Peak Oil – Cause of Current Economic Problems?

Peak Oil – Cause of Current Economic Problems?

Peak Oil – Cause of Current Economic Problems?

There are many arguments about the merits of the peak oil problem, but few about the results should it occur. For instance, we can credibly ask if peak oil is the cause of our current economic problems.

Capitalism is built on the very simple notion of supply and demand. When the supply more than meets the demand, the price drops as the suppliers compete for customers. When supply is insufficient to meet demand, the price goes up as consumers compete to get a piece of the pie. One needs only look at the housing market in the United States to understand this.

Before the Great Recession, the demand for housing was massive and areas like Las Vegas were seeing price appreciation rates of more than 20 percent a year, a huge number for housing. Then the bubble burst and demand dropped like a rock. Suddenly, you have a massive inventory of homes on the market and few buyers. Prices stated dropping like a rock dropped in lake. As I write this, the housing market appears to be turning over and falling again.

The question a few economists are asking is what role does oil play in this? You are probably under the impression the housing market disaster and Great Recession were created by loose banking practices and evil bankers? Well, the banking industry is a mess, but loans didn’t just go bad. No, what if the banking problems were not a cause of the Great Recession, but a symptom?

As you probably recall, we suffered a major oil price shock just before the Great Recession. Prices went above $140 a barrel, figures never before seen. The result was a massive drop in consumer spending as Americans sought to deal with this new cost. The American economy is a consumer economy. When demand dried up, the loss in revenues caused many businesses to fail since they could not meet their credit obligations. The rest, as they say, is history.

Ah, but what about the fact oil went down in price after that? You are right. In fact, oil prices crashed down into the low 20s. This is because the level of demand in the world imploded. Suddenly, we had more oil than we were using. The excess capacity resulted in prices falling…until demand started to pick up again.

As I write this, we are in a recovery and demand for oil is rising again. Prices are also going up, to just over $100 a barrel. The question is what will happen now. If oil prices go up another $20 or so, consumers are going to pull back on their spending again. This will again lead to a recession. In fact, this may lead to a depression since the federal government is “out of bullets” at the moment when it comes to doing anything to get the economy rolling again.

The Future

To predict the future, we must look to the past. A surge in oil prices has always resulted in a recession historically. Always! If we have hit peak oil, and I think we have, then we are looking at a period of intermittent recessions followed by weak recoveries followed by recessions as oil prices jump up and down. That, my friend, is going to redefine the economic world and not in a good way.