Here is the latest piece by a very talented ex-CIA analyst named Tom Whipple. Nobody can match him on the quality of his weekly energy analysis, IMO. Here he looks at the bigger picture. Even if he is only partly right, the picture is very scary indeed. Worst of all, he has usually been right in the past. — Roger Baker
The peak oil crisis: storm of the century
by Tom Whipple
A “Perfect storm” refers to the simultaneous occurrence of events which, taken individually, would be far less powerful than the result of their chance combination. Such occurrences are rare by their very nature. — Wikipedia
In recent weeks we have been bombarded with reports of perturbations in the mortgage/liquidity crisis that is creating havoc in the financial world.
The travails of the “financial industry”, as it is called these days, are affecting oil prices at least as much as the normal forces of supply and demand.
Commentary on what is about to befall us is becoming scarier with each passing day. Learned professors are writing in the New York Times that our financial system is in danger of coming unglued. The general thesis is that America’s financial institutions are only capitalized at $1.1 trillion yet they are supporting $11 trillion worth of mortgages. Home prices are going to have to fall by 30-50 percent before most people can afford to buy homes again. When this drop in housing value is over, some 20 million homes will be mortgaged for far more than they are worth and a fair portion is likely to be abandoned. Some think the banking system is in for some very hard times. Others have dubbed the burgeoning financial crisis “peak money.”
But there is more: global warming seems to be causing unprecedented droughts and glacial melting which in turn are leading to lower food production and empty reservoirs and a substantial drop in hydro-electric production around the world.
Welcome to “peak climate,” “peak food,” “peak water,” “peak electricity,” or as some people are putting it, “peak everything.”
Some parts of the world are pumping so much fossil fuel emissions into the air that they can barely breathe. Perhaps they are reaching “peak air?” Then there are worries about the world’s carrying capacity –- “peak people?”
There is no question that a lot of bad things are about to happen –- more or less simultaneously. If some “peaks” we can see looming ahead occur at the same time, they will reinforce each other leading to a far more serious situation than if they occurred decades apart where they could be dealt with separately. Simultaneous shortages of fuel and water in the same area would have serious consequences as large resources would have to be devoted to providing life-sustaining water supplies, putting additional pressure on oil supplies and prices. If the drought in the Southeastern U.S. continues much longer, Atlanta may be the first large city in the U.S. to experience this phenomenon.
Other peak situations cut both ways and may have unforeseen and unintended consequences. Food grain-based biofuels (peak oil vs. peak food) should in theory help to mitigate the peak oil situation but is contributing significantly to peak food and higher food prices. The amount of corn-based ethanol being produced today is making a minimal contribution to keeping down oil prices while resulting in much higher food prices. Increases in fuel and food prices are starting to result in significant inflation which in turn is complicating efforts to deal with peak money.
The timing of the various peaks will have a lot do with how they interact with each other. Serious consequences from global warming (peak climate) is usually thought of as being many years ahead, but if the Georgia drought turns out to be a consequence of global warming then massive economic damage from global warming may be closer than many imagine.
Keeping in mind that as yet unimagined interactions and consequences of the various peaks may arise, at the minute it seems that a major financial crisis and peak oil will set in during the next few years. The interaction of these phenomena will be complicated. At times they will mitigate each other and at times will reinforce the troubles. Currently the consensus of the global market is that as prospects for a recession improve, oil prices deserve to go down based on an eventual drop in demand. In recent weeks, we have seen nearly every governmental attempt to deal with the liquidity crisis in the U.S. and Europe resulting in surges in oil prices in hopes they will be successful.
The interaction of declining oil supplies and a world monetary situation out of control would seem to have the most potential for serious trouble in the immediate future. Newspapers, magazines and the cybersphere are filling with stories by credentialed and knowledgeable people saying that a financial meltdown has already started and that the situation will get much worse in the next year.
Current evidence suggests that at least in the U.S., Europe and China the demand for oil will continue to remain high until completely overwhelmed by economic difficulties. With the world’s population increasing by 76 million each year, the demand for food is unlikely to subside and prices are likely to increase – food-based biofuels production or not.
Thirty years ago when inflation grew and the economies sagged, we called it “stagflation.” This time the term may be too mild to encompass what seems about to happen. Within the next year our liquidity problems, unsatisfied demand for oil, growing food and water shortages, and other consequences of overindulgence appear likely to merge into an unprecedented economic storm. In the midst of this storm, which could continue for years, world oil production is likely to decline forever and the resources to mitigate the storm are likely to become very scarce.
Someday the events we are all going to live through in the next decade may become known as the century’s most perfect storm.