the vast majority today, this theory advanced by a wide range of energy experts argues the world is going to face, in the near future, a permanent and irreversible decline in global oil production.
(12 October 2008)
The CNN I-report, in which this article appears, is a user-generated site.

My April 2007 Forecast Regarding The Connection Between Peak Oil and the Collapse of the Monetary System

Gail the Actuary, The Oil Drum
It is not a coincidence that just as we are hitting peak oil, world monetary systems seem to be edging toward collapse. Monetary systems are debt based, and depend on growth to continue. Resources are finite, and we are reaching limitations on them. Many of us have predicted that monetary systems may collapse, either as we approach peak oil, or shortly after peak oil. I have talked about the connection between peak oil and monetary system collapse in a number of posts. In this post, I reprint relevant sections from one of my earliest TOD posts, written in April 2007.

… Conclusion

We cannot know exactly what the future will hold, if technology is not able to overcome the many issues associated with a finite world, including declining oil and natural gas supply, decreasing fresh water supply, and climate change. Whatever changes occur are likely to differ from location to location, as the world activity becomes more localized.

We tend to think of governments as fairly stable, but these too may change. Countries may subdivide into smaller units. Some have even suggested that groups of states may break away from the United States.

Educational institutions will most likely change. Fewer students will probably attend colleges and universities, and the subjects of interest will likely change. The sciences and agriculture or permaculture are likely to be topics of interest. More students may want to live on campus, if transportation is a problem. Adult education may become more important, as people seek to develop skills for a changing world.

Businesses will also change. Local businesses will become more important, while multinational companies recede in importance. Manufacturing will become less important, and recycling will become more important. Providing necessities will get top priority, while nice-to-have items will not sell well. Barter, or a new monetary system that substitutes for barter, may be the way business is done.

People may choose to live closer to work, or may work at home, so as to minimize costs associated with commuting. Some people may choose to live with relatives or friends, so as to save on utility costs. Eventually, many homes in undesirable locations may be left empty, and the parts of these unoccupied homes that can be used elsewhere will be recycled.

The next 50 years will certainly be interesting ones. Perhaps, with technological advances, some of the potential problems can be avoided. But we will need to work hard, starting now, to develop ways to work around the problems which seem to be ahead.
(13 October 2008)