I Think I Hear the Fat Lady Singing
“The opera ain’t over till the fat lady sings” – Dan Cook, sports writer and broadcaster 1978
I have spent this past weekend at a lecture and workshop by Arizonan Guy McPherson, who is currently touring New Zealand. McPherson blogs at Nature Bats Last and has recently published a book called Walking Away from Empire: a Personal Journey. During his lecture he presented some very interesting oil production/price data that has made it possible for a number of mainstream and non-mainstream economists and financial advisers to project a date for the next economic crisis. Many, like McPherson, believe the next one will be so catastrophic it will bring down the global financial system and world trade and monetary system, and possibly our energy and telecommunications grid. In other words, TEOTWAWKI (The End of the World as We Know It).
For nearly a decade various Peak Oil economists have been predicting the collapse of the global economic system, based on the growing cost of oil extraction (we’ve used up all the sweet stuff that’s easy to get at – sucking it out of tar sands and from deep water wells is far more difficult and costly). While the mainstream media rarely makes the connection, all industrial activity and economic activity has always depended on the ready availability of cheap fossil fuel. Yet a close examination of world oil reserves and production shows that the era of cheap fossil fuel has ended. Owing to the high cost of extraction, world oil production virtually plateaued in 2004. According to current data it will begin to decline sharply (by 4% per year) in 2014.
You know the coming crisis is real when the world’s most two most famous insurance companies, Lloyd’s of London and Chatham House, advise the businesses they insure to begin scenario-planning exercises for the oil price spike they expect in the “medium term” (Lloyd’s 2010).
Until recently the exact timing of the next oil spike (and economic collapse) has been difficult to predict. In large part, this relates to the failure of industrialized countries to operate as free markets. While no other country is as generous as the US in the corporate welfare government provides multinational corporations, all industrialized countries do it to some extent.
Numbers That Point to a November-December 2012 Oil Spike (and major economic crisis)
1. Oil production has plateaued
The following graph is from an exhaustive paper analyzing global oil production trends by Russian economist Dean Fantazzini. Fantazzini counts all liquid fuels (e.g. liquified natural gas), owing to their ability to be used interchangeably with oil. You can see that production virtually flat lined in 2004:
2. Demand from energy hungry countries like China and India continues to increase rapidly.
When demand exceeds supply, the law of supply and demand dictates that the price must increase – unless government intervenes to stabilize it.
- From India Reports
3. All Modern Recessions Were Triggered by Spikes in the Price of Oil
Even more surprising is the following graph, published in the Wall Street Journal in February 2012. It shows that every recession since 1973 has been triggered by a steep increase in the price of oil. It’s perfectly logical when you think about it. Businesses have no choice but to cut their oil use when the price goes up. And because of the direct link between energy use and industrial production, economic activity decreases accordingly. This, by definition, is a recession.
- WSJ Oil price recession chart
Other economists have extended the oil spike/recession link back to World War II. Since 1947, according to James Hamilton, every recession but one was linked to a spike in oil prices.
Recent Demand Collapse
The price of oil per barrel has decreased 25% in the last three months, mainly due to demand bottoming out in dying economies like Greece and Spain. The price of gasoline hasn’t reflected this decrease, in part because Eurozone oil sanctions against Iran are expected to push the per barrel cost up again. Bloomberg’s predicts the price to rise to $114 per barrel in the 3rd quarter of 2012.
What Obama Could But Won’t Do
Owing to the upcoming elections, we can expect Obama to release most of America’s strategic oil reserves. However this is a drop in the ocean, compared to the billions of barrels lost to Europe and the US due to the sanctions on Iran. Other options open to the President are to implement price controls (like Nixon) or to ration gasoline (like Roosevelt during World War II). Obama’s past behavior suggests he worries more about pissing off oil companies (by interfering with their price gouging) than voters angry about the price of gasoline. Thus I think bold action on his part is highly unlikely.
Preparing for Economic Collapse
McPherson’s presentation had a powerful effect on the hundred or so of us who listened to it. Perhaps the fat lady hasn’t quite started singing, but I can sure see her standing in the wings. About thirty of us met with McPherson and his wife the following morning to begin drawing up a detailed food security plan for New Plymouth. If there is a second, more severe economic crisis in December, New Zealand’s oil imports could cease overnight. Without petrol for our vehicles, we are a long way (by horse or donkey) from the agricultural centers that currently provide most of our food. While many of us already produce large amounts of fruit and fresh vegetables in our gardens, we are very short on staples (like potatoes and grains), sources of concentrated protein and seeds.
McPherson will be doing an interview with Radio New Zealand, and I will post a link to the MP3 file when it’s broadcast.