Did peak oil cause the present financial crisis?

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Ruhh's picture
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Did peak oil cause the present financial crisis?

A very interesting post and discussion on The Automatic Earth today.

Ilargi: There is a long-standing misunderstanding about the perceived influence of perceived limits to energy availability in our societies that leaves people from the energy field, or even those who have trouble understanding finance, convinced that what is known as peak oil is the driving force in our present financial collapse.

As crucial as energy is to our lives and lifestyles, such claims are simply wrong. People -except in exceptional cases- don't lose their homes because gas at the pump became more expensive, and banks wouldn’t have gone bankrupt -barring trillions in public bailouts- because their energy costs went up. I don't want to regurgitate the entire topic, but then there’s no need for that either; a brief glance at the numbers should say enough.

An example.

As you may remember, sometime in 2008, the price of gas temporarily went up by about $1 per gallon. This is when the first accounts began to appear of people linking the present financial crisis to the energy crisis, claiming that the latter caused the former. To me, this never made much sense. I do, however, have fond memories of very interesting discussions on the topic at the time with very smart oil man Jeffrey Brown.

Still, the numbers were what they were, even back then, and in the end, derivatives didn’t cause peak oil anymore than peak oil caused derivatives. Some phenomena simply need no help destroying themselves.

Say, to drive 25,000 miles (40.000 km) per year, the average American needs about 1000 gallons of gas. The price rise in 2008 then cost her an extra $1000 for the year. In that same year, her home lost about 20% of its value, or $40,000. Her pension went down an often reported 30%, which can, depending on her age, range anywhere from say, $100,000 to $1 million. In other words, the average American easily lost about 50 times as much in pure financial market terms as she did at the pump in 2008.

In 2009, gas prices came down considerably, but home prices kept on falling. Hence: while her financial losses on energy costs diminished, the home price losses continued.

Yes, home price losses lessened somewhat towards the end of the year, but Bob Shiller predicts a 28% additional loss for 2010. Yes, pension funds made good on some of their losses on rising stock markets, but that was achieved through what I like to call the $1 trillion-a-month government financial injection. Which means that while our protagonist may now thus have the fleeting promise of a tad more pension income when she passes the eligible age in the future (a receding horizon in and of itself), she also has additional "personalized federal" losses tacked onto her account that run in the tens if not hundreds of thousand dollars. And since the annual US federal deficit is acknowledged by all sides to remain at least in the multiple trillion dollar range for many years to come, she will be called on to pay goddess-only-knows how much going forward.

Where did the financial losses originate? In the energy field? Not even close. They stem instead from low post tech bubble interest rates which led to low mortgage costs which led to everyone wanting to buy a home which led to no-questions asked loans which led to high volumes of mortgage based securities which led to a zillion other forms and sorts of derivatives which led to untold trillions in lost wagers which led to a collapsing financial economic system, a process we find ourselves in the early stages of. We can argue about the sequence in which these things happened, but not about whether they did happen, or about the role of peak oil in their occurrence.

A derivative is a bet, pure and simple, and the time when more than 50% of all bets turn winners is of necessity limited by the same laws that limit the life expectancy of any ponzi scheme. They are self-destructive. Since energy prices have nothing to do with the collapse of the MBS ponzi tower, which doesn’t need any help breaking down, thank you very much, since its demise is firmly written into its own foundations, the idea that peak oil or any other form of energy crisis was the cause of the financial crisis, i.e. the cause of the collapse of the housing/securities/derivatives scheme(s), can be safely discarded and put out by the curb with the rest of our broken dreams. Once you understand what derivatives are, and why there were $1 quadrillion of them floating around at one point in time, maybe that's where you start to see why peak oil is not a factor in this crisis of ours.

That is not to say that energy issues could never be, or even never have been, the cause of financial problems. Just that they are not this time around. Nor were they, obviously, in the 1930's depression, not an insignificant point for those who are still confused. Neither does any of this take away from the importance of peak oil. That importance, however, will play out in the future, it does not do so now. For one thing, energy demand and usage have plunged in the past two years. For another, oil producing countries are pumping out fuel literally like there's no tomorrow, because the finance crisis hits their budgets like so many sledgehammers. Something, incidentally, that I've long predicted, not a hard call to make, since an organization such as OPEC, and the quota it boasts, have credence only in times of economic plenty. The financial losses on investments incurred by Middle East nations are surely staggering, though we have no concrete numbers other than Dubai's demise, and they were definitely not caused by oil running out, but by Saudi and Abu Dhabi investments in US securities.

Admittedly, there is a different aspect to this theme, though it's not a game- or evidence changer. On March 7, 1956, Shell geologist Marion King Hubbert spoke at a conference in Texas, where he launched his now famous notion of a peak in both US and world oil production. The pre-printed version of Hubbert's paper distributed at the meeting made the following statements:

"According to the best currently available information, the production of petroleum and natural gas on a world scale will probably pass its climax within the order of a half a century, while for both the United States and for Texas, the peaks of production may be expected to occur within the next 10 or 15 years."

In the official company version after the talk, Shell left out Hubbert’s world oil production prediction altogether and changed his words about the US to:

"[..] the culmination for petroleum and natural gas in both the United States and Texas should occur within the next few decades."

The truly powerful people on this planet, and they do exist, and no, you don’t know their names and faces, may of course have picked up on what Hubbert said, then and there or in subsequent years, devised strategies to hold on to what they had in the face of what he predicted, and decided to (pre-)crash the entire world economy in the face of the inevitable crash peak oil would bring about sometime down the line.

But that is all merely a guessing game, with anonymous potential actors toting potential ideas about potential outcomes playing out over many decades, during which many potential power players would have died. Nice theory, but not exactly something we can base any solid idea on about a connection between energy and the economy.

Peak oil will take its well-deserved center stage place when our debt drama has somehow been resolved, many years from now, and at the expense of the lives and health of many millions of our friends and family members. Could you survive losing your entire wealth and belongings after gambling them all away in Vegas? Yes, you could, and many have. Could you do so in the face of a mortal disease, let's call it peak oil, in your new found poverty? Yes, you could, many have, and for many years too. Peak oil is mortal, but not instantly. Peak oil isn't even an issue, is it, if demand collapses?

Maybe it's not the impact of peak oil on finance, but the impact of finance on peak oil that will be the biggest threat to our societies. As oil prices linger at record highs, albeit below the 2008 $147 a barrel, exploration budgets have been cut to the bone. And trust me, new-fangled notions of using spent nuclear rods to develop shale oil won’t change that. That, after all, is what I based my Law of Receding Horizons on, with kudo’s to Ken Deffeyes. Shale is dead, and it was never born other than in the minds of people with dollar signs in their eyes.

I tried to write the above as a train of thought piece, didn’t research my own words through the years on the topic, nor anyone else’s, apart from the exact date and words for Hubbert’s Texas speech. I see no need to do so. I could write ten times as much as I have here on this, but I hope that won't be necessary. I hope you better understand now what the links are between peak oil and you losing your homes and jobs, and that they are not what some well-meaning people would like you to believe.


Original post with commentary at


deggleton's picture
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Re: Did peak oil cause the present financial crisis?

I agree that Peak Oil had nothing or next-to-nothing to do with it.

In the summer of 2008, CM wrote that he suspected some hedge fund had blown up and that we'd probably never know the story.  He noted that prices of all commodities were falling and advised against pre-purchasing fuel oil for the '08-'09 heating season, which otherwise seemed like a no-brainer, in view of the trajectory of petroleum prices.  He was right with that; buying oil later was much easier on the wallet, while investments were losing value.

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