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US Peak Oil Adaptation: Prognosis in a Credit Crunch
Stuart Staniford, The Oil Drum
In this post I want to start exploring a hypothesis that is worrying me a lot. Specifically, the possibility that the emerging financial/credit crisis could cause a near-term collapse in demand for energy, energy prices, and investment in energy infrastructure. That in turn could lead to an even poorer failure to adapt to peak oil than we have seen so far, resulting in great difficulties once the economy begins to recover from its credit problems. I'm not claiming to have conclusive evidence for this hypothesis, I am not sure of its truth myself, and this post will only be a beginning of exploring the issues.

Let's first review the situation to date. I began worrying that we might be essentially at peak oil already back in November 2005. This was the date of Ken Deffeyes' famous prediction based on Hubbert Linearization, but my concern was based as much on the plateauing of the monthly oil production series in spite of high prices. As more evidence emerged, I firmed in my view that peak oil is probably about now.

A couple more years of data have not changed the picture much.

...Now, this is probably a worst case for what we might face in the next few years, and there are some reasons to think things will be much milder. But let's just explore it as a worst case. There are two points I want to draw from it. One is obviously to note the sharp contraction in GNP generally from 1929 to 1933. It almost halved in nominal terms, and even in real terms, it dropped by a third. A contraction in GDP of that order of magnitude today would likely produce a very dramatic drop in oil usage (recall the correlation between GDP and VMT growth), which would without doubt collapse energy prices to pre-peak levels for a number of years. In the great depression, the unemployment rate rose from 3% to over 20%. With no income, and likely very restricted ability to borrow, that's a lot of people who wouldn't be doing too much driving.

Furthermore, consider the "Gross Private Capital Formation" element of GNP. That is private investment, and it dropped to almost nothing in 1932 or 1933. Now private investment today includes things like research and development in alternative technologies, venture capital funding of clean-tech startups, installation of wind power or solar power sites, laying down of new railroads, new nuclear power plants, coal-to-liquids plants, development of new oilfields, etc. Recall also the correlation I pointed out between fuel economy changes and economic growth - in a depression, it's a safe bet that average fuel economy of the fleet would simply degrade as few people bought cars and the existing fleet got older and less efficient. In short, whatever your preferred method of mitigating or adapting to peak oil, you can pretty much kiss it goodbye during a major meltdown of the financial system.

This, of course, will not make peak oil go away. Credit crunches and even depressions, as extremely painful as they may be, are inherently temporary. After a suitable time, the offending debt somehow gets written off and offending assets are repriced and the economy resumes growing. However, when this one passes, peak oil will still be there waiting for us. And whatever time we lose in investing in all the things we need to do is an opportunity lost forever.
(2 September 2007)
Posted originally on August 20. Re-posted today, it has gotten even more response (over 200 comments).

Busted: What the Economy and Peak Oil Have To Do With Each Other
Sharon Astyk, Casaubon's Blog
I strongly recommend that everyone here read Stuart Staniford's analysis [above article] of the relationship between the credit crunch and our peak preparations. Staniford is one of the most balanced and careful analysts out there - he's been a voice of moderation and reason among peak oil thinkers. But reading Staniford's analyses over the last year, I get the sense he's increasingly worried.

...Precisely because Staniford isn't prone to panic or overstatement, I think people should take this very seriously. The comments, including the criticisms of Staniford's analysis, also are worth a look - predicting the future is difficult, and Staniford is doing something rather difficult. Staniford's deepest concern is a dramatic reduction in our ability to invest in infrastructure changes, alternative energy, alternatives in transport. If we find ourselves dealing with an economic crisis, our ability to invest on a large scale in alternatives will fall dramatically. And if oil prices fall in the short term due to conservation motivated by us being poorer, it will make alternative energy investment seem like a bad deal - and we don't have a lot of time left on that one.

Personally, in some ways I worry more about demand destruction *not* happening than about its occurrence. Because the reality is that most Americans I know are so deeply tied into the energy system that they will probably cut back in almost every area but their shopping and commute to work. Matthew Simmons, at ASPO this year, observed that demand destruction simply wasn't happening in places like Australia and Kenya, where rising gas prices resulted in people cutting back on other things. I'm sure we'll conserve to some extent. But human beings don't behave rationally, and we've become so dependent on cheap energy that I suspect most of us will give up our meds before we'll give up our cars, let the groceries run out at the end of the month before we turn off the lights.

...For a very long time, I've been making the very simple argument that we're about to encounter "ordinary human poverty." I take the term from Sigmund Freud, who once said that the goal of psychoanalysis was "replacing neurotic suffering with ordinary human misery." Freud's claim is that most suffering it ordinary, normal, human. And I think most of us in the rich world, who thus far have been comparatively isolated from ordinary human poverty, are in danger of encountering it. We're in danger of not being able to put enough food on the table, of finding that after we pay for gas and food and medicine, we're in the hole every single month. We're in danger of getting a little further behind and more desperate each month, of losing our houses and getting evicted from our apartments, and more and more entering the world of the poor.
(2 September 2007)

Bush's Bogus Bailout: Introduction to Tony Soprano Economics 101
Carolyn Baker, Speaking Truth to Power
I'm an historian, not an economist, so anything about economics-macro, micro-whatever, has been as foreign to me for most of my adult life as soil samples from Mars. But several years ago I had an epiphany that shattered my then-left-liberal/progressive world.

I awakened from decades of delusion that I could adequately grasp world and national events without understanding the essential nature of how money works in the capitalist economy in which I live. I realized that until I acquired that understanding, all of the other subjects I preferred to talk about-war, social justice, race, gender, environment, energy depletion, civil liberties, globalization, and many more were inextricably connected with the financial machinations of the imperial beast within whose belly I reside.

Today, I do not claim for one moment to be an authority on economic issues, but I have studied the works of some folks who are, such as Catherine Austin Fitts, Michael Panzner, Michael Hudson, John Crudele, Paul Grignon, and Hazel Henderson.

From them I have learned to more skillfully read the tea leaves of the current economic upheaval that is brewing within the United States and is now rippling into the global financial markets. Furthermore, I have realized that my government and the economy of the United States is being run as a criminal syndicate, and that the most useful way to understand the subprime mortgage meltdown and its implications was to familiarize myself with the economics of Tony Soprano, that infamous main character of the HBO TV series "The Sopranos", Mr. King of New Jersey "waste management" and proprietor of the Bada Bing.

...We have only begun to see the reverberations of the mortgage meltdown. They will be as sweeping and mindboggling as global warming or an earthquake measuring 10 on the Richter scale. Tony Soprano economics aren't necessarily noisy, but they are gargantuan in their reach and ramifications. Global economic meltdown, initiated by the ruling elite of the United States with full knowledge of omnipresent, pervasive global resource depletion-or as some have called it "Peak Everything", will obliterate the American middle class and result in the ownership of the planet by a voracious ruling elite.
(2 September 2007)
I like Carolyn's opening paragraphs about realizing that economics are key. At some point I too realized that to understand the moving forces behind history, I had to look in the financial pages and in the non-dogmatic Marxist analyses (the journal "Monthly Review" for example).

What political figures said, I discovered, was mostly epi-phenomena and window dressing. It was much more important to watch the flows of money and changes in the tax structure. I listened to practical business people and the few skilled investors, like Warren Buffet, George Soros and John Rogers. For general understanding, I found the current crop of mainstream neo-classical economists not very helpful, functioning more as cheerleaders than as real analysts. They can be useful on specific technical issues though. Keynsian economists are due for a comeback. -BA

Can the Mortgage Crisis Swallow a Town?
Nelson D. Schwartz, New York Times
At current rates, analysts expect foreclosure filings to hit a rate approaching heights not seen since the Great Depression.
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TAMMI and Charles Eggleston never took out a risky mortgage, never borrowed more than they could afford and never missed a monthly payment on their neat, three-bedroom colonial in the Cleveland suburbs. But that hasn't prevented them from getting caught in the undertow of the subprime mortgage mess now submerging this town.

Over the last 18 months, the Egglestons have watched one house after another on their street, Gardenview Drive, end up foreclosed and vacant. Although lawns are still tidy and empty homes are not boarded up and stripped as they are in inner-city Cleveland, the Egglestons say Maple Heights no longer feels safe after dark. Nor do they have the confidence they had when they moved in a decade ago that this is the ideal place to raise their 6-year-old twin girls, Sydney and Shelby. So, in May 2006, they put their home on the market in order to move closer to Mrs. Eggleston's parents in another middle-class Cleveland suburb, Richmond Heights.

They have had no takers. Although they lowered the asking price to $99,000 from $109,000, no one has even come to look at it in more than six weeks. "My heart panics every time I drive down the street and I see another for-sale sign," says Mrs. Eggleston, pointing past the placards in front of her porch to others that dot surrounding yards like lawn furniture. "Some people on the street couldn't pay, so they just left. The competition to sell is just ridiculous."

It is a scene being repeated in cities and towns across America as loans that were made to borrowers with little or no credit history, many of whom could not even afford a down payment, fail in ever-growing numbers. It is also a story of how local economic trends are intersecting with national politics...
(2 September 2007)
Contributor Jeffrey J. Brown writes:
This past week, I heard a local radio story about credit card debt, and a woman said that her credit card company had raised her default interest rate to about 33%. I suspect that we may begin to see attempts at wholesale repudiations by heavily indebted consumers of mortgage and credit card debt, and ultimately to some degree taxes. Of course, the Bankruptcy code was conveniently toughened a couple of years ago, but I wonder if we might see some kind of reversion to more of a cash/barter economy.

Economic risk management
Mary King, Trinidad News
My best subject at UWI in the area of economics and mathematics was Statistics and Probability. This gave me the tools to deal with uncertainty and eventually to manage the attendant risks of even day-to-day living.

This tool is fundamental to actuaries, telecommunications engineers, financial fund managers, to the study of quantum mechanics and of extreme value to petroleum exploration engineers.

...The industry players understand the risks and manage these uncertainties accordingly. For example, as Mr Houston of BG recognises, petroleum in T&T [Trinidad & Tobago] will become harder and more costly to find and if found the individual fields will become smaller and smaller and less cost efficient. Thus to manage such risks the companies require more incentives, though the risks cannot be completely alleviated.

Similarly, any government that depends on the proceeds (taxes) from the energy sector has to be cognisant of the risks attached to its cash flow, of the concept that petroleum is a finite and depleting resource. As a result it has to manage the economy to alleviate as much as possible the impact of this risk on the operation of the economy. Our Government has recognised the risk of price volatility in the market, though with Peak Oil the only way for average prices to go, appears to be up, and has set up a Stabilisation Fund.

However, it is yet to acknowledge the traditional exploration risk of the industry which increases with age of the current fields as recognised by bpTT, BG and BHP. We have not found any new gas reserves for sometime now and though we HOPE that there is more out there, the risk (probability) that there is no more is not zero.
(2 September 2007)
UPDATE: Just added.