Opinion Piece
Overview of the unfolding of recession and depression as the oil economy fades
http://www.naturalhub.com/slweb/fading_of_the_oil_economy_recession_overview.htm can be emailed or posted using this shorter version of the location -

summary   details of fading hydrocarbons    price spikes   timeline petroleum prices 2006  recession in USA   immediate response to recession
medium term response to recession 
recession to depression

Can oil prices continue the recession caused by the collapse of the housing bubble? Yes. This speculative 'think piece' is related to conditions in the Eurasian, and North American (and Oceanian) universally well educated technology-based, democratic and weakly democratic societies; specifically, societies that live in the temperate and warm temperate zone.

The on-going assumptions  are that the American presidential/business/military administration has almost full control of Iraqi and has de facto control of Iranian oil and gas, and that all Middle East states are being 'directed' to accept US dollars only for oil
. Backed by oil, the USA dollar does not suddenly collapse. This is a 'soft descent' into ultimate depression scenario, not a 'hard fall'.
note 2008: the unforseen 'domino effect' of collapsing bank mortgage ponzi schemes has now thrown the USA and Eurozone economies off the cliff - a hard fall into recession. The power of these same forces continues, and may cause a 'hard fall' into depression.

In the short run
, the US dollar backed by oil has prevented a USA depression; in the medium run, depression is inevitable no matter what.

The timing of these events can fairly confidently be given as occurring at some point between 1 and 30 years time
[Note 2008: the recession 'event' turned out to be 3 years time, relative to when this opinion piece was written]. The timing of the tip from deep recession into depression is hard to predict.

In the very longest run, depression fades into a changed paradigm of daily life where our understanding of energy, work, and what we value have shifted dramatically.

"Our window of opportunity is slowly closing... at the same time, it probably requires a spiral of adversity. In   other words, things have to get worse before they can get better. The most important thing is to get a clear   picture of the situation we're in, and the outlook for the future - exhaustion of oil and gas, that kind of thing -  and an appraisal of where we are and what the time scale is. And the time scale is not centuries, it is decades."

- Dr. M. King Hubbert (1903-1989), principle predictor of "peak oil', speaking in 1988.


It is difficult to think about 'how things will play out' when an oil-based global economy loses its cheap energy source. It has never happened before. It will never happen again. All the recessions and depressions of the past were relatively brief. New energy sources and new technologies saw human populations put their inventiveness and industry into the newly opening opportunities, and recession soon faded to a distant memory.  But
in a society built with cheap oil, a society utterly dependant on cheap oil, a recession rising from permanently expensive oil will not be 'over' for a very long time.

The slide into recession is unlikely to be dramatic or continuous. The impact will vary between countries. If the 1973 oil shock and subsequent recession is a guide, industrialised countries with the lowest rate of growth in the working age population have the least unemployment, albeit the overall hours of work reduce.

There will be periods - especially at the start of the slide into recession - when fossil fuel prices drop dramatically in the face of widespread unemployment and an oil demand that falls significantly below supply.
[Note 2008: crude oil prices dropped heavily at the beginning of the 'global credit crisis' that steepened the onset of recession] Conditions will improve. But growth off the back of these relatively brief intervals will be both limited and short-lived.
[Note 2008: new information suggests that at some point within the next 3-4 years deepening recession will meet dropping export oil volumes. Export volumes will fall due to oil producing countries increasing their own internal consumption. Oil producing countries internal consumption is rising year on year due to increased population growth and increased wealth. Less  and less is therefore availble for export. In addition, megafield oil production rate declines of at least  6% to 8% year on year will eventually cut absolute quantities available for consumption anyway, whether in the oil producing country, or in oil-importing countries. In summary, low oil prices due to reduced oil consumption in a recession, will be replaced by inexorably increasing prices as decline in both oil availaible for export and geological decline cut in. This suggests that there is unlikely to be any brief resumption of growth in most western countries]

In the longest term, if well educated technologically advanced societies prevent the degradation of their greatest asset -
universal science-based education - the huge problems of adjusting to the economics of sustainability will slowly and painfully be overcome.

The change will initially traumatise many; but most people will eventually adjust. The human spirit responds with determination and resilience when crises face a nation.

The following 'unfolding' of events is pure speculation. The sequence of unfolding may be marginally wrong. The speed at which is happens may be wrong by several decades, both in duration of some conditions, and when they occur. The depth of effects at each 'stage' may also be wrong.

It is certain that the unfolding will be different in each country, according to its resource base, population levels, economic, political, and social structure. It may be accelerated or made much worse by environmental degradation, such as salination or erosion, or by water shortages and cyclic crop failures.

But, in general, this is roughly what might be expected. Why? Because all industrialised temperate zone nations - and therefore their governments - are in the same boat. No nation is exempt. Their freedom to choose strategies is restrained by the reality of expensive fossil fuels. They cannot do what they want to do. They can only do what is possible. What is immediately possible is very limited. What might ultimately be possible will take many generations to make real.

Unfolding Global Recession

Standstill in Gross domestic product (or more sensitive/sensible indicators) for 2 successive quarters
A 'recession' is 'officially' 2 successive quarters with no growth in business and economic activity. The cause is generally the same - higer interest rates, loss of business confidence, lowered business investment, 'rationalisation' and closing of industries, unemployment, fall in retail sales.

Example: once the statistical 'noise' is removed, it can be argued the west had 3 recessions in the last 40 years - in contrast to the idea they go in a recurring ten year 'business cycle'.

1974 - 1975 First oil shock - Oil prices skyrocket by 400% due to OPEC continuing to limit supply. Prices reach $US25, about $US40 a barrel in todays (Q1 2005) dollars. Inflation in western oil-dependant economies is 11% - 15%. In the USA, the consumer price index increases by 12%. Recession results, with low economic activity and high unemployment.

1982 -1983 Second oil shock - Iraq invades Iran in late 1980. Oil prices reach an all time high by the end of 1980 - $US35 a barrel end, or $US92 when translated to todays (Q1 2005) dollars. Actual shortages persist in some area. Structural oil-inflation helps overall inflation reach double digits (over 12%), unemployment in USA is 8%, interest rates reach nearly 20%. Double digit interest rates mean some businesses and households can no longer pay their savings and loan debts. The USA  Federal Deposit Insurance Corporation fails and is bailed out.

1990 - 1991 Third oil shock - Iraq invades Kuwait, sabotaging or setting fire to 700 oil wells. Oil price almost instantly doubles, from $US15 to more than $US30 (dollars of the day) as 4 million barrels a day (544 000 tonnes/day) are removed from supply. Asian imprudent loans, overvalued stocks, and wild betting on currency futures combines with the oil shock to trigger the Asian debt crisis. Overblown Asian property values crash by up to 70%. Recession results.

Oil supply:demand mismatch
Oil price skyrockets. Traders place their bets on price at future delivery. Oil price goes higher. In the 70's a 5% shortfall in oil supply resulted in prices rising 400%. But this was from an artificially low priced base. In an slower developing supply:demand mismatch prices may only double, as they are coming off an already much higher baseline.
[Note 2008: while oil prices were already trending up by 2005 when this article was written, by 2006 they were 100% higher than 2004 prices; by 2008 they spiked to more than 100% higher than 2006 prices; before dropping in the second half of 2008 to a level roughly 10% higher than 2006 - about $70 a barrel. Demand is likely to remain weak as jobs are lost and businesses slow down or fail. But by the end of 2010 declining major oilfield production may well drop below even weak demand, raising prices once more.]

Higher energy cost of production increases the price of almost all goods and services
Spending power is eroded. Retail spending flattens. Factories costs (mostly fuel and the 'oil component' embedded in manufacture of imported or locally purchased parts and equipment) typically increase at about a quarter of the increase in price per barrel of crude. Initially, these permanent inflations are absorbed by decreasing the profit margin. Ultimately, they must be passed on.
[Note 2008: most businesses have now trimmed as much margin as they can bear. Many are holding lower inventory as bank credit to buy and hold stock is unavailable.]

Consumers meet higher costs with bank-promoted personal debt
As oil prices ratchet up, vast waves of oil profits end up in banks, who must re-lend the bonanaza to whomsoever they can.
Consumers in many western countries meet rising costs by borrowing against their mortgage or credit cards, with the active encouragement of banks 'aggressive' lending policies. This is a temporary phenomenon, but creates an extraordinary consumption and employment 'boom'. It is an 'oil-profit' credit boom - the bubble depends entirely on continuously low interest rates.
[Note 2008: This artificial boom ended about mid-year. The collapse was precipitated by global banks, money traders and hedge funds buying or inventing extremely high risk 'ponzi scheme' paper promises whose true 'junk status' finally had to be admitted, even by highly compromised bank 'auditors'.]

Food prices increase
The world is largely fed by converting nitrogen in the air into mineral nitrogen fertiliser pellets, which is then applied to the soil thus allowing grain crops and grass to grow. The process of extracting gaseous nitrogen from the air includes the use of large amounts of natural gas as a 'feedstock'. This is only one of the costs of oil-based agriculture. Diesel is another major cost of production. Food prices at the store will probably not rise dramatically, but initial indications are that they will rise by around
10% for each doubling of price per barrel, using a $US30 baseline. At $60 a barrel food might be 10% more expensive, at $90 it might be 20% more expensive relative to the date oil was at $60 a barrel.

Example: When oil prices doubled in late 1990 (due to Iraq invading Kuwait), the cost of urea (the most widely traded nitrogen fertiliser, and made mainly by gas-rich countries of OPEC) increased by a third.

Example: following the 1973 oil shock, the price of USA wheat exports tripled. Other factors were at play (mainly exports of a large USA grain surplus in a grain short world), and not all this is due to rises in the cost of oil as an input into production of wheat. Nevertheless, USA domestic food price increases were 14% by the end of 1974.

Example: As at september 2005, every $US10 rise in a barrel of crude adds around 10% of additional costs to agricultural contract ploughing and harvesting. Contracting is fiercely competive, and these costs must be passed on to the farmer, or the contractor will become insolvent. The farmer may have to absorb some of this cost increase, or may pass some or all of it on. The consumer at the very end of the supply chain is faced with cost increases in groceries from every link in the chain, not just the farmers increased costs. These are attributal to fuel increases on the farm, the off-farm transport, the warehouse, and the costs of transport from the warehouse to the retail outlet.

Workers costs of getting to work increases
The cost of transport is a major cost for those on low wages. There is very little discretionary spending available. It is relatively so small that if they cut it all out, it wouldn't help much anyway. The better paid are relatively oblivious. They either cut back on some discretionary spending, or save less. Oil prices act as a tax on wage workers, with the burden disproportionately heavy on the low paid.

Example: As a general rule, every time a barrel of oil goes up 1 US dollar, the price per US gallon at the petrol station forecourt increases by US 2.5 cents per US gallon.

1 US 'short' gallon is 3.79 litres, so for most countries, a one $US1 rise in the price of a barrel of crude translates to US 0.65 cents price rise per litre.

As oil can for the greatest part only be bought with US dollars, any weakening of a countries currency against the US dollar has the effect of an increase in the price of a barrel of oil, even if the actual price is static.
[Note 2008: The USA and Eurozone central banks and treasuries issued billions of dollars and Euros to 'pay off' worthless ponzi bank and commercial promises to pay. The banks do not receive the money as a windfall 'profit', it simply goes to nullify a huge bank debt - a debt previously listed on the bank books as an 'asset', or hidden the accountants 'off-book'. The conversion of the 'asset' to its true nature, a liability, would bankrupt the business if not 'offset' by the government printing presses cash injection. This money is unlikely to feed inflation as very little of it - if any - is likely to ever 'trickle out' of the banks balance sheet and into the economy. Mostly, it solidifies into extra banks stocks, to be held by the government. A further tranche of write-downs will occur in in 2009 when trillions of dollars of derivatives hidden 'off-book' finally have to be accounted for in the banks books. $540 billion has been set aside so far to pay the shortest term and most viable of the money market and commercial paper portion of these debts. The government takes  - unbelievably - collateralised debt from the financial 'managers' as 'security' for shouldering the burden of paying back the investors! Collateralised debt is known as 'derivatives' - the same ponzi paper that collapsed the USA and Eurozone banking system in the first place...However, the dollar will continue to be backed by oil, and so the dollar may not weaken severely until late 2009 to 2010, in spite of the 'usual' spikes and falls outside a recession-constrained band. Gasoline for workers is likely to remain relatively cheap until then.
Ultimately, the dollar must either weaken under the burden of unfunded and failing liabilities from every direction, or re-value itself in conjunction with other major currencies. When it does, much government debt will be written off, either due to a lower value dollar, or as a government default on bond maturities. The end result will be the same - a sudden increase in the price of gasoline.]

Wage demands increase
As prices inflate through the increased cost of oil, so workers look to retain their spending power. A
much larger proportion of lower paid workers wages is eaten up by constant rises in essential, non discretionary spending - petrol cost of getting to work, food, electricity, heating oil.
[Note 2008: businesses in the real, i.e. productive, economy are now cutting costs, including labour. Orders are down, and there is large, and increasing, industrial overcapacity. Factories and plants are underutilised. The leverage workers had to demand compensatory wage increases in the artificial boom prior to october 2008 was almost full employment. This phase is now history, the leverage no longer exists, wages will remain static, or fall in real terms.]

Central banks attempt to prevent a prices-wages ratchet
Believing  increased prices and increased wages cause inflation (unable to recognise that permanently expensive oil creates a inevitable structural price increase), central banks raise interest rates.
[Note 2008: The collapse of the greed-induced financial ponzi schemes have forced banks to lower interest rates in order to re-start stalled cash flow. This histroric event has resulted in an accelerated fall, rather than slide, into recession. As a result, this phase has been 'skipped' and the environment, for the moment is deflationary.]

Loss of business confidence and continuing flat spending causes some cut backs
Businesses trim the only costs they can - staff numbers and working hours. Slight rise in unemployment ratchets the retail spending slow-down. Gross national product cuts back.
[Note 2008: well under way. In the USA, cuts to manufacture of energy wasteful SUV results in job losses in Chysler. The number of job cuts in the financial 'services' industry continues to increase - 130,000 jobs have been cut in the banking, broking, and money managing industries since mid 2007. Hedge funds - due to collapse starting 2009 - will likely lose at least 10,000 jobs by year end.]

Banks try to stall the deflation of the housing bubble
People with little or no assets or equity who bought houses with the intention of selling in a rising market are now unable to meet the interest payments. 'Subprime lenders' cannot pay the banks that loaned the money for high risk lending. Banks try to stall revealing the level of repayment defaults by its subprime lender clients. Revealing the increasing level of bad debt exposes the banks to credit rating downgrades; calling in the loan to the subprime lender simply gives the bank a larger portfolio of poor loans and increases the banks mounting poor performing debt. Banks work to minimise their losses by stopping risky lending cold. At the same time, they play for time, restructuring debt over longer terms and offering 'repayment holidays' in an effort to slowly deflate the housing bubble, rather than allow it to collapse. The gamble is that economic conditions will 'improve' and most debtors will be once more able to repay their debts.
[Note 2008: Aided and abetted by hedge funds, banks continued to promote securities distantly held over mortgages they knew had a strong probability of default. Some banks engaged in a complex 'shell game', 'reparceling' the makeup of these notes as they corroded in value, moving defaulting mortgages to 'someone elses' notes - without consultation - so that 'favored' investors held 'less toxic' notes. Banks did not stop gambling via 'extremely risky lending' until september 2008, when it was far too late. Their gamble failed spectacularly.]

High interest rates bankrupt over-committed home buyers
As fixed term mortgages come due, people are faced with rates of interest on high capital loans that exceed their ability to repay from the weekly paycheck. Defaulting on home mortgages and lifestyle loans increases. People see house prices start to drop. Those who bought at inflated prices see their equity in their home evaporate as its value falls on a market with more sellers (due to loan defaults) than buyers. People 'hang out' for recovery in house prices in the longer term. It doesn't happen.

Example: In the 1990 - 1994 recession in the UK following the Iraqi invasion of Kuwait (when oil prices doubled) house values declined and resulted in 2 million people whose mortgages were larger than the value of their house (negative equity). By 1995 this resulted in 350,000 mortgage defaults - a nearly threefold increase in mortgage repossessions relative to the previous decade.

by 1990 the booming Japanese economy had led speculators to drive land and stock prices in Japan to fantasy levels. Very average homes just outside Tokyo sold for more than $US2 million in 1989. 'Churning' of ever-rising stocks led to big profits and a euphoric belief the 'bear' market would never end. Many borrowed money on the strength of the increased value of their home or business to invest in the stock market boom. In 1991, the Japanese Government raised interest rates to cool the creation of new money. The Nikkei stock index crashed by over 30,000 points within a few months. (It hit an historic low of 8,000 in 2003). Japanese housing prices dropped like a stone. They continued to slide year on year for 14 years, a pattern that continues to this date. Both the Japanese government (via their hand-in-glove government backed banks) and Japanese corporations are still saddled with huge speculation-derived debts from the1980’s.

The difference this time is that the recession may not end.

Climate variablity ratchets down the slide in coastal property values

Coastal property values erode with the rest, but at a much lower rate. Some highly desirable properties in highly desirable locations don't lose value at all. But extreme climatic events caused by shift in climate event intensity and locality with increasing sea temperatures can change everything. Storms of unusual intensity driven by warmer oceans, in turn caused by unprecedented increases in the 'greenhouse effect' gas carbon dioxide (from coal, oil, and gas 'unlocked' from its geological tomb) can abruptly turn an entire generations mindset from coveting coastal land to despising it. At the point of greatest fear, property prices for coastal land collapse. The cost of repairing coastal infrastructure destroyed in tidal surges and hurricanes is far greater than in the peak of cheap oil. The burden falls on local counties and ratepayers, saddling them with debt stretching far out into the future. Worse, the insurance companies start to draw red lines around low-lying coastal areas. They will not write insurance for any home or business within these zones. Values for uninsurable properties fall further.

Example: In the 1920's buying and selling Florida real estate became known as a road to instant riches. In the height of the bubble, real estate prices quadrupled in less than a year. When the bubble burst, property speculators were forced to sell to try to avoid bankruptcy. Most failed. The lack of buyers was made very much worse when an unusually strong hurricane hit Southern Florida in septemeber 1926. Wind-driven tidal surge turned large areas of low land into swamps, and a huge storm wave slammed into several coastal towns. In all 13,000 homes were destroyed and 415 people died.

Unemployment forces mortgagee sales of deeply indebted rental properties
Many of those who bought one or two rental properties at cheap interest rates and with almost no deposit find the value of the speculative rentals is now far less than than the amount paid. Once the landlord is unemployed, mortgage repayments cannot be met from rent in a 'renters market', and the cost of repairs and maintainance far exceeds rental income. Some lose both their rental property and their family home, as it was used as 'collateral' for the loan. And the banks call in their collateral to cement-in some return on their reckless lending while they still can.

Relentless trend of layoffs, business closures continue
The energy intensive and discretionary-spending based airline businesses are hit hard. There are airline bankruptcies and more layoffs. Society is now well aware of the reality of the fading of the oil economy, largely due to uncensored access to information via the internet.
[Note 2008: Commencing.]

Businesses retrench
Managers are increasingly pessimistic, and act accordingly. Vacancies are left unfilled. Staff numbers are reduced. Investment is put on hold. Salary increases are stopped. Business decision-making is taken in 'cautious' mode, emphasising short-run objectives rather than planning for what is an uncertain future. Gross national product falls.
[note 2008: The current environment is deflationary.
Most of the bad bank debt will be bought by the Government, in return for equity in the form of preferred shares in the banks. The shares have a rising interest rate, the object is for the banks to ultimately buy the shares back. But as economic activity stalls, there is a real risk banks will default on their interest obligations to the government. There is no-one to lend to, but interest on the money in the banks accounts still falls due. Virtually all the loosely regulated banks - those of the USA and the Eurozone - are unprofitable. Thus on-going losses in both profitability and asset base will be borne by the stockholders - and a major stockholder is now the taxpayer. The taxpayer is likely to have to take an even larger stake - perhaps a full stake - by the end of 2008, and certainly by the end of 2009. Thus all risk and real losses that should be borne by the bank stockholders will now be transferred to the taxpayer. Credit will remain very tight. Business will be slow. Unemployment will creep up. Spending will fall. Stock markets will be down. Investment in new enterprise will be limited by overcapcity in almost every sector. Savings will increase.
Oil price inflation is likely around about 2011, resulting in energy-structural inflation within a deflationary environment - stagflation.]

Some inefficient giant businesses living on corporate welfare are severely affected, crippling local economies
Large businesses whose inefficienceis are protected with taxpayer subsidies and 'pork barrel politics', or which are living off sequestered earning generated by pension investment funds mostly owned by their employees, go to the wall. There is large damage to local towns dependant on the work and flow-on income from the mega-plants.

Example: The Boeing Corporation, while a Government 'favorite' in the era of the American war against Vietnam, nevertheless had massive layoffs
in 1970. To avoid bankruptcy, it laid off 35,000 people, from managers, through engineers to general hands. The next year it laid off 15,000 more. The supplying contractors and contract machine shops consequently lost work and also laid off staff. Local businesses had fewer customers, many of whom spent less. They too laid off workers in the slack trading conditions. Unemployment in Puget Sound reached 17%. Job vacancies locally were non-existant. Available unemployment insurance was used up. Governmental 'top ups' were also exhausted. Charities had to give out food parcels. Government vouchers (food stamps) for basic food supples were issued to the most desperate unemployed. Suicides rose dramatically. People sold whatever they had, from household items to cars to try to raise money. So many goods were on offer locally that they sold for a fraction of their usual resale value.

Government retrenches
Welfare costs to government balloon. Governments slash public servant numbers, trying to strike the balance between retaining the experience and deep institutional knowledge of older workers closer to retirement age against the desire to retain the young and those with dependant families.
[Note 2008: Many USA states are deeply in debt, and need still more debt to pay public service. Directly and indirectly public service may account for 30% - 40% of jobs in some states. The response so far is to reduce public service jobs. The retrenchment is likely to accelerate as State budgets blow out.]

Some governments desperately try to offload their requirement to fund retirement and create a boom
Knowing that pensions will be a large burden on a shrinking taxpayer base, some governments attempt to 'privatise' social security by forcing people to subscribe to 'managed funds', based largely on stocks. In spite of negative returns (losses) for some managed funds, and despite the certainty of savings being severely eroded in a permanent recession, governments point to the (largely pension - fund driven) historically ephemeral period of very good returns from managed funds, trying to sell the idea 'good times' always go on forever. The hope is that forced 'investment' in the stock market will create a boom and restore 'confidence'.

[Note 2008: The value of managed funds reflects the investment strategy of fund managers. Many funds 'invested' in real estate 'backed' ponzi schemes. Bankers in USA 'lent' stocks they held in trust for investors (i.e. didn't actually own) to speculators to 'sell short', thus attacking the value of the stock of productive businesses, and raising the cost of funding to those businesses. These stupid and destructive 'investments' have destroyed the large part of the value of investment funds (about $US2 trillion in retirement savings by USA taxpayers have been lost over the last 12 months according to testimony from the USA Congressional Budget Office). Commission and fees to banks and fund managers and advisors continues to be paid, however negligent their strategy and advice may be. Government strategy remains to evade future government retirement money liabilities by forcing private savers to rely on an out of control 'cowboy' money market. A market run by individuals deeply imbued with an immature, selfish, short-termist, high-risk attitude. Secure, sustainable, long term investment for retirement through these people was bound to fail. And patently has. No one trusts the financial 'geniuses' and their 'managed' funds. There is a rush to security, such as government bonds, with returns on investment virtually ignored. As at november 2008, 30 year bonds teild 4% - a negative return, in real terms. Worse, 2 year bonds return just over 1%.  The hoped for boom will not materialise.]

In 2008 New Jersey's government pension fund lost over $23 billion in the collapsing sharemarket and hedge bets promoted by banks and fund managers.By the end of 2008 the fund had a value of less than half the $US118 billion in benefits it is ultimately committed to meeting. If the Standards and Poor 500 drops to 600, the $5 billion draw per annum versus the annual addition of about $1 billion will fairly quickly run the fund dry.

People psychologically 'hunker down'
The oil price crisis (it is not a supply crisis, and never will be - there is ample supply for those who can afford to pay; nor is it an energy crisis yet - it is a cheap liquid fuels crisis) eclipses all other topics in the media. People reduce spending, try to pay off as much debt as possible. Non essential items - eating out, coffee house lurking, going to movies and theatres, profligate texting, heavy phone use, broadband internet access, new clothes etc - are cut back or abandoned. Layoffs in the service industries abound, further ratcheting the slow-down and loss of confidence.

Example: in USA in 2005, over 41% of people were working in the service industry.

People in isolated communities lose money by commuting to low-paid work
Low income people in isolated rural communities with little or no public transport and travelling large distances to get to their poorly paid jobs now find the costs unbearable. Travelling to work eats a disproportionate part of their daily income. Some quit their jobs - the cost of getting to work in distant towns uses up such a large proportion of their daily wage it simply doesn't make sense to continue. Local spending decreases as peoples incomes fall and as petrol, basic food, and rent costs leave almost nothing left to spend in the community.

In 1999, households in USA earning less than $US15,000 spent 8.2% of their income on gasoline. By september 2005 low income earners were spending 10.4% percent of their income on gasoline. In contrast, households earning more than $US80,000 spend only1.9% of their income on gasoline.

Example: The 7.5 million rural Americans on low incomes have to spend about 15% of their income on gasoline relative to the urban poor spending about 10%. 

Demand for oil drops
Lower income people are first to cut back on petrol spending. With little means, they are unable to trade up to more economical vehicles. Their older high-gas-use vehicle are unsaleable. But even middle income people curb petrol spending to degree. The drop in consumption depends on the ratio of lower income to middle/higher income in a country, and on the effectiveness of campaigns to conserve fuel by altering driving practices, but more importantly, on the effect of the inevitable very high interest rates on spending in general. The drop in consumption eases prices temporarily, but doesn't re-create jobs.

Example: In the second oil shock of 1980 - with its consequent 'recessionary' very high interest rates - world oil demand declined from around 63 million barrels a day in 1979 to about 55 million barrels a day in 1983, a roughly 12% drop in consumption for the 4 year period. If the year-on-year increase in consumption that would be expected in 'normal' times is also taken into account, the drop in consumption is higher still.

[Note october 2008: As noted above, the collapse of the financiers foolish ponzi money schemes has forced central banks to offer low interest rates in order to try to keep commerce flowing. However the sharp introduction to recession - triggered by the ponzi money schemes - means sharp oil-demand drop. If demand drops 2.5% per year - and more sharply later - 2009 will see this taken off an estimated about 90 million barrels a day by year end 2008. Consumption is then 87.75 million barrels a day entering 2009. However, others estimate year end production of 80 mbd, dropping production to 78.2 mbd beginning 2009. As 'production = demand' figures were published in july 2008 for all liquids at an average of 87 mbd for 2008, this is likely to be around the ultimate average for the year. Production capacity drop and demand drop are likely to be about matched, even with 2.5% annual demand decline, until end 2013. However, sadly, oil producers export capacity will drop more sharply before this - due to increased internal consumption. By about the end of 2011 we may see insufficient oil exported to meet a reduced global demand. Prices must then rise again.]

Increase in bankruptcies and defaulting on loans for homes and speculative property
As unemployment and interest rates increase, more families can no longer pay their interest on the loans they took out on overpriced houses, and on car and holiday purchases. These loans were leveraged by previously rising equity in their home. Unemployment means few house buyers, and the downward pressure on house prices continues inexorably. As banks are forced to sell into a market where there are few buyers, the downward ratchet continues. Many people still paying a mortgage now find the equity they had in their home has gone. Some are paying off loans that are significantly greater than the current market value of the house.

Stock markets shake out
Stocks whose price is based on expectations of future price gains - rather than on actual earnings - are 'loss cut'. Share market nervousness could see some stocks in some exchanges achieve 'junk' status. Other stocks, especially mature energy stocks and some gold stocks, do well, as do stocks in fundemental commodities.
[Note 2008: october sees stocks fall as steeply as in the 1929 Wall St collapse.]

Business pension funds found deficient
Lowered business profits lead to cuts in dividends. Low dividends, coupled with high unemployment, decreases the demand for a given businesses stock. Lower demand cuts the stock price, making it difficult for the pension funds to pay its retirees even by liquidating some equities. Employer contributions have been unrealistically  low, as contributions have been cut, based on the assumption of future rates of  fund growth that are quite unrealistic. Some businesses cannot meet their contribution to the pension fund. Some go bankrupt. Government fund guarentee trusts don't have enough to cover the failed funds, and themselves go into debt.

Forced privatisation of social security fails
Those governments that forced taxpayers to invest in 'managed funds' now have to face anger over the unecessary enrichment of fund managers and impoverishment of taxpayers as the value of the fund is dramatically slashed and taxpayers lose the largest part of their 'contribution'.

Recession deepens
More people are out of work. Government welfare payments increase dramatically at the same time as the tax payer base is shrinking and the population aging due to the 'baby boom' demographic bulge. Some governments are technically bankrupt - they have overspent on military and corporate welfare (subsidies). The economy is stagnant ('not moving'), by all measures, including gross national product.

Example: in late 1974, following the oil shock of october 1973,
people registering for jobless benefits peaked at one million new registrations in a single week. The US Federal-State Insurance payments were triple the amount prior to the oil shock. By early 1974 they were expected to be running at around $US17 billion per year.

Governments print money
Technically bankrupt administrations print more and more money via government bonds. The value of the bonds has to be made more attractive by increasing the interest rate payable to holders. Banks in those countries are then forced to put up the interest rates on existing loans as well as the few new loans they write. The value of the currency falls and falls. This is inflation at work within a recession.

[note 2008: To date, USA has exported its inflation via sale of bonds overseas. As a spectacular sideshow, it is using its ability to print money to buy into a huge slice of the global banking business. The banks are willing partners because many either are, or soon will be, technically bankrupt. Around US 82 trillion dollars of derivatives are due to come back onto the banks books from 2009 onward, according to this years Bank of International Settlement figures. This vast sum - a significant part of which will be loss -on the Financiers and downstream 'investors' account, will be neutralised with Government money, freshly minted to buy the banks. 
Baskets of regional reserve currencies, plus gold, may be needed to regulate exchange rates, as no currency - apart from perhaps the Swiss franc - is stable enough to be a 'safe haven' from the dollar, the euro, or the pound.]

Central banks sell gold to hold confidence in major trading currencies
As long as people have faith that gold is a 'reliable' store of value, it tends to erode faith in currencies, especially the USA dollar, which have little or no gold or 'black gold' backing. In a vain artificially erode a move to gold in order to bolster confidence in the USA dollar and hold its value, central banks dump gold on the market to drive the price down.

Example: in the pre-recessionary conditions of july 2007, with a steadily weakening US dollar and oil a few cents off its all time high, there is evidence central banks moved in a concerted fashion sell off bullions - or at least sell off notional ownership of bullion.

[Note 2008: Consequent on the collapse of the money market ponzi schemes, central banks abandon attempts to hold down gold prices. Eurozone banks announce they will no longer sell gold. The status of USA gold reserves is uncertain. The USA mint slows issue of gold coins right down. The amount of gold listed by treasury has remained static for some years, in spite of sales. It is uncertain if the gold held in USA government vaults is US gold, or gold being held on behalf of overseas central banks. Auditors are refused permission to physically closely examine all the USA gold bars]

Local Governments forced to pay bank interest from cost-saving 'austerity measures'
Local governments, deeply in debt for roading and other infrastructure, are unable to meet their interest repayment committments. The overseas banks that made the loans force local government to introduce 'austerity' measures to 'balance their books'.
As a result, spending on roads, rail, medical care, schooling and other municipal services is cut. Thousands of government workers lose their jobs. Those cities and municipalities with worker pension funds are forced to hand over control of those funds to the banks.

Example: In December 1974, following the 1973 'oil shock' US and London banks forced the heavily indebted New York City to meet its interest payments by handing over control of the cities pension funds to the banks, cutting costs by severely cutting spending on infrastructure (roads, hospitals, schools etc), and dismissing thousands of city hall workers.

Surge of interest in gold and silver
The value of some currencies erode. Share market blue chip stock profits fall. Stock values re-adjust downward. Mortgage defaults erode the value of bonds. Real estate investment falls with falling availability of credit and negative returns from many rental properties. People are uncertain how to retain the value and safety of their savings. Some people secure physical value in precious metal - gold and silver. Prices are bid up. Demand for gold and silver for manufacture falls in the face of high prices falls; but is substantially overtaken by demand for gold and silver as a safe haven. Marginally profitable gold mining companies become profitable.
[Note 2008: October saw a surge in gold demand, especially for coins and small bullion bars. Mints are unable to keep up with orders for coins. The broad trend for gold is up.]

Inflation increases
High oil prices causes some 'oil-economy-structural' inflation. That is, while businesses can absorb costs for a while by reducing profit margins, at some point higher costs of production have to be met by prices increases. Obviously, structural inflation is in effect the
higher oil-cost-component in an economy. Ignorant economists advocate that government Treasuries and Reserve banks 'control' this uncontrollable structural inflation. Gullible Reserve Bank govenors raise interest rates to 'drive down' inflation into an 'acceptable' band. Low cost imported goods that normally keep western inflation figures down start to rise in price as the cost of commodities from oil to plastic feedstock, to steel to copper inexorably rise.

Crippling interest rates collapse the housing bubble
High interest rates on the big loans taken out in the decade after the mid to late 90's are now unpayable for almost all ordinary people. Most people declare bankruptcy as soon as possible in these circumstances.

Banks ask taxpayers to pay for their business mistakes
Banks attempt to recover some of their lost profits by trying to gull governments into taking over written-down mortgage debts.

Banks create money by lending more than the money taken in as savings and deposits (typically ten times the actual amount physically 'in the bank'). This system to create capital from nothing first arose in the18th century as coal energy was first harnessed to the new steam engine, factories, cheap labor, cheap raw materials, and exploding technological advances. Banks became aware creation of 'book entry' money via loans in excess of actual deposits was workable so long as loans were used to 'bankroll' viable new industries, were prudent, and under tight managerial control. Banks, aware from historical cycles of property boom and bust that capital 'created' for speculation in housing is quickly wiped out in recessionary times, attempt to plead ignorance. They loudly and persistantly represent themselves as 'innocent' victims of 'unforseeable' circumstances, while at the same time try to dupe society into paying their wealthy shareholders an amount equal to the shareholders loss.
[Note 2008: As noted above, bank losses go far beyond reducing value of a mortgage book backed against declining property valuations. Governments have involuntarily aquired a share in the mortgage portfolio of banks, not because the asset value of good mortgages is falling, but because banks were complicit in creating junk bonds, trading them as if their value was increasing, disguising their true worthlessness, and continuing to create and hold such large amounts that the sheer volume and global pervasiness of these loss-making instruments destroyed  the banks balance sheets. Global bank bankruptcy forced governments to create government backed credit - not necessarily tax money - to keep banks in existance simply to keep the wheels of commerce - the usual temporary and long term business loans - oiled.]

Landlords ask taxpayers to subsidise their profits
Demand for rentals increases markedly as mortgage sales puts people out of their homes. Landlords have increasing demand, but tenants have decreasing ability to pay, as many are the unemployed. Large corporate landlords, and banks forced into the 'landlord business' by a large stock of unsalebale foreclosed properties see a way of socialising their costs - they demand a subsidy from the taxpayer to 'make up' the difference between the ability of the unemployed to pay rent, and a 'fair profit'. Weak governments heavily influenced by banks and the ultra wealthy capitulate and donate taxpayer money to banks and landlords via tenant subsidies.

Strongly democratic Governments act to prevent rent racking and house price subsidies to banks
Some governments reject the self-serving arguments of the banks and landlords and refuse to artificially support rent prices by giving substantial gifts of taxpayer money to landlords. Governments set up more and more low cost emergency shelters and mobile home parks as a 'step-through' measure to 'face off' the banks and landlords. House prices fall further as landlords quit the business. A pool of community owned housing stock is accumulated at prices advantageous to the community as a market force to prevent landlords profiteering.

Banks offer the government 'cheap' foreclosed housing stock. Iron-willed governments use the state-owned temporary accomodation and housing to screw the price banks are asking for family homes right down to bedrock. This ensures the banks experience the 'instructive loss' that flows from bad business decision-making (reckless "aggressive" lending). It helps them come to terms with the reality of the power of the buyers market, where that buyer is holding all the cards, and is the community.
[Note 2008: The speed of the global credit crisis has largely - but not entirely - prevented governments from screwing banks down and acquiring cheap community housing assets. Governments, having now bought shares in the banks, could direct that selected mortgages be rewritten to reflect the new lower value of houses. The government could then purchase those very heavily discounted mortgages. The power is with governments to aquire good bank assets as well as bad, but the USA - in particular - seems reluctant to pass on to the taxpayer any community 'dividend'  for shouldering the huge risk arising from the greedy capitalism of the rich financiers. Corporate-corrupteded, weak, 'pseudo-democracy' continues in the USA.]

Some governments try to spend their way out of recession
Not recognising the structural (expensive transport energy) nature of the recession, some governments resort to the classic device of borrowing huge amounts of money and immediately spending it on public works. This is very successful for a while (effectively ending unemployment and keeping money circulating quickly in the economy), but money 'created' from government bonds or 'created' from bank bonds (loans) brings with it higher interest rates, and a wages and prices spiral. In the end, inflation can no longer be controlled.
[update 2008: The failure and subsequent bailout of the USA/Eurozone banking system means lending has slowed right down. Bonds issued by large economies such as USA are sought as security, even when yields on 10 year USA government bonds are as low as 4%, and therefore negative because yeilds are under the rate of inflation. Inflation is around 5% in USA, using 'massaged' government figures, and the true rate is closer to about 10%. Bond interest rates are held down in order to encourage banks to borrow and loan out once more. Dramatic fall into recession now prevents a wage/price spiral. 'Official' inflation rates will likely be relaitively moderate for the next few years. There is now a window of opportunity for governments to invest in productive long-term sustainability assets, such as 3rd generation nuclear plants or wave energy power generation.]

Some governments let the market decide the currency value
Other countries don't 'turn on the printing presses'. Their currency floats, according to what the international currency market (and speculators) think it is fundementally worth (true value). Interest rates are lower, but little capital from bonds is available for public works.

Spending slows right down
A combination of high unemployment and high gas prices causes a massive stop in discretionary spending. Prudent governments don't have the money to 'stimulate' the economy with 'public works'. Government cost-cutting to retain money replaces borrowing money.

Everyone is trying to sell to the rich. Most people, by and large, spend only on essentials, and watch every cent. Competition for existing customers is intense. The customer you have is tended like a rare plant. If you lose her/him to a competitor, you may not be able to find a replacement.

'Big ticket' items are bought with caution and after much investigation as to durability, reliability and availability of parts. The spending cycle on these items stretches out and slows down.

The speed of 'significant' money circulating in the economy slows right down. Bargaining, trading, and opportunistic 'tax free' jobs rises steeply as the 'black economy' starts to expand. This is the beginning of market forces at work. This is deflation at work in a recession.

Example: in the 1974 oil shock
low skilled wages were driven right down, people accept any work but most was part time or temporary and often very poorly paid. Some 'odd jobs' were paid in food. Consumer spending fell as underemployed and unemployed people end all unessential travel, could not afford phone services, could not eat out, and turned to 'making do', for example by repairing and sewing clothes. The amount of consumer money circulating through the economy fell significantly.

Government support for higher education crumbles
Layoffs amongst the educated middle class continue. Governments question why they are subsidising people to attain degrees that have no job-value in the market. Funding for many University courses in business, legal, and social areas is slashed. Funding for some 'socially useful' engineering, medical, agricultural, and teaching degrees is by and large retained, as is funding for trade degrees relevant to sustainable living.

Capital for business shrinks
Reckless investments in the 80's mean many banks are technically insolvent. Some banks fail and are propped up by the taxpayer. Some 'Investment' Banks fail, wiping out the savings of thousands of people. There is deep distrust of the safety of banks and of businesses. People are reluctant to invest in bonds and other debt instruments. Capital for business and student loans shrinks.Commercial activity is severely restrained, with flow-on effects to employment.

For example, in the first quarter of 2007, that is, before the crisis hit, capital markets sold about $US1,500 billion in bonds and other debt instruments issued by federal agencies, municipals, corporates, mortgage prospectors, and asset bundlers. In the third quarter of 2008, only about $US680 billion was sold, a drop of around 55%. And debt-sales dropped off even further thereafter.

Increased pace of business closures
As the downward spiral continues, each business that closes reduces the pool of customers with cash to spend at other businesses. This pushes businesses already on the brink of viability over the edge.

Closing parts-manufacturers causes downstream manufacturing businesses to interrupt production, or even quit certain lines. Businesses find it increasingly difficult to find suppliers of the right product in reliable volume. Businesses caught by manufactered parts supply problems may have insufficient sales and capital to 'step through' disconnection and themselves fail. If they are an advanced manufactured equipment supplier, there may be a further cascade of 'mission critical equipment failure' in businesses downstream from them.

In the Great Depression industrial production fell by 50% in some parts of the world (chiefly USA).

Low income people slide into desperate straits
While middle income people spend only maybe 5% of their income on petrol, low income people are forced to spend proportionately much more As petrol and other prices rise, petrol becomes almost unaffordable. But petrol in our society is a commodity basic to being able to work, buy goods, and interact in society; it is an essential, even for the poor. For them, there are now no discretionary items available to cut out, no fat in the system. People become desperate. People sell possessions at far less than their value to pay for petrol. They cannot afford to fill the tank. People cancel meals to save money to pay for petrol to get to work. Un-repayable credit card debt for petrol and food rises. Borrowing from relatives for essentials increases. Car repairs are deferred. Many try to do their own car maintenance, and some repairs. Ironically, there is no money available to buy a more economical vehicle; the people who would benefit most by a more fuel efficient car are least able to afford a better vehicle. They are stranded with their existing gas-guzzlers, unsaleable at any price.

Rise of unemployed street-side traders
Unemployed people refuse to sit on their hands and wait. Tiny, local, home based businesses expand, but almost all deal in very low value items and services, helping money circulate, but only relatively small amounts. Many are 're-cut' businesses - the large number of people thrown onto a low or very low income may no longer be able to afford a whole pizza, but can afford a slice. Even a small over-priced slice is better than no pizza at all.

Private Welfare schemes in some countries cannot meet beneficiaries needs
Some retirement fund schemes (especially in USA) no longer have the cash flow they expected as their investments lose value in the downturn and few businesses return significant profits to their majority shareholders. This is made worse by some unprofitable businesses (especially car manufacturers) using portions of the paid up share funds to support their failing industry. The retirement funds are caught with a double hit - many of the stocks are non-performing no-dividend stocks bought for capital appreciation and thus give no cash flow, and their value, instead of appreciating, has depreciated dramatically so relatively little can be made by selling them.

Governments that have tried to encourage savings and cut spending gain no traction
Conventionally, employment is stimulated by productive investment. Capital comes from savings, not credit creation and expansion of money supply. Conventionally, when government budgets look like 'blowing out' and borrowing looks to be inevitable, governments slash government spending to avoid going into debt. Borrowing creates an expanded money supply and inflation.

These are unconventional times. Many people save, but don't spend. Businesses are too cautious to expand or invest. The economy stagnates (deflates). Structural inflation from oil prices continues to ripple through the economy. Stagnation and inflation - stagflation - results.

At the very time these governments cut services, additional services for welfare and work programmmes are needed. The effect of the cuts are neutralised by the need for more money for welfare. Services are cut. Money is borrowed. Inflation increases. Stagnation continues. Government deficit grows.

Nothing seems to work. Governments seem to gain no traction. They flip-flop between expansionary borrowing and recessionary austerity.
Unrelenting austerity may cause deep recession to tip into intractable deflation (lots of savings, falling prices, no spending) and economic stasis - stagnation and depression.

Governments that have 'borrowed and spent' try to supress the resultant inflation
The inflation that comes with massive government borrowing and spending to stimulate 'effective demand' - consumer spending -   in the economy is no longer controllable. Tweaking interest rates is no longer successful. These governments now put a lid on prices. They also freeze wages. The result is the destruction of the value of their currency. Recession may tip into depression with deflation and economic stasis - stagnation.


Depression admitted in many countries
Widespread repudiation of debts by individuals, banks, businesses, local governments and countries creates the conditions for a depression. This massive correction enables societies to "start again" with a clean slate. But as capital has been essentially underpinned by cheap energy, new capital investment is very expensive. 'Starting again' is therefore slower and far more expensive then ever before, especially as most surviving business is slow and hyper-conservative about debt. The best that can be hoped for is periods of brief  'pick up' with intermittant energy price falls.
[update 2008: Brazil 'raids' its pension funds and moves to repudiate debt.]

Depression in USA
Falls in the value of the USA currency, the resultant increased cost of imported oil, the necessary high interest rates on USA treasury junk bonds, the collapse of uneconomic 'dinosaur' subsidised industries, and the domino fall of small business after small business meets a huge budget deficit, unemployment of 20% and rising, high food prices, high 'relief debt', failing pension funds, desperate personal indebtedness, and huge loss of confidence in business. Deep recession has faded into depression.

Initially, the cognitive dissonance of seeing the 'comfortable known' become the 'uncomfortable unknown' results in widespread protest marchs and extreme public anger at the government. It soon dissapates as people are forced to wrestle with the practical difficulties of organising 'walking-distance scale' distribution of food to a large carless population - most of whom live many miles away from the nearest supermarket.
[update 2008: the bailout of the U.S./Eurozone financial system has cemented in low interest rates on bonds. When USA treasury bonds lose their appeal as the world economy slips deeper into depression, the bonds will simply become unsaleable. The USA is likely to then repudiate a large part of the debt, that is, the bond holder will only get part of their money back.]

Depression in China
China's money supply  about doubled between 2001 (when it was 11.89 trillion) and 2004 (when it was 22.51 trillion). This rate of money growth is about three times faster than the growth of the credit-money bubble in the U.S. from 1921 to 1929. The Chinese real estate bubble bursts, and the Chinese stock market follows it. (China allowed private home ownership after 1998, and mortgages have gone from close to zero to more than US$300 billion in a very short space of time. China's experience of real estate is only the upside- increasing values. China has never had of experience the downside of loan-backed private home 'ownership' - value collapse and bankruptcies.)

China, handicapped by corruption, and with little effective commercial law, is hit by the three strikes -
1. loss of major export markets, especially in USA, due to global recession;
2. banks choked with non-performing state sector loans that should never have been made (and illegal loans from state servants to entrepreneurs) for flawed businesses that should never have been started; and
3. erosion in the value of the currency.
Low currency value makes oil imports expensive. When China cashs in USA treasury bonds the money is repaid in a currency that has depreciated hugely. Many private businesses fail. Many State businesses also fail, but are supported by central government credit expansion (money printing). Unemployment sky-rockets. Structural oil-price inflation ramps up the costs of food. People move back to relatives in the countryside to 'ride out' the hard times.

Petrol use falls by more than 12%
Unemployment leads to carlessness. The unemployed are not making money, so they save it by selling their cars.
In a 'long depression' the many unemployed cannot afford the financial drain of owning a vehicle. For them, it wouldn't matter if petrol was almost free - they wouldn't be able to afford to keep the machine to use it in. Demand for petrol is likely to drop most drastically in car-dependant cultures such as USA (maybe even by up to 50%), but globally demand is likely to gradually fall beyond the ~12% demand drop of 1981. In the long run, at 30-50% unemployment, global consumption could perhaps drop by 25%.

Example: World petrol consumption dropped by more than 12% during the peak of the steep and deep recession that emerged in 1979 and continued to about 1984, a time of up to 20% unemployment in some western industrialised countries. In 1981 petrol prices in USA were over $US3 a gallon in 2005 adjusted dollars - the highest ever.

Demand for cheap consumer goods evaporates, easing oil demand
 As a result of the severe slow down in economic activity in America and China (in particular), oil demand slumps dramatically.
[note 2008: this happened with the precipitous onset of recession. Many factories in China are going out of business as orders evaporate. It is likely to become even worse over time.]

Oil prices fall dramatically
In what were regarded as 'normal' times (and are now regarded as aberrant times) around half the oil burned was used in personal transport. Unemployment and pricing have curtailed use of motor vehicles for non-essential purposes. Demand drops, maybe by 4 million barrels a day in USA in particular (about 50% of 'normal' consumption). Drop in demand from China cements-in downward price pressures. The rate of consumption drops even lower than the rate of decline in oil production. Lack of demand causes a rapid fall in the price of oil.

Oil and gas returns to its 'scarcity value' once more
Governments hoard as much cheap oil as they can while prices are relatively low. Oil and gas supply slip back below demand. Prices start to rise once again. Businesses find the 'recovery' is temporary.

Gas prices make electric power very expensive
Demand for gas for generation of electricity is huge. There is a frantic scramble to 'fast track' wind,
small scale hydro, and tidal power projects. Planning for long term huge hydro projects starts with urgency. Engineering capacity and financial backing is a severe bottleneck.

Prudent Governments shift capital to productive and sustainable enterprise
Much of the bank-created illusory 'capital' in housing assets has been readjusted to its real value at a dramatically lower plateau. Prudent governments progressively borrow manageable amounts of money locally to invest with private capital in joint venture that can sustainably yeild profit in the medium-long term and create long-term infrastructural and competitive benefits. These projects focus on energy in all its forms, creating it, and conserving it. Taxpayers capital is more evenly balanced between sustainably productive high quality government-private businesses and housing.

Food prices skyrocket
When oil prices reach around $US350 a barrel (as measured by 2005 US dollar purchasing power), all food prices, including basics, about doubles. 

Global crisis meetings
Nations agree to capitalise transparent urgent massive-scale production of solar arrays at lowest possible price. Agreement is reached to legislate for compulsory aquisition of relevant patents if the patent holders do not cooperate fully.

Massive energy projects drain some government coffers
On top of the extra welfare payments and the higher price of oil and gas, some governments are paying for hurriedly approved large scale projects that won't be completed for decades - hydro dams and oil production in national parks and severe environments. Money comes from petrodollars once more. The mega-banks, now desperate for high quality investment, find a lifeline at last. This time, 'low risk' borrowing countries refuse IMF invervention, denominate the loan in the currency of their choice (and can switch it) and determine the loan period. Times are hard enough that any basically sound corruption-free country can call its own terms on loans. Most desperately impoverished countries cannot get petroloans for any project - unless the project is energy related, viable, and the lender is the major beneficiary.

Government retrenches even further

Cuts are made to the medical services the government will pay for. Repairs to the elderly - hip and knee replacements - are cut right back in favor of community care by oversupplied community labor. Welfare assistance is not available until all personal savings have been used up. Those with assets hidden in family trusts are required to either unwind them and live off the proceeds, or formally make over all beneficial payments and assets to the government once in the beneficiaries hands, or on their death.

Supply chains for business operations erratic and unpredictable
Conventional business operational planning techniques aim to eliminate or work around bottlenecks, queues, and varying cycle times for components and raw materials used in business manufacture. This 'flow' planning keep plants steadily productive and frees up capital that would otherwise be locked up in unmanufactured raw materials, or in as yet unsold inventory. These techniques no longer work well - they only work well in stable conditions of cheap oil.

Now, supply of raw materials and components is increasingly erratic and unpredictable. The ideal of 'quick response' and 'just in time' from component manufacturers becomes a wry joke. Those larger businesses with sufficient working capital turn back to 'inefficient' techniques of stockpiling raw materials and components, and warehousing sufficient spares for the entire product life cycle. Paradoxically, within these conditions, those who can arrange the least-cost supply lines both into and out of their factories have a competitive advantage. Those that can balance reliable long term supply without excessively stockpiling raw materials or manufactured inventory have a competitive advantage. Decisions of what products will be supplied to the market and why are pivotal.

Large manufacturers absorb each other to create more storage space and reduce the number of products and models. Standardisation increases to help parts manufacturers remain viable. Planned 'built in' backward and forward engineering of parts compatibility increases to aid efficiency and enable more economically viable future 'low cost' repair business rather than 'high cost' new model business.

Widely interwoven and deeply structured technology experiences 'falling dominoes' failures
As more and more small suppliers fail, and as large suppliers cut the number of lines they manufacture, crucial components in sophisticated vehicles, plant, machinery, become harder to find. In some cases, a critical component may be simply unobtainable. Otherwise excellent machines and plant become inoperable for want of even a low value relatively trivial component which is no longer manufactured. Some specialist plant no longer has spares available at any price. Failures in manufacture, supply and repair lead to domino-like failure of other component manufacturers further down the chain, who in turn cannot supply further plant, processes, or manufactured inputs, which creates yet further breaks in manufacturers chains, or renders a customers product permanently useless for the want of a minor component or service.

Shock at long term joblessness turns to anger
As people who have never been unemployed in their life find unemployment dragging on far longer than they could have imagined, hope turns to despair. Some become embittered and angry.

Example: Post the late 1973 oil shock, civic administrations cut staff heavily to cut costs. In New York City, 700 administrative staff lost their jobs just as large numbers of unemployed were applying to the city for relief. Anger at the bureaucratic bottlenecks led to predictions of social unrest and militant popular protest marchs on the state capital.

Unemployed under-educated urban youths form gangs
Unemployment reaches high levels - possibly 35% possibly more - although masked by part-time work and public works schemes. Disillusioned and bored young men seek the thrills of violent attacks on 'outsiders', whether authority, as represented by police, or any identifiable 'different' group in society.

The government is faced with the need to control the haters and the smashers before they are manipulated by rabid and violently discriminatory men who, in normal circumstances, would never have traction in society.

Insurance companies become risk averse
As the pool of people who can afford insurance shrinks, insurance companies are hit by increased numbers of fraudulent claims from desperate people at the same time as its customer base is seriously eroding. Insurance companies, with one eye on the possiblity of storm-surge from the change in weather patterns (and possible beginning of sea level rise from Northern ice cap melts), make premiums on coastal and flood-plain land unaffordable. Many cannot afford to insure, yet cannot re-locate. Further pressure comes on deeeply indebted governments to give emeergency grants to those who lose their house in storms or fires.

Petrol and diesel for essential services is subsidised
As time goes by, in spite of massive 'demand destruction', fuel becomes absolutely short on the downside of oil production that has peaked. Fuel doesn't have to be rationed - there is plenty of it, but at an unaffordable price.
Workers in emergency services, health, basic food production and distribution, water reticulation, sewerage, fuel distribution, electricity production and distribution, public transport, essential telecommunications, post, local and central government, essential banking services, policing and prisons, schools, funeral services, domestic and industrial waste disposal and the armed forces all have coupons or subsidies to enable workers to afford petrol and diesel for travelling to work.

Social enterprises boom
Doing something useful, preferably in a group, is a fundemental and strong need in humans. But not when it imposes expense on the already  impoverished. Therefore governments subsidise 'socially managed' businesses that truly benefit the employees and the community. These are entities that are businesses whose aim is to employ and develop their workers to maintain their work ethic, give a sense of pride and usefulness, and provide a living wage. They aim to make a profit, but only in order to survive rather than make a 'return on capital' to a group of shareholders.

They are 'not for profit' businesses. They accept donations (tax deductible). They receive all kinds of community support. Generally, they are in service industries, such as 'meet and eat' industries, in environmental care, and in social support services such as elder care and mental health support. Subject to strong business discipline to avoid waste and poor decision-making, there is nevertheless a paradigm shift that recognises that subsidised and tax free enterprise, while at one level 'costly', at another level prevents further social costs from crime, skills slippage, community disintergrations, and disengagement from society, with its consequent suceptibility to the seductive 'solutions' of psychopathic but charismatic fanatics.

Some governments cut military and medical spending, others cut medical spending
Some governments are so afraid of 'losing control' that instead of cutting 'big ticket' military spending to almost nothing and diverting the funds to relief, they make minor cuts, and guarantee the military retirement fund, but no other federal employee funds.

Other governments cut expensive military spending and reconfigure military into civil defense forces, and cut all high tech medical expenses, as well as high cost prescription drugs.

Weakly democratic countries may tip into one party dictatorships
If civil unrest is widespread, weakly democratic countries with very powerful and weakly accountable presidential arrangements may suppress and censor the press, ban public assemblies, and use civilian armies to bully opponents and oppress freedom of speech. The presidential office may declare an emergency, and take on sole power as a temporary measure - which drifts into permanence. In this situation, the power resides with the presidents party. To get anything done, citizens have to have 'connections' with party officials.

One party weakly dictatorial countries may tip into weak democracies
In one party states where citizens are conditioned not to show any kind of dissent, palpable public anger in a collapsing economy may be best appeased by opening up (as Russia did). When command and control economies have held an economy back through its inevitable descent into official corruption and inefficiency, and when 'greedy capitalism' has also turned out to be both (literally) toxic and a barrier to coping with unavoidable change, the most efficient answer is the accountability of democracy.

When married to a market economy with just sufficient regulation to keep energy resources and other monopoly infrastructures in community hands - and to enforce the primacy of  the right to clean air and water - democracy cannot be matched.

The danger is that in countries with a huge pool of under-educated
poor people there will be vast social unrest triggering brutal state suppression before the newly impoverished middle class people realise that they must choose now. Either a popular imperfect democracy, or an even more cripplingly repressive party/military/industrial elitist gangster-state.

Water shortage
As climate patterns shift, as draw down of ancient aquifers reach their limits, extensive irrigation for some crops becomes uneconomic. Huge social effort is turned to reforesting catchments to slow runoff and create the 'organic sponge' of deciduous tree leaf litter needed to absorb and slowly release water. Recreational water use is banned in many cities. Home rainfall harvesting tanks are subsidised. Water harvest, storage, and distribution is critically reviewed, along with the types of agriculture and horticulture land is used for. Small, labour-intensive, intensively managed farming of high calory yeild crops such as potatoes and sweet potatoes becomes a central government-subsidised local social good.
In some favorably located regions it becomes a viable small scale industry.

Frontier - like settlements laid out
In the past, small farms were a lifeline for family members that lost their city jobs in a depression. The farms were able to support many of the unemployed until conditions improved. Few small farms are left in the west (
in 1990 there were 117,000 farm units in the state of Iowa, by 2004 there were only 19,000), except in the recently democratised east European countries. As a result, government will have to step in to help create the 'buffer' or 'sponge' of small farm living. It is starting from a low base, as there is little or no 'good' land close to transport left. The most productive land is also the most flood-prone land. The best decisions in the worst circumstances are made.

The government sequesters low-value hills adjacent to flood fertile plains and coastal margins for low capital communities. People of good character who are willing to endure isolation are given rights to small parcels of land and very basic mobile-home type housing. The expectation is that they will live an impoverished lifestyle, but with as many elements of self reliance and energy and nutrient conservation as economically feasible.

Best case - Recession and depression slowly ease

Slow pick-up in the emerging tiny energy conservation and renewable micro-generation industries
Although hampered by high costs of materials, ingenuity, technical expertise and small scale government subsidy tips some of the numerous experimenters and small traders in this area into full scale mass production.

Expanding rail, canal, coastal shipping and local port network reshapes communities
As new small ports, 'barge beaches', connecting inland waterways and expanded rail networks start to systematically integrate, previously isolated local communities start to grow, and small service industries develop. Artisan repair and 'make do' industries follow.

Huge human capital is used widening and deepening canals in Europe (in particular) to be able to carry useful loads.

Natural gas stops the slide
The worlds vast natural gas resources are useless without well maintained pipelines within countries, large capacity pipelines between countries, specialised gas ships, and specialised terminals. Once this infrastructure is in place, a mini-boom occurs as motive energy, although still expensive, is cheaper than it was.

Coal steps in
Work on using coal cleanly in steam engines begins to show results. Some coal is gasified, some is ground and direct injected into power station steam plants to run generator turbines.

Sophisticated steam engines run trains, coastal shipping, large excavators, and massive trucks such as used in the mining industry. Where high quality coal is available port to port, steam is used in conjunction with sophisticated sail technology to power smaller trans-oceanic ships carrying non-containerised mixed cargoes.

Solar power helps
Earlier global crisis meetings that made production of solar arrays a world priority start to show fruit, with houses being retrofitted with huge solar roof panels feeding power via embedded small computers directly into the grid.

Wave energy starts to impact
Massive investment in electricity generation from stationary tide-surge-powered generators starts to pay off with reliable supplies of significant amounts of power.

Market forces make the efficiencies
So long as subsidies do not cause too much distortion, local, regional, and international fair trade starts to make clearer what industries and materials are and are not sustainably economically viable into the future. Capital flows to energy projects with the quickest returns, as well as to those with the best long-term sustainable returns. The best projects are funded from petrodollars, and consequently owned by oil exporting countries. In time, foreign ownership is reduced by negotiation or nationalisation in the public good.

Industry and occupations adjust to the changed nature of the economy and social values
Long term adjustments to business viabilities are now real. Some occupations disappear. New needs give rise to new occupations. The values of energy conservation, innovation, fair play, community, small business, sustainable material exploitation, re-cycling, and constrained and intelligent consumption also result in new occupations, as well as changes to existing functions. Directly-paid employment rises once more. Those not in directly-paid employment are engaged in indirectly paid socially useful occupation.

Barter remains strong, black economy starts to fade
More and more black marketers and cashless bargainers become tax payers once more as the negatives start to outweigh the benefits. Entrpreneurial skills honed on the streets start to create more and more small businesses, but this time they are sustainable and highly flexible.

Pace and space have changed
Everything happens more slowly. Goods cross oceans in sophisticated - but much slower- computer controlled hybrid sail/steam ships. Delivery schedules are partly dictated by the wind, and arrival dates are 'fuzzier'. Couriered items pass through far more hands, with far more pedal power being in the chain. Airfright is very expensive. People live in far more widely dispersed communities, albeit they tend to be along rail, canal, and coaastal shipping routes. Things are much more often repaired than replaced. This takes time. Everything is much more expensive. Purchases are considered, valued, and looked after. The cost of machinery is weighed against the cost of labour. There is an increase in the number of jobs such as road repairs that are done by hand rather than big machinery. Only the rich can afford to speed anywhere. Automotive traffic is much less, the roads are emptier (and poorly maintained), and traffic is slower.

Personal transport has changed forever
Public transport - chiefly sophisticated steam powered rail engine -  is king. Personal transport is mostly bicycle, micro-engine bicycle, hydrogen gas powered bicycle or tricycle, or lightweight small engine scooter or motorbike. Visiting takes a lot longer. Trips now involve overnight stays, instead of the 'there and back in an hour' when petrol was cheaper than water.

Is life better or worse in a society based on multiple and decentralised sources of sustainable energy?
For individuals and families in democracies, probably basically the same as it has ever been. But in different circumstances, and with different values and attitudes.

 © Copyright 2005 The Naturalhub
version history
 version #2 - #19: 2005 - 2006 (minor amendments)
version #22: important updates october 2008
version #23 november 2008
(minor amendments)