Opinion Piece
Timing of a depression triggered by high oil prices
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summary   details of fading hydrocarbons    price spikes   timeline   recession in USA   immediate response to recession
medium term response to recession

Note from early 2010: this opinion piece was written in 2007, before the financial crash of 2008. It is a forward-looking historical fact-based 'scenarios' consideration , out to about 2025.

When will high oil prices (an oil crisis) trigger a depression in most industrialised Eurasian, North American, and Oceanian countries?

First, a depression generally follows a period of recession.

An overview of the features of a steadily deepening recession has already been given.

Briefly, recession is caused by business slowdown as the much higher prices of oil feed into the industrialised economies. Businesses lose confidence, retrench, lay off staff, and reduce investment in new plant and machinery; retailers see less consumer spending; inflation reduces spending power; interest rates rise. This will cause recession, but not a deep recession.

For there to be a deep recession, there first has to be a credit bubble - a high level of personal indebtedness in the community. This certainly exists in 2007.

Will the collapse of the housing bubble trigger a depression?

Most industrialised countries have seen a huge speculative real estate frenzy by 'mom and pop' investors. Overvalued properties have been bought with loans by banks that cover almost the entire purchase price. The banks have been thrusting money into peoples hands on a rising property market, willfully ignoring prudence and history. Interest rates have been artificially low, driven by the insatiable USA need to sell its federal junk bonds in order to finance oil imports and massive military liabilities.

The stage is set. When interest rates rise, mortgage repayments far exceed the wage earners ability to meet the monthly loan installment. People default. Houses are sold in mortgagee sales for lower values. The inflated house prices collapse. People hold mortgages costing more than the new, more realistic, resale value of their house. Many chose bankruptcy to clear debt.

Collapse of the housing bubble is enough to trigger a deep recession. But it is not enough to trigger a depression.

More is required.

Share value collapses combined with banking collapses and a 'run' on cash, if sufficiently global, will trigger depression.
But local banking collapses and local sharemarket collapses won't.

Will bad loans held by banks trigger a depression?

Are today's banks for practical 'everyday' purposes sound? Yes.

Banks will hold large amounts of 'unrecoverable' debt following the inevitable property bubble collapse. They will hold large amounts of unrecoverable debt from loans to some businesses that fail when consumer spending drops and unemployment rises. But much bank lent money is essentially a 'fiction', and is book entry 'notional' funds lent far in excess of existing real-money deposits (usually more than ten times the amount of actual deposits is 'available' for lending). 'Losses' from bad loans are essentially 'book-entry' losses from 'book-entry' created money. 'Book-entry' payments from government printing presses can wipe the worst loans. Government will then own the banks. Remaining loans can then be defaulted on.

Bad loans - even brief 'runs' on deposits - will not trigger a depression.

Will a huge fall in the sharemarket trigger a depression?

What about the world sharemarkets? Could they implode and trigger a depression?


The sharemarket crash of 1929 was a vast 'speculative bubble' founded on buying and selling companies that were often producing little more than self promotional hot air. Much of the money for the speculation was 'ponzi' loan credit created by out-of-control banks. Today's sharemarkets are constantly re-adjusting and re-valuing companies. Some companies are valued for earning streams, and some companies are valued because they are believed to be growing in size and assets. In a deep recession some will rightly reach 'junk' status because their business is a fading star. Others, even with a reduced earning stream, will retain a reduced but real value (a select few will even rise as investors 're-weight' their choice of company sectors to invest in). Most importantly, there is no culture of 'mom and pop' ignorant speculation in what are little more than shell companies (except in the highly distorted Chinese share market).

Will rising oil prices trigger a depression?


When will high oil prices cause a depression?

At some point in the duration of a deep recession.

When might a deep recession start?

First, the credit bubble has to collapse
[note from early 2010 - partly done.The bubble has collapsed in USA and Eurozone, and bad loans offloaded to respective taxpayers over many years to come. The China speculative bubble is yet to collapse].

Next, oil has to become structurally expensive. A reasoned guess post-credit-collapse would be when oil both reaches and maintains a price of close to $US80 a barrel.
note from early 2010: oil has been at this point for only 3 months. So possibly end 2010, start 2011. ]
Temporary spikes to around $US100 a barrel don't indicate depressionary conditions. At the point of oil settling at or over $80 for a year or longer there is likely to be structural (oil component of goods price adjustment) inflation of 10% - 20%. At this point, if price movements in 2005 are a guide, petrol may reach close to $US4 a gallon at the pump. This will make petrol effectively unaffordable for many low income people who have no other transport options (chiefly a USA condition).

New refinery capacity for heavy oil has kept pace with increased reliance on heavy oil as light oil supplies diminish. Mildly recessionary conditions in late 2006 caused demand to fall and reduced prices. A pumping capacity bottleneck, mainly from Saudi and Mexican megafields has already been masked by reduced demand (mainly in Asia) following oil spiking to $US77 a barrel in July 2006.

Business nervousness, changing consumer behaviour, and seasonal slacking of oil demand will likely make any spike temporary, should it occur. Increased bilateral trading in oil (direct from producer to consumer) outside the betting floor of the futures traders has increased, meaning price is more stable. Whether it stabilises at a higher or a lower level depends on the USA economy and on whether Mexico, Venezuela, and Saudi Arabia are able to forego production in the interests of holding prices up. Their domestic situations may force them to sell at a lower price than they would like.

A credit bubble collapse will likely be triggered by rises in USA treasury interest rates. Higher interest rates will likely combine with oil price inflation to remove a larger percentage of tax-paid disposable income from circulation in the economy. Considering the vast USA government debt, the on-going dollar cost of seizing and guarding Iraqi oil ($US5 billion a month by december 2005), and the beginning of a move away from the essentially valueless USA dollar as a currency of international settlement, then the USA Federal reserve will probably need to move within the next few years to make it's bonds more attractive.
[note from early 2010 - fear in the 2008 collapse has seen a move to the perceived 'safety' of the USA dollar. With high - temporary - demand, the bonds could be sold at effectively zero real interest. The USA dollar is losing fundemental value as the economy continues to contract and as Government prints money via bond issue after bond issue. There may be a popular loss of faith in bonds by mid 2011. At that point USA will have to increase interest rates, as noted above. Alternatively, it could repudiate payment of interest on bonds. This would cause full loss of faith in Treasury bonds. The USA could then simply physically print additional cash money - dollar bills - to service its debt. This is no different to issuing bonds in principle - it is a form of deflation of monetary value - but would popularly be perceived as 'Zimbabwean' money printing. ]
The mechanism is to increase interest rates payable on the bonds. (The US could of course back the dollar with oil by seizing all Iraqi oil revenue as 'spoils of invasion'.)  Oil prices might reach or exceed the historic oil price high reached in 1980 by mid 2008, driven mainly by decline in mega fields, but tempered by price driven demand reduction.
[note from early 2010 - Correct. Oil reached an historic high in july 2008]
Winter fuel oil shortages 2007/2008 and large hike in natural gas prices - and therefore electricity prices -  in USA will add to economic slowdown.

Recession beginning by the end of 2008 is somewhat likely, and USA treasury bonds lose their attractiveness as a consequence. Yet the USA will need to finance an even larger government deficit as structural inflation raises all governance costs, and as unemployment costs rise. US interest rates must then be raised by the end of 2009, no matter how unwilling the government may be to do so.
[note from early 2010 - false, see above for an explaination.]
The only alternative is massive government spending cuts, on a scale never before seen. These cuts are extremely unlikely.
[note from early 2010 - correct. In fact, there has been massive acceleration in federal spending. 'Funded' by debt, via bond issues.]

The 'structural' pumping capacity bottleneck will likely occur in december 2008 or 2009, cause a spike to $US90 a barrel (unless new Saudi 'sweet oil' fields do come on stream as promised). It is uncertain whether or not oil might remain at or around the $80 per barrel level thereafter. It depends on the price-driven change in consumer behaviour in how much petrol and diesel consumers choose to burn, against how much they are forced to burn in the essentials of living. It depends on what degrees of freedom consumers have to buy smaller cars or motorbikes, to live closer to work, to substitute public transport. It depends on whether consumers believe oil shortage is a temporary blip, or a long term trend. The conditions should be clearer in 2008/9. Recessionary conditions will be apparent by then anyway.
[note from early 2010 - correct. Recession is now structural, constrained between the interplay of structurally higher price of 'full' oil supply and falling demand due to the recession itself.]

Recession in itself reduces demand. Oil consumption drops. Reduced demand weakens oil prices. However, at some point, the year on year reducing production from large high-volume oilfields (that have passed their peak of production) reduces global supply until it matches the reduced global annual demand. From then on, as pumpable supply drops below even new reduced global demand levels, prices once more increase. The best guess for this point is around 2015.

Deep recession may start before 2015. It may be triggered 'early' if any of the major Saudi or Mexican fields collapse, or if climate causes electrical energy supply shortfall, water shortage, significant crop failure, and if resultant socially hysterical hyper-reaction causes a precipitous collapse in business confidence and employment.

How many months or years will a deep recession last before it becomes a depression?

At the point at which 25% to 30% of the population are unemployed, many more part-time and on-call workers have less work than they want, when there are few business start-ups, when the tax take of government is insufficient to meet its expenditure, food prices have doubled, and when the trend is for no improvement in these conditions.

What is a reasonable guess at the timing of the start of depression?

A depression is more or less a recession that doesn't end. It doesn't come as a single dramatic event, easily identified and widely reported in the news. A 'depression' exists in deeply recessionary times when things have been bad for so long without significant recovery that people start saying we are slipping into a depression. Most people are generally optimistic, and are unwilling to assume the worst simply because business, employment, and spending power conditions are tough. But people will know when they are living in a depression, they won't have to hear about it on the radio. It will be self evident. Even so, before then, we do worry, and psychologically need to 'know' the signs of the 'worst case', the signs indicating the possible 'start' of a depression.

We could possibly use the point at which oil is so expensive that most low income earners cannot afford to run a car, and food and retail prices in general have increased by 20%.

At this point, the cost of getting to work may use up a huge portion of the wages earned. Countries such as USA with relatively sprawling towns and suburbs with poor public transport would be worst hit. Older European cities with residency and work embedded within densely populated cities, and excellent public transport, fare better. At this point, it is impossible that only low income workers are affected. Whereas past depressions have been characterised by an initial imprudent credit hyper-expansion followed by huge and prolonged lack of business and consumer confidence - even in the face of sufficient energy and sufficient capital to keep business growing and employment and money circulating - this 'depression' may be fundamentally different.

The never-before-seen factor this time is that insufficient energy supply limits the possibility of recovery. This time, business and consumers are better informed and more confident due to better education and information sharing, and a fairly good social security 'safety net'. We should be far better equipped to intelligently face economic downturns. But the various 'traditional' cures for dips in economic activity -  increasing government spending, decreasing business tax, slashing government services, 'fixing' interest rates to a very low level, subsidising domestic industries, removing subsidies from industries to re-orient them, subsidising raw materials, subsidising the shift of production bases to low wage-low care countries - no longer work. Why?
Because the game has changed.

Up until now, economists have never had to weight the cost of energy heavily in their models of how economies work. Energy has always been cheap and abundant. The economists tools in an era of cheap energy - 'tweaking' of government policies, taxes, and laws - now have minimal effect. These economic devices are not new energy sources. In an age of astonishing new technologies economists expect 'more investment' in energy technology to substitute for energy shortage.

Lets be clear. Technology is not an energy source. True, both government policy tweaking and technology can help efficiently use existing energy sources, and thus reduce costs, but this effect is marginal in the bigger picture of reducing global supply of cheap energy.

Previous depressions were not limited by energy - they were limited by confidence and government competence. An 'energy constraint' depression is a physical-constraint depression, not a psychological-constraint depression, and is fundamentally different.

Don't look to history for guidance. While this 'limit to energy factor' has never been seen before in the history of modern democratic industrialised nations, its trajectory can at least be broadly understood and predicted. How? By the trajectory of oil, gas, and coal depletion.

But there are many other factors - chiefly climatic, economic and political that could (and probably will) - make nonsense of this guess. These influences are far more difficult to predict and therefore take into account.

Depression in the USA

The USA is the most heavily car dependent nation on earth, has low population densities in cities, relatively rapidly growing population numbers, relatively poor public transport, is coming up to shortages in natural gas for electricity generation, already has a large number of impoverished people, has no saved reserves to pay for social security, has a private credit bubble, has many industries distorted by taxpayer subsidies, has a government living on overseas credit, and is in the unique position of having most of the worlds banks using the USA currency as a default international standard currency of value.

"The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."
Unabashed comment of former Fed employee Ben S. Bernanke in a speech in 2002. Half of what he said is true.

Loss of faith in the currency will make it of low value. The backing for the dollar is oil. Oil backing is almost the sole reason banks have faith in the currency.

The dollar has oil backing for two reasons-
1. Historically the feudal Saudi 'royal family' was elevated to power by the USA in return for it accepting only US dollars for oil sales.
2. USA has captured the Iraqi oil fields.

Deep recession in the USA will in theory fairly certainly tip into depression in 20 years time (2025) when light oil production naturally fades to about that of the late 1960's.
[note from early 2010 - deep recession will certainly tip into depression much earlier than the above estimate. What wasn't taken into account was the increase in population in oil exporting countries. As their populations burgeon, they use more of their resource domestically, and the amount available for export falls steadily, even if total annual production is unchanged. Exportable oil will likely have fallen by about 25% by end 2014, so there is a rough estimate is even odds (50:50) depression will commence in USA by the end of 2014. Obviously, there it is possible, but less likely, that it may start earlier. Obviously, the likelihood increases every year after end 2014, but not steadily, rather, at a constantly year-on-year accererating rate - reflecting oil depletion rates, which in turn influence availability of oil for export.]

Even if the USA invaded Iran, Saudi Arabia, Venezuela and Nigeria and seized their oil for the exclusive use of the USA, almost all the light sweet crude in these countries would be used up by about 2040.

This is, of course, an absurd notion, but it illustrates the point that even expanded theft and sequestration cannot save the most powerful nation on earth from the inevitability of depression.

But we must consider one fundamental factor unique to USA - the dollar is the de facto global reserve currency, and has been since 1973 when banks stopped backing their currency with gold. But, in spite of the huge USA internal economy, the dollar is fundamentally unsound. The world banking system has historically been manipulated by the USA into using the dollar as reserve currency. This has easily been achieved - trading in oil has been in dollars, an arrangement cemented decades ago with the Saudi dictatorship. All countries want to buy oil. All countries must buy USA dollars to pay for oil. In this way, the USA has been able to print money to pay for its budget and trade deficits. It is virtually the only country in the world that has been able to export its domestic inflation. Banks around the world have large accumulations of dollars as a result.

The USA currency can only retain its 'acquired' value so long as oil producing nations insist on dollars as payment for their oil. While USA is regarded as a very, very, good friend indeed of the Saudi regime, it is not well liked in the other major middle eastern countries (and especially Iran and Iraq). Then why does the Middle East support the USA dollar by insisting on payment in the greenback?

In fact, most would slash their dollar holdings - punish USA - tomorrow. But the international oil exchange bourses in New York and London have called the shots on payment for oil until now. Recently, Iran has made some sales directly to adjacent European countries and to India and China, and insisted on payment in euros and other regional currencies. This must worry the presidential/business/military complex in power in USA.

Saudi Arabia has relatively recently repatriated many USA investments back to the kingdom and re-invested in the region. Saudi has re-invigorated its interest in gold. Since the end of World War II, an ounce of gold has fairly constantly been worth 15 barrels of oil. The ratio has been disconnected over the last four years, and an ounce of gold buys only 7 barrels of oil. Whatever the underlaying reason, gold in the bank or oil in the ground may be the best long term stores of value. In the first quarter of 2005, 20% more gold was sold than the same period last year. While Saudi has not yet asked for payment in gold, it has mooted accepting payment for oil in a basket of regional currencies as well as the dollar.
[note from early 2010 - oil is now roughly $US80 a barrel. Gold is roughly $US1,100. Oil at $80 x 15 is $1,200. Gold has re-connected its 15:1 ration with a barrel of oil.] 

Iran plans to open an international oil trading bourse over the internet in mid 2007. Payment to be in the currency of your choice. Iran already supplies large quantities of oil and gas across the border to Europe.
[note from early 2010 - Iran has failed to open the bourse, as the level of corruption and competing internal power interests has made it impossible to effect]

Russia also trades gas and oil heavily into Europe - around half its production. In 2004, it, too, mooted payment in euros.

Venuezuela, heavily exposed to the USA economy through large oil exports to that market, is looking to diversify its crude oil sales, including selling directly to China.

The trend may be unstoppable. When a certain portion of the world trade in oil is in a mix of currencies (and in gold), with the dollar simply one part of the mix, central banks may become very nervous. They would be negligent if they did not diversify and rebalance their various currency holdings away from heavy overweighting in the USA dollar - and also re-invest in some gold.
[note from early 2010 - Most significant Central Banks no lonker sell their reserves, and some, are nett buyers.
China has prohibited silver export, physically shifted some of its gold from vaults in London to vaults in Hong Kong, made purchase and import of foreign gold by its citizens relatively easier than most Western countries, and is heavily - and successfully - promoting citizen gold ownership via state propoganda and street-side facilities. There are but a very few similar facilities for the average Western citizen.]

Buy gold online - quickly, safely and at low prices

Central bank sell downs will tend to drive down the value of the dollar.

The effect could be a cascade - a lower value dollar causes those who have overaccumulated the dollar to quit a large part of their holdings before the value falls even further. This drives the dollar down in a self ratcheting fashion. What is the end result?

A dollar then won't buy as much oil as it did previously. The cost of oil and oil products within USA becomes higher. With the USA having to buy a far greater portion of its oil needs on the international market, it needs to spend more devalued dollars to buy it. But these dollars are largely 'printing press' fictitious dollars backed by USA treasury bonds. With the dollar not attracting a lot of interest, bond yields must be racked up by increasing the interest rate payable on them. Higher interest rates on federal bonds leads to higher interest rates on mortgages.

Higher mortgages leads to homeowners being unable to pay, mortgage defaults, and then higher costs to the federal mortgage guarantee system. All this may happen at a time when stocks are sliding as investor confidence slides. (Some claim that there is evidence the USA government has from time to time recently been 'insider trading' with selected brokers to keep stocks values high and confidence in place. A similar claim is made the USA government has been trading to artificially lower gold prices.) Of course, many small businesses in the service industries and allied discretionary spending would fail as more and more of the family budget goes on higher petrol, gas, electricity, and winter fuel oil costs. These are deeply recessionary conditions.

So the artifice by which the USA has manouvered its currency as the currency of oil trade in order to vastly overspend its productive capacity may ultimately be exposed as based soley on confidence. If confidence is lost, it may fall like a pack of cards.

In this scenario, the USA may slip into a depression suprisingly quickly - far more quickly and dramatically than current base-line conditions would predict. The advent of depression may be sooner in USA than the rest of the industrialised world. But not much sooner. Ultimately, there are no exemptions from depression for any country.

Can the USA prevent the cascade? Yes, it can. It can hold a gun to the head of every major oil producing nation and say "you will only accept US dollars for oil - or else." This may be the only credible explanation for the propoganda demonisation of Iran in january 2006, and again in january 2007. It may be planning a demonstration of power - destruction of key elements of military and domestic infrastructure as a warning of the consequences of non-compliance with the US arrangement for marketing oil.

Iran, in spite of its florid hyperbolous rhetoric, is about as likely to use a nuclear weapon as any other regional state, such as Pakistan or India. That is, even if Iran acquired nuclear weapons, it dare not use them. The result of use of a nuclear weapon by Iran would be an almost instant cremation of the greater part of the population.

In contrast, North Korea, as unstable a country as is possible to find - and quite likely to be crazy enough to use them regardless of consequences - is making nuclear weapons without a murmur from USA. Where a nuclear strike from Iran is extremely unlikely, a much more likely scenario would be for North Korea to be hired by virtually any country or group (with North Korean contacts) as a 'willing agent' to smuggle remote-detonated neutron bombs (made in China or Russia, and either corruptedly obtained or willingly supplied) into USA or west Eurasian cities. If Iran with nuclear missiles might one day be a threat to West Eurasia or USA oil interests, bombing its nuclear facilities to remove real or fictitious weapons research capacity does not remove the threat. Iran - or any country or terrorist group - could contract out the 'hits'.

Nuclear conflagration aside, the stakes are very high for the USA 'dollar based' economic system. It seems increasingly likely that USA will use a show of force to enforce the 'dollars for oil' rule. This will only delay depression in the short run. In the end, geological reality trumps guns. In the medium to long run oil will be priced in other currencies (almost) no matter what the USA does, and countries will increasingly peg their currency to national reserves of gold.

The joker in the pack for this last scenario is climate variation. USA is one of the few countries able to grow surplus grain. In a time of climate-caused grain shortage in an era of a heavily devalued dollar, it would be very profitable to turn grain into oil. A carbohydrate into a hydrocarbon. The reason is that a devalued dollar would make USA grain exports cheap. And an oil-rich region with a burgeoning population can't eat oil.

“Agripower has to be more important than petropower."
Secretary of Agriculture Butz, referring to using food as a weapon, post the first oil shock.

It is possible the USA may be able to make a 'managed landing' of the overvalued USA dollar on the back of its rich black prairie loams. An oil for grain strategy will not prevent depression in the longer run - it might initially delay it. It might change a cliff into a slope.

Depression in industrialised Eurasia and Oceania

These other countries are usually less car dependent, have higher population densities in cities, stabilised populations, usually excellent public transport, are also facing shortages of natural gas for electricity generation, have a smaller number of impoverished people, have some reserves for social security, have a smaller private credit bubble, have more people renting rather than mortgaged, have higher per person savings as a result, have industries distorted by taxpayer subsidies in Eurasia (less so or not at all in industrialised Oceania), have governments owing relatively little or no overseas debt, and whose banks using the USA currency as reserves but which are also weighted toward the euro. The backing for the euro is trade. Trade - financial soundness and prudence of governments - is almost the sole reason banks have faith in the currency. The euro has very little oil backing right now. (But that may be changing.)

Deep recession in many (but not all) industrialised Eurasian and Oceanian countries will in theory also fairly certainly tip into depression in 20 years time (2025) when light oil production naturally fades to about that of the late 1960's.
[note from early 2010 - Probably false. Likely to be earlier.  See above.]

Compact countries such as Switzerland that have already invested heavily in energy efficiency, renewable energy, public transport, and sustainable land use may not experience depression conditions until some years into a broader Eurasian depression. China, as a recently industrialising country, still has most of its population living as low income, poorly educated (or uneducated) peasants on small farms. This rural diaspora provides a 'sponge' to soak up the jobless from the cities - a circumstance unique to China.

In general, the only difference between Eurasia (and Canada) and the United States is that there is a bigger societal and governmental buffer to take the initial impact of depression.

It is extremely unlikely that any Eurasian country - including China - would attempt to seize any significant sized oil fields in another country.

Depression later than 2025 - other factors
Equating the onset of depression solely by the onset of geologically determined fade-off of oil pumping capacity of a reserve known to be finite is simplistic. The 'classic' bell curve will only happen if oil is pumped out as if demand is constant, no matter how high the price.

Obviously, as the oil supply becomes less than the amount the market demands, that oil-dependent market is disrupted. People become unemployed and consume less. People adjust their driving habits. People buy motorbikes and small cars that use less petrol. People stop buying frivolous junk. Cheap plastic junk becomes expensive plastic junk. Businesses fail, and the oil demand of that business becomes zero. At a certain point of economic slow-down, demand falls off. The price of oil falls with it.

Therefore, once recession has bitten deep, slackened demand flattens out the slope of the oil depletion curve.

As a result, oil consumption fall enough to delay depression. For how long? It is impossible to know, because it is measured against a theoretical 'event' - an earlier depression - that didn't happen. But even halving consumption rates will not double the time until depression, as the peak of production and subsequent decline of the mega fields is the major factor in an oil dependent global economy. Most mega fields have either peaked, or will peak in the next few years. Most are already being pressurised, so the 'truth' of the decline is obscured. As a result, at a certain point, most mega fields will decline steeply rather than fade off gracefully. The decline rate may not be 3% or so a year. These mega fields may decline by closer to 13% a year.

Shall we say depression might be staved off by a decade if prolonged deep recession, coupled with massive government  investment in coal gasification, conserves petrol globally, and thus oil demand? It is an unreasoned guess. Reduced crude demand from virtuous countries practising intensive conservation might be greedily snapped up and stored by a less virtuous countries. The tragedy of the commons. There is no global regulator to ensure fair share. Or define what 'fair' is. The message for all countries remains - if you don't grab it, another country will. Global oil supplies will not be conserved, they will not be 'eked out' for future generations.

Depression earlier than 2025 - other factors.

US dollar collapse
The USA has sold an enormous numbers of Treasury Bonds - creating a huge expansion of money supply and enormous US government debt. This vast US credit bubble is kept inflated by faith in the dollar, supported by oil denominated in dollars. As USA faces massive oil costs with oil bottlenecks and a hugely oil dependant economy, it is only a matter of time before those holding dollars start nervously watching other dollar debt holders to see who will move to sell first.

First movers will 'capture' the greatest return, as the dollar will initially be relatively strong. Countries with large dollar reserves could quietly quit them in fear of an ultimate US dollar value collapse.
[note from early 2010 - China has devise a simple and very effective plan to very quietly commence to move out of dollars as a currency into gold currency. See above]
This could trigger automated 'sell' orders from currency speculators, creating a 'selling climate' and a fear of being left with the 'hot potato'- in turn leading to a massive dollar sell-down. While this would be very good for US exports, it would remove the USA's main source of government income - sale of US treasury bonds. Pensions and other social security payments would be at risk, but worst of all, either funding for the military would have to be slashed, or medical and education budgets would have to be gutted.
[note from early 2010 - Many USA pension and social security funds are now effectively unfunded due to the malinvestment in the derivatives and other ponzi schemes - many of which remain off book even at this date - which led up tot he 2008 financial crisis. There are more - massive losses - to be bought to book yet.]

In this scenario, a sudden and dramatic early onset of depression may be largely localised to USA (and probably Japan and China).

Drought and water shortages
Prolonged drought affecting wheat and maize production in USA, Australia and China might cause a grain shortfall sufficient to evaporate surplus supplies from the world market. If Thailand, the worlds major rice exporter, also co-incidentally has a smaller harvest, there could be insufficient grain to feed the Middle East. Food riots in the huge and already disaffected local populations could lead to disruption or damage to major Middle East oil fields, triggering a temporary but dramatic cut in world supply and pushing deep recession into depression in many countries.

Other factors
Some might argue religious fundamentalism might get 'out of hand' in Saudi Arabia, leading to overthrow of the current regime and restrictions on supplies to the west. This is very unlikely, as Saudi Arabia enters into boom times, with hugely increased revenues, historically low government debt, and strong local private sector investment in local business and economic activity.

Others argue war may break out in the Middle East, disrupting supply. This is highly improbable. The Americans have replaced their puppet Saddam Hussein and his thugs with a democratically elected government. That government is now entering close co-operation with Iran, a country that Husseins regime had previously attacked in 1980. American military based in Iraq ensures Saudi Arabia, Kuwait, and the other minor Gulf states are safe from invasion from anyone. While America may destroy Iran's nuclear facilities (via its only reliable arab ally, Israel) it cannot in any sense afford a full-scale invasion of an additional country, no matter how oil-rich; albeit a strike may shore up the dollar system for a time.

High oil prices have already set recessionary conditions in train to greater or lesser extent. (Unemployment, business failure and reduced business investment are the most obvious indicators.)

The most likely scenario is for the deeply indebted USA to raise interest rates by the end of 2008 (or soon after), which is likely to co-incide with a spike in oil prices to $US90 due to pumping constraints.
[note from early 2010 - the financial crisis caused a flight to 'perceived' safety, i.e. the USA dollar, and to a small extent, gold. As a result, USA dollar bonds could be sold at effective zero interest rates. Pumping constraints have been overtaken by fall in demand due to recession. See above]

A combination of increased unemployment flowing from oil-price structural inflation of 10%-20% and mortgage defaults due to unmeetable monthly repayments collapses the credit bubble.
[note from early 2010 - Correct, in part. See above]

Weakened demand due to recession combines with temporary surges in new sweet crude supply. Oil prices fall, but natural decline in world oil pumping capacity sinks under even a reduced demand by about 2015 or a little earlier.

Recession slips into deep recession by somewhere around the end of 2014. (There is a medium odds chance the USA dollar will lose its position as the currency of oil and set off a dramatic confidence cascade into full-on depression in USA by end 2011.
[Note from early 2010: USA will have difficulty finding money to pay interest and 'roll-over' Treasury bonds by end 2011]

Deeply recessionary conditions drag on until conditions slowly slip into depression, some time after 2015 but before 2026.
[note from early 2010 - there now appear to be even odds for 2015 due to the reducing quantum of oil available to be exported. See above. ]

Climatic, economic or political events in the intervening period may act to hasten or delay the onset of depression.

From about 2026 onward, depression becomes a long drawn out adjustment, an adjustment made easier - but not easy - by strong democracy.
[note from early 2010 - It can now be estimated that depression is 75% likely by 2018, based on fall in availability of oil to oil importing countries]

Undemocratic and weakly democratic countries  may ultimately fail to adjust, and the population becomes subjected to terrorist violence from thugs and gangsters employed and manipulated by powerful ideologues and demagogues.

The projections for fading oil supply on the 'down' side of the Hubbert curve are based on presentation chart 43 from a Presentation at the Technical University of Clausthal, Germany, by petroleum geologist Colin J. Campbell in december 2000. There are more up-to-date projections, but the 2000 projections are only trivially out of date.

 © Copyright 2007 Sustainable Living Organisation. (Version 7, early 2010 - notes added)

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