Anatoly Karlin at Sublime Oblivion has compiled some provocative graphs which suggest that the global peak of oil production has played a large causative role in the global economic meltdown of the past few years. Right off the bat we should look at how skyrocketing oil prices caused global food shortages and price inflation for other necessities, but also how the rising gas prices hurt US Real Estate markets and burst the subprime mortgage bubble. We know how that damage was compounded into the financial crisis and got us where we are, but what hasn’t been studied is the role of oil in originating the breakdown, not to dismiss the role played by lax regulatory oversight, financial mismanagement or straight-up theft by large banks and speculators.

I look forward to this argument on the role of oil being expanded and enriched by an anti-capitalist framework. [alex]

Excerpts from Oily Origins of the Economic Crisis.

Anatoly Karlin, February 18, 2009.

In an article some months ago I suggested that “perhaps this crisis is simply an unconscious recognition of this inconvenient truth?” – namely, the peaking of oil extraction and all that it implies for the continued survival of a financial system built on assumptions of continuous economic growth. In other words, the fashionable approach of focusing on exotic financial instruments, regulatory failures, etc, if a case of mistaking the forest for the trees.

The Oil Drum had a nice graphical summary. According to the author, Gail the Actuary, the chain of causation runs thus:

This explains the extreme severity of the crash – record GDP growth at a time of plateaued oil extraction in the 2005-2008 period was patently unsustainable, so a very big “correction” could not have been unexpected.

And it is quite a correction.

As of the September-November average, global industrial production was plummeting at an annualized rate of -13% and merchandise trade by a truly remarkable -43%. And it is obvious the collapse accelerated since then…

Already far worse than during even the worst month of 2000-2001, the last and only global slowdown for which the IMF has data.

…

Another Oil Drum blogger, Phil Hart, wrote about the dramatic rise and fall in oil prices in terms of simple supply and demand curves…

Oil demand and supply.

His thesis is that because of the geological limits to oil supply, the marginal cost of providing ever more oil is generally low until it reaches some point – say, 85mn barrels a day – and then veers off into the sky (i.e. becomes very inelastic). Demand is also inelastic, since modern society basically runs on oil. Hence there comes a time when the demand curve reaches a point when its intersection with the supply curve – i.e., the market price – starts rising exponentially.

Exponential rise in oil prices; all exponents in a finite environment will eventually overshoot and collapse.

Supply can no longer be expanded to any significant extent, despite the market signals. All we managed was a precarious plateau, the big rate of natural decline of existing oilfields being compensated for by remoter and lower-EROEI sources…

PS Edit: Is it also a coincidence that possible the hardest hit major industry was the automobile sector, with production plummeting by up to 50% in most countries? Particularly when you consider that they are the sector that is most tightly linked to cheap supplies of oil products?

Calculated Risk compiled a graph of the fleet turnover (total vehicles divided by annual sales) to give a historical value for the number of years required to totally refurbish America’s car fleet – from hovering at 13-15 years, it soared to an historically unprecedented 27 years. Projecting this forward, the size of the fleet will decline AND age simultaneously since most vehicles don’t last anywhere near 27 years on the road.

Click HERE for the full article.