Now Ireland?

[Keela]

I wonder though cv101 - if the energy simply can't keep up with the exponential growth (because production increases slow up rather than keep pace) then that effectively puts the financial system in difficulties.

And that is before any decline. The more I consider all this, the more it seems that the financial difficulties would first arise BEFORE the ultimate peak not AT or AFTER it.

Just wondering out loud really.

[Totally_Baffled]

No prizes for being right for the wrong reasons. Peak oilers did not predict the current form of the economic crisis. I'm pretty sure that the economic crisis would be playing out almost identically had oil production increased over the last three years to say 90mbpd and the price not exceeded say $50.

Disagree with you there Chris.

Many have written that the way PO was going to nail us was as follows:

Oil supply crunch = inflation = monetary tightening(interest rate increases = housing bust = bank bust(s)

The magnitude has been made worse by the ridiculous housing/credit bubble, but it would of happened even if lending was in the realms of normality.

High oil prices created the inflation in the early seventies, late seventies, early eighties, and maybe even the early nineties (when Mr Hussain invaded Kuwait). The result was recession even though lending was nowhere near todays levels.

Ok we maybe not strictly at PO as supply is still rising, but the symptons were the same due to demand.

When the real PO does happen -I suspect the crisis will be the same as now.

At the very least oil was the trigger IMO

[clv101]

Oil supply crunch = inflation = monetary tightening(interest rate increases = housing bust = bank bust(s)

I don't really think this is what we've seen though. There wasn't much of a supply crunch, yes prices went up quite a bit but inflation isn't really high. A few percent over target is not 15%+.

I don't think what we are seeing today is the result of $100+ oil and around 5% inflation. That's just not significant enough. The problem we have is due to money supply running ahead of the real economy for the best part of a decade, the incredible leverage achieved and the collapse of confidence associated with the inevitable failure of some of those loans. The housing market in the US and here would have crashed with $50 as with $150.

The chain of events you outline above would have happened... eventually, but it wouldn't have been 2008.

[Totally_Baffled]

I don't think what we are seeing today is the result of $100+ oil and around 5% inflation. That's just not significant enough. The problem we have is due to money supply running ahead of the real economy for the best part of a decade, the incredible leverage achieved and the collapse of confidence associated with the inevitable failure of some of those loans. The housing market in the US and here would have crashed with $50 as with $150.

Why would the housing market of crashed at $50 oil? Inflation would still be at a comfortable level.

What would of caused so many to default on their mortgages in the US? (and to a lesser extent the UK)

In the case of the US that was only caused by rates going from 1% (affordable) to 5.25%(not affordable!)

As for increase in MS comment, are you suggesting the run up in oil prices was due to the inflated money supply? If so, an increase in production would of dealt with that - but of course we ran out of spare capacity. Thus we got the inflation which central banks subsequently dealt with! (the definition of inflation of course is too much money chasing too few goods??)

[clv101]

I don't think what we are seeing today is the result of $100+ oil and around 5% inflation. That's just not significant enough. The problem we have is due to money supply running ahead of the real economy for the best part of a decade, the incredible leverage achieved and the collapse of confidence associated with the inevitable failure of some of those loans. The housing market in the US and here would have crashed with $50 as with $150.

Why would the housing market of crashed at $50 oil? Inflation would still be at a comfortable level.

What would of caused so many to default on their mortgages in the US? (and to a lesser extent the UK)

In the case of the US that was only caused by rates going from 1% (affordable) to 5.25%(not affordable!)

As for increase in MS comment, are you suggesting the run up in oil prices was due to the inflated money supply? If so, an increase in production would of dealt with that - but of course we ran out of spare capacity. Thus we got the inflation which central banks subsequently dealt with! (the definition of inflation of course is too much money chasing too few goods??)

The market would have crashed because it had got hopelessly out of touch with reality, an average house costing something like 6 times the average wage. There were no first time buyers left in the market, the buy to let market was no long profitable with yields lower than cash in the bank. The US, UK, Ireland, Spanish... houses market bubble would have popped if oil was free.

The defaults on the mortgages - and it isn't that many, doesn't need to be many were the inevitable result of lending people more than they could afford - self cert. 6x income etc. Bad lending has caused defaults, not $3 gas.

I'm not saying increased money supply drove up oil, good old supply and demand did that. And demand did respond with a new record supply over 87mbps a couple of months ago.

[RevdTess]

When you look at a chart of global GDP versus oil supply, the clear correlation has apparently broken down in the last 2-3 years with GDP rising much faster than oil supply. Some might (and do) point to this as evidence primarily of oil supply constraint but for me it's more to do with over-exuberant money supply. The real economy (physical goods and services) simply couldnt keep up with the debt. There was not enough real economic activity to invest in and so money flowed into oil and other commodities as a hedge against inflation. This slowed the real economy even more and triggered the US housing debt crisis that started the dominoes falling.

It's difficult to say exactly how much real oil supply constraints were behind the rise in oil. I tend to feel oil was targeted for 'investment' because it was perceived that peak oil was close and global demand was accelerating ahead of supply. I think the supply constraints are still there, but demand has obviously weakened dramatically.

I've no doubt that high oil prices played a part in the present crisis. However it may in this case have been more a feedback to the over-egged money supply, rather than peak oil. I realise that I've somewhat changed my view on this. Earlier in the year I would have defended supply and demand as the primary driver. Now I'm not so sure. From my analysis I'd have said prices should have started falling in mid-June according to the fundamentals I track, but prices continued to rally for another month after that before collapsing. So there's clearly many factors at play.

[Totally_Baffled]

The market would have crashed because it had got hopelessly out of touch with reality, an average house costing something like 6 times the average wage. There were no first time buyers left in the market, the buy to let market was no long profitable with yields lower than cash in the bank. The US, UK, Ireland, Spanish... houses market bubble would have popped if oil was free.

The defaults on the mortgages - and it isn't that many, doesn't need to be many were the inevitable result of lending people more than they could afford - self cert. 6x income etc. Bad lending has caused defaults, not $3 gas.

I certainly agree that bad lending and the decline in the viability of buy to let would of caused certainly prices to stall or maybe even start declining, but I don't think it would of caused the 'crash' we have seen now.

At 1% interest rates - a mortgage at 6* your income is affordable. A typrical $200,000 mortgage would only $751 per month repayment, its only $166 interest only.

The issue was that rates rose to 5.25% which meant that repayment was now $1200 or $833 interest only! Certainly NOT affordable!

On top of this you had the stagflationary effects of high oil prices. $4 gas eats into the money you have for your mortgage repayments does it not? (and income rises were not compensating)

You say the amount of defaults was not that many. Well as of August 2008, 9.2% of all mortgages in the US are in foreclosure or delinquent. Thats circa $1.2 trillion of defaults - thats a lot!!

House prices are a function of the price of credit - while credit was cheap there wasnt an issue. Once it got expensive (or realistic), then it was game over.

The trigger for the expensive credit was inflation caused by, at least in part, to high oil and commodities IMO.

Lets call this one a score draw Chris

[Andy Hunt]

When you look at a chart of global GDP versus oil supply, the clear correlation has apparently broken down in the last 2-3 years with GDP rising much faster than oil supply. Some might (and do) point to this as evidence primarily of oil supply constraint but for me it's more to do with over-exuberant money supply. The real economy (physical goods and services) simply couldnt keep up with the debt. There was not enough real economic activity to invest in and so money flowed into oil and other commodities as a hedge against inflation. This slowed the real economy even more and triggered the US housing debt crisis that started the dominoes falling.

It's difficult to say exactly how much real oil supply constraints were behind the rise in oil. I tend to feel oil was targeted for 'investment' because it was perceived that peak oil was close and global demand was accelerating ahead of supply. I think the supply constraints are still there, but demand has obviously weakened dramatically.

I've no doubt that high oil prices played a part in the present crisis. However it may in this case have been more a feedback to the over-egged money supply, rather than peak oil. I realise that I've somewhat changed my view on this. Earlier in the year I would have defended supply and demand as the primary driver. Now I'm not so sure. From my analysis I'd have said prices should have started falling in mid-June according to the fundamentals I track, but prices continued to rally for another month after that before collapsing. So there's clearly many factors at play.

This sounds like a fair analysis to me, I can understand your perspective on this Tess. But going back to the gap between the fiscal economy and the real economy, surely this is where peak oil makes the difference between a normal recession (or even depression) and the 'long emergency' Kunstler talks about.

In 'normal' circumstances (i.e. with plentiful mineral/energy reserves) the fiscal economy would eventually realign itself with the real economy, with a crash in commodity and energy prices leading to a renewal of economic opportunity and new growth coming through. But if the only incentive to develop 'unconventional' fossil fuel reserves is high prices, then the investment just isn't going to be made, and absolute supply capacity will fall along with the oil price.

So rather than having the space to recover and regroup, the real world economy will be squeezed like grapes in a winepress, and any financial instrument or structure which is not directly plugged into the real economy will rupture and disappear from the system.

In other words, the world economy as we have known it is over, it's finished - it will never recover to a functioning state. Any new economic system will have to be based on something of real value - could be gold, but more likely renewable energy. A sort of renewable replacement for the time-limited petrodollar - maybe even Buckminster Fuller's World (Renewable) Kilowatt Dollar.

If we accept that, then we can see that the 'new' world economy already exists in a kind of unborn state. If we measure the size of the 'real' world economy in terms of the quantity of renewable energy currently being generated in the world, and attempt to extrapolate a trajectory for growth of the renewable energy sector, then have a guess at how fast the timed-out non-renewable economy will shrink, we might be able to get some idea of how long it will take before the world economy returns to a state of growth.

My guess is a few decades if we go all-out for renewables.

Or I could be talking complete nonsense.

[Ludwig]

The whole world is going bust, country by country - the most indebted (except America) first, then everyone else.

This is exactly what POers were predicting years ago, so why the surprise? The whole world economy depends on credit and that means we're all bust, just some buster than others.

Britain will be among the bustest because we haven't been producing anything really useful for decades.

No prizes for being right for the wrong reasons. Peak oilers did not predict the current form of the economic crisis. I'm pretty sure that the economic crisis would be playing out almost identically had oil production increased over the last three years to say 90mbpd and the price not exceeded say $50.

Sorry to be blunt but I think that's nonsense. If the oil price hadn't gone through the roof when it did, the point at which people started defaulting on their subprime mortgage payments would have been deferred by several years.

In the meantime there might have been a recession as investors started saying, "Hang on, this lending situation is going a bit crazy" but it wouldn't have been of the scale of what's happening now, with banks that survived the Great Depression going bust.

Total global energy supply is still increasing - we haven't got to the collapse by failure of growth that POers predict yet, the credit crunch won the race.

Hold your horses - the collapse predicted by the POers was not by failure of growth but by failure of confidence in the possibility of growth.

POers predicted that the crash would be caused specifically by the peaking of oil production, not of total global energy supply. Oil is by far the most useful energy we have and it accounts for most of our transport. If transport is stuffed, it doesn't matter all that much if total energy supply can continue increasing for a few years yet (at a rate, mind you, that is already slowing).

It doesn't make sense to say that the current crisis was caused either "by the credit crunch" or "by Peak Oil". Both PO and the credit crunch have influenced its timing and scale.

On a deeper level, the credit crunch and PO are 2 sides of the same coin. There was always going to be a credit crunch because credit forms the basis of the global economic model, an economic model that is unsustainable given the finiteness of the world's resources.

[SILVERHARP2]

[quote="Ludwig]Sorry to be blunt but I think that's nonsense. If the oil price hadn't gone through the roof when it did, the point at which people started defaulting on their subprime mortgage payments would have been deferred by several years.
[/quote]

Nonsense , The US housing market started turning down in 05 , it was a classic lending bubble, oil was not a player in this except that the credit inflation seeped into commodities as well. The buyes in the US could never afford to make the full payments, they borrowed on the basis of teaser rates which were due to reset hmm... around now, you clearly dont understand the financial situation in the US or you would not have said that this could have been deferred for several years.

[skeptik]

The US, UK, Ireland, Spanish... houses market bubble would have popped if oil was free.

energy is less highly taxed here in Spain - Petrol & diesel significantly cheaper, and have come down since the fall back in crude price.

Electricity is more expensive due to the large push for renewable sources (mainly onshore wind) since the mid 90's. The bubble was due to Spain joining the Euro at the wrong exchange rate plus a monster wodge of subsidies (thank you Germany!) from the EU, as at that time Spain was considered to be 'underdeveloped'. This resulted in a huge input of public & speculative money to the construction/housing industry.

Now money has got tight, the EU dosh has run out and the bubble is busting. Hopefully the million empty dwellings will come down to a point where all the twenty somethings living at home with their parents will (at some point, hopefully!) be able to afford a place of their own.

Finance parted company from the real economy which it is both supposed to represent and facilitate. A lot of the imaginary debt/money which has no underlying real assets has to disappear. I'm sure we all hope that this can be achieved without totally destroying the real productive economy. If it slows growth for a considerable time it might in hindsight be regarded as a blessing in disguise.

[RenewableCandy]

...Any new economic system will have to be based on something of real value - could be gold, but more likely renewable energy. A sort of renewable replacement for the time-limited petrodollar - maybe even Buckminster Fuller's World (Renewable) Kilowatt Dollar.

If we accept that, then we can see that the 'new' world economy already exists in a kind of unborn state. If we measure the size of the 'real' world economy in terms of the quantity of renewable energy currently being generated in the world, and attempt to extrapolate a trajectory for growth of the renewable energy sector, then have a guess at how fast the timed-out non-renewable economy will shrink, we might be able to get some idea of how long it will take before the world economy returns to a state of growth.

My guess is a few decades if we go all-out for renewables.

Or I could be talking complete nonsense.

Assuming that you're not , I can add that the growth rates in the Renewables industry (kW installed of PV, SHW, wind ...) are pleasingly high. 33% and even 50% per year are not unusual. 'Course they're starting from very low, but, what did that chap Bartlett say?..

[Andy Hunt]

Exponential growth in renewables? Marvellous!!

I read somewhere that a small company selling renewables hasn't noticed the credit crunch affect their business at all, they are as busy as ever and getting busier.

When the great trees fall, the little saplings get more light . . .