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
When will high oil prices (an oil crisis)
depression in most industrialised Eurasian, North American, and
First, a depression generally follows a period of recession.
An overview of the features of a steadily deepening recession has already
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
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.
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
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.
collapses and local
sharemarket collapses won't.
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
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
actual deposits is 'available' for lending). 'Losses' from bad loans
'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
Bad loans - even brief 'runs' on deposits - will not
trigger a depression?
What about the world sharemarkets? Could they implode and trigger a
The sharemarket crash of 1929 was a vast 'speculative bubble' founded
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-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
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
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
conditions. At the
point of oil settling at or over $80 for a year or longer there is
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
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
pumping capacity bottleneck, mainly from Saudi and Mexican megafields
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
as a currency of international settlement, then the USA
Federal reserve will probably need to move within the next few years to
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
as 'spoils of
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
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.]
alternative is massive government spending cuts, on a scale never
before seen. These cuts are extremely
[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
to work, to substitute public transport. It depends on whether
consumers believe oil shortage is a temporary blip, or a long term
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
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.
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
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
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 existin
g energy sources, and thus
reduce costs, but this effect is marginal in the bigger picture of
reducing global supply of cheap
Previous depressions were not limited by energy - they were limited by
confidence and government competence. An
depression, not a psychological-constraint
, and is
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.
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.
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.
fairly certainly tip into depression in 20 years time
(2025) when light oil production naturally fades to about that of the
[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.
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
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.
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
But we must consider one fundamental factor unique to USA - the dollar
is the de facto
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.
already supplies large quantities of oil and gas across the border to
[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.]
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
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
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
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
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
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.
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
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
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
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
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.
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
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.
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
[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
Recession slips into deep recession by somewhere around the end of
2014. (There is a medium odds chance the USA dollar will lose its
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
Climatic, economic or political events in the intervening period may
act to hasten
the onset of depression.
From about 2026 onward, depression becomes a long drawn out adjustment,
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
Undemocratic and weakly democratic
may ultimately fail to
adjust, and the population becomes subjected to terrorist violence from
thugs and gangsters employed and manipulated by powerful ideologues and
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.
2007 Sustainable Living Organisation. (Version 7, early 2010 - notes
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