6 days ago former British PM Gordon Brown warned that unless swift action is taken, the Eurozone crisis will exacerbate in the new year. Another untold story is the oil price, which has recently been creeping up and up. A London based research team recently warned that oil production is about to peak. The phenomenon of "peak oil" is not unheard of, but it has had little coverage in the mainstream media, even though it has been known for decades. Essentially, there comes a point with any natural resource where production enters terminal decline as it become impossible to profitably keep expanding/ sustaining supply. Industry experts and insiders have described an important symptom of peak oil as "the bumpy plateau". This describes a climbing oil price, which when it reaches a certain point causes an economic crash, which destroys demand, and sinks the economy. The cycle repeats itself, over and over, until the economy has restructured itself so that it is not so dependent on the resource. Strikingly, the worldwide economic crash in the fall of 2008 occurred shortly after the oil price reached an all time high of $150 a barrel after climbing quickly in the previous months and years from more like $30 a barrel.
A debt crisis is caused when debtors struggle to repay, and in the case of European governments, this is due to a lack of growth in the economy, which has dampened tax revenues in the recession, leaving a deficit. The current monetary system works on an infinite growth paradigm, because debt (money) is created on the assumption that it will be invested in a profitable venture (housing, business, etc), but since all money is loaned into existence with interest, banks must expand the money supply to keep the economy liquid. This is easy in the good years, but in a recession, savers will draw on their existing bank reserves to get by, which has meant recently that there is not enough lending, which has driven up bond yields (interest rates on government debt). The concern is that there is no end in sight. Governments seem trapped because they must maintain economic growth, but cut the deficit at the same time, and there doesn't seem to be away to have austerity without taking the demand out the economy. The hope is that quantitative easing and low interest rates will stimulate a private sector led recovery to fill the gap, but this ignores the oil price. Oil plays such a fundamental part in our whole economy, it is used in transport, agriculture, the pharmaceutical and chemical industries, in the manufacture of plastics, resins, hardware, you name it. So a high wholesale price of oil can be very damaging to business. Consumers in the UK are insulated because most of the petrol/diesel price we pay at the pumps is tax, so we do not feel the pain so badly, but recently high food price inflation is probably due to the rising oil price because there is a lot of derived demand for oil from food. After the 2008 crash, the oil price also shot down, but now it is climbing again. It recently reached a high of $90 a barrel, and if it continues at its current rate we could end up in the same worrying situation in a year or so. Remarkably, everything that is happening in the markets today is exactly as the sustainability community has predicted. When the media claims that nobody could have predicted the 2008 crisis, they were wrong. When governments claim that growth is the solution to the current debt mess, they are also wrong, because in the short term, growth will only add to demand for oil, jack up the price, and crash the economy again. In the short term, what we need is a transition, but a transition to a less hydro-carbon intensive economy is going to take a long time, so we might well face another world economic crisis in the next two years.
In fact, I need to make a correction, of course, it was the Wall Street crash that occurred in autumn 2008, whereas the financial crisis itself had started long before, with the collapse of Northern Rock in 2007. What we have seen recently is other big banks needing bailouts, for example, Anglo Irish bank recently gave the Irish Government such a fiscal headache, they later needed a bailout from the EU and the IMF totally nearly E90billion. This could be the financial crisis of 07/08 starting to repeat itself. As for the oil price again, the world simply cannot cope with a price that is too high, because nearly every product and service that gives a value to the economy is dependent on oil. All projections for oil demand are misleading, for example, the International Energy Agency forecasts a roughly 30% increasing in demand over the next decade, mainly fueled by growth in developing nations. However, demand is not what we should be looking at. Of more relevance is supply. Whilst we may be able to buck the downward trend in crude production from more conventional reserves for a few years by exploiting tar sands and deep water reserves, these sources have a high investment/return ratio, so even if we can utilize them somewhat, they will only add to the price of oil. Currently, there remains a small gap (about 3 billion barrels above demand- which is 84 million a day) between supply and demand, but this will only erode quicker as economies grow, because the price would suggest that we can no longer expand supply whilst maintaining the same cost. Industry experts tend to agree that new types of oil can only offset the decline in old sources for six years at most. The next six years look to be economically turbulent as a result, so we should take Brown's advice and brace ourselves for another crisis in the new future. The difference is, it may be far worse than even he imagines.
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