"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Wednesday, March 30, 2011

Could Peak Oil Reverse Globalization?

Yes, there are many alternative sources of energy, however, when it comes to transportation, either by truck, ship, or airplane, petroleum is still King.  It is used well over 90% in the transportation of products in the global economy.  Windmills and solar panels are not going to be pushing cargo ships across the Pacific anytime soon.

Oil, as the largest component of global energy, also supports our monetary system.  Think of oil as we think of interest rates.  Low interest rates spur investments, just as cheap oil spurs economic growth.  But it is not just the price that matters, but the direction of the trend.  Just as a rising interest rate environment diverts money into non productive uses - the servicing of increased debt loads, so too do increasingly higher energy costs divert money to non productive uses.  Higher oil also diverts money from industrialized nations to resource exporting nations.  But it is also a very strategic resource that gives strength to the US Dollar, as the world's reserve currency.

The use of oil is not going away anytime soon.  However, the sources of cheap oil are diminishing.  There is still plenty of oil out there - but it is located in the tar sands of Canada, or deepwater offshore.  This oil is much more expensive to extract and process.  And as political instability in the Middle East increases, so too does the price of the easy oil - conventional oil that does not need as much processing and literally gushes out of the ground like a fountain.

Economist Jeff Rubin gave a speech to ASPO (Association for the Study of Peak Oil and Gas) last October. In it, he predicted triple digit oil prices within 10 months.  Was he right for the wrong reasons?  After all, he attributes the rising cost to diminished production of cheap conventional oil.  I guess we'll know in another ten months?

Nonetheless, he ends his speech on a rather optimistic note, very unlike many peak oil adherents.  He sees an economic revival occurring in the US as it imports less and produces more for itself.  However, he still warns us that an alternative transportation policy needs to be developed.

Here is the presentation, the link that follows contains the transcript of the speech for those that prefer to read it.

And an interesting quote on Oil costs and domestic industry, particularly the Steel Industry:
Take the steel industry, for example. Just before the recent recession, some very curious things were happening in the US market. When oil prices got to be over $100 barrel, all of the sudden, Chinese steel exports to the US fell at double-digit rates. And all of the sudden, US steel production was up. And all of the sudden, US Steel Corp., which was one of the biggest dogs in the market, all of the sudden its share price doubled. 
What was going on? I’ll tell you what was going on. For the first time in 20 years, it was cheaper to make steel in the United States than to import it from China. Why? Consider what China has to do to send you steel. First, it has to ship iron ore from Brazil, across the Pacific Ocean, turn it into steel, which is itself a very energy-intensive process, then ship it back, across the Pacific Ocean, to you. At $20 barrel, that works. At $100 barrel, that doesn’t work.

Transcript HERE


boatman said...

while i'm not sure the numbers quite get us there in the short run.....ultimately they will and this will be a part of the REAL 'new world order' of the not-so-distant future......after the public-turned-soveriegn debt-turned currency collapse that we have temporarily pushed down the road, mist.

lots of tears for some people between now and that resolution.

Misthos said...

I agree boatman. Back in 2007, I thought it would hit the fan much sooner and much harder. I underestimated the options government has to inflate assets and to take on that private sector debt.

But as you say, it is now a sovereign debt and soon a currency issue.

Dave Narby said...

Peak oil could reverse globalization, assuming we are at peak oil.

The US has had a stealth policy of using up other countries' natural resources first before depleting it's own.

Watch for all sorts of 'new' discoveries over the next few years...

Misthos said...

I agree about the real (unspoken) US energy policy. And the conspiratorial streak in me leads me to believe that all that environmental talk about shallow water drilling is a red herring. If the US experiences a real energy crisis, the environmental arguments are done with.

And so long as the US has the world's reserve currency, which it can print at will, why consume domestic oil when all you need are easily printed dollars to buy foreign oil? Ride the wave as long as you can.

Eventually, dollar reserve currency status will diminish significantly, or as I believe, the system breaks down and gold resurfaces - and then it will be necessary to drill for that oil. Until then, it's better to leave it in the ground.

Whenever gas goes over $3.00 a gallon, the drill baby drill crowd goes nuts. I don't think that's wise. The real crisis is not $3.00 a gallon, but $5 or $10 a gallon... and a very different world at that - and then its drill baby drill as well as energy conservation - no more SUVs to lug around a few bags of groceries.