James Kunstler -- Clusterfuck Nation
Oct. 9, 2006 -- Against the background of everything else happening in the financial
markets is the apparent circumstance of peak oil. Even The New York Times joined the chorus in a Sunday editorial, saying:
Our
demand for petroleum products strains the limits of the global capacity
to supply them. In past decades, if a pipeline broke in Nigeria, Saudi
Arabia might compensate by setting workers to pumping more oil. Now,
with little additional capacity, rising prices are necessary to balance
out supply and demand.
No more increasing capacity = peak oil.
It's as simple as that. We now have nine and a half months of
"rearview mirror" action to look back and see that world oil production
has retreated from its all-time high of just over 85 million barrels a
day (m/b/d) achieved in December 2005 (just as geologist Kenneth
Deffeyes of Princeton had predicted). For 2006, production has remained
in the 84 m/b/d range every month reported so far, while demand has
exceeded that.
Texas oil man Jeffrey Brown, a commentator at TheOilDrum.com,
the outstanding oil discussion group on the Internet, makes the point
that Saudi Arabia is at the same point statistically (in terms of
ultimate recoverable reserves) that Texas was at in 1972 when
production there peaked. The world's four greatest oil fields are in
depletion (Burgan [Kuwait], Daqing [China], Cantarell [Mexico], and
Ghawar [Saudi Arabia]) and these have accounted for over 14 percent of
the world's oil production. (Ghawar alone accounts for over 60 percent
of Saudi Arabia's production.) The North Sea has peaked and production
there is "crashing." Venezuela has peaked and its oil is shitty heavy
crude. Indonesia (an OPEC member) has peaked and is now a net oil
importer. Nigeria's political chaos is making production increasingly
difficult-to-impossible. Production in the Canadian tar sands is not
making up for losses elsewhere. The US is down to about a four-year
supply of conventional crude and condensates while we import 70 percent
of the oil we consume. Discovery of new oil (including Chevron's
largely hypothetical deepwater "Jack" finds) is barely covering a
fraction of the world's consumption. So it goes...
Where
finance is concerned, the basic implication of peak oil is pretty
stark: an end to industrial expansion (i.e. "growth"). All the
alternatives to oil will not keep the industrial economies expanding --
they can only slow down a contraction, and only marginally so. The
trouble with this picture is that finance is a system that uses paper
markers to represent the hope and expectation for the expansion of wealth.
These markers are currencies, stocks, bonds, option contracts,
derivatives plays, and other certificates that are traded in open
markets. If there is no longer any hope of increased wealth in the
world, then all those tradable paper markers become losers. Their value
unwinds and imagined piles of wealth evaporate into thin air.
The unwinding process depends on the psychology of the people who
own these certificates. If they do not understand the global oil
situation and its implications, then they will continue to hope for and
expect expanded wealth, and thus continue to regard their paper
certificates as credible markers of value. And that is largely the case
at the moment, since most of the playas in the financial markets are not paying attention to the peak oil story, or don't believe it is for real.
Two special and transient circumstances are now propping up the
financial markets. One is that for practical purposes the world is
virtually at peak, meaning this is an extra-special time of strange
behavior (like the point in the apogee of a steep sub orbital flight in
which passengers become momentarily weightless). Supply and demand for
oil are only beginning to go out of whack (that is, demand just barely
exceeding supply). Even at this early stage, the oil markets themselves
are showing stress, as hoarding behavior sets in and induces wider
swings of price volatility. But these swings in oil prices -- such as
the one we're in right now, where prices have crashed 20 percent since
the panic buying (hoarding) of June and July -- send false signals to
the financial playas. The main false signal is that all is well on the
global oil scene... there's no real supply problem... and hence no threat
to the continuing expansion of industrial production and its associated
wealth-generating activities. This signal just tells the playas to buy
more paper markers. Thus, the stock market goes up.
The second special and transient circumstance is
that so much wealth has already accumulated along the way to peak, that
financial markets take on a life of their own -- as existing wealth
"invests" itself in more paper markers hoping and expecting to "grow"
into even more wealth. The problem here is that existing wealth is
actually being squandered, since the paper markers will only lose value
as the hopes and expectations vested in them dissolve in
disappointment. But we haven't quite reached that point yet.
In simply bidding the markets up, the system has spun off even more
gobs of presumed wealth. Some of this "liquidity" -- say, in the
checking accounts of people who work for Goldman Sachs -- has found its
way into Manhattan condominiums, or Aspen McMansions, and filtered
through the system to everyone from the lawyers who write up the
pre-nuptial agreements to the guys who sell the furniture to the people
who drive the delivery trucks that bring it to the door, to the men
laying tiles in the new bathrooms.
The basic insanity of a
system that presumes vastly increased wealth where none will occur, has
led to further distortions in finance. The most obvious one is the
so-called housing bubble. The misplaced extreme expectation in the
ever-increasing value of paper wealth, led to the hijacking of
mortgages by financial playas who bundled them into odd lots of
tradable debt (promises to pay) and used them to leverage abstruse bets
(hedges) on the behavior of other kinds of paper markers (currencies,
interest rate differentials, commodity prices) -- very profitably as
long as all playas believed that industrial societies that run all oil
would continue to grow, to produce more wealth. The level of
abstraction in these rackets -- their distance from the reality of
productive activity --is self-evident.
But they were so
successful that the profligate creation of ever more mortgages became
an increasingly reckless and irresponsible enterprise. Contracts were
made with house-buyers who had no record of credit worthiness and often
no real proof of income. Contracts were made on terms (interest
payments) that were deceptive, even ruinously false, for the
house-buyers. The reckless reassignment of lending risk into ever more
abstract layers of deferred obligation, and the ease of credit that
ensued, allowed millions of ordinary people to acquire real property on
unrealistic terms, which had the affect of bidding up the price of
houses that these owners will eventually have to surrender for
nonpayment.
That process is now underway. The reckless
creation of mortgages had the further effect of stealing demand for
house-building from the future. So many new houses were built and then
sold to people who will probably have to surrender them, and then so
many more beyond that were built in the expectation and hope that
reckless mortgage creation would continue forever, that there is now a
massive over-supply of total existing houses while the pool of suckers
for new ruinous mortgages has shrunk to zero.
Similar
excesses in all the other lending and debt sectors, including
"non-performing" credit card obligations and government deficits, will
also unwind and thunder through the system.
Meanwhile, the
false signal from the oil markets that has been broadcasting for eight
weeks will come offline and a new signal will come on as prices go back
up. The pause in bidding for future oil induced by the panic
over-buying of the summer will end. The heating season is here. It's 40
degrees out in upstate New York this morning and the furnace is
cranking. The Chinese and the Indians and even the people in France
have not stopped using oil, even if Americans have put their Winnebagos
up on blocks for the season.
As the price of oil goes back
up, the financial markets will get a new signal that running industrial
societies has just gotten more expensive again. That will dampen hopes
and expectations for increased wealth from these societies. Meanwhile,
the air will be coming out of millions of mortgages, and the loss of
value will spread among playas holding these bundles of mortgage debt
(i.e. promises that money spent on houses is being paid back, which it
won't be). At the same time the houses themselves will lose value as
the pool of potential buyers shrinks to nothing. That is, the inflated
value (high price) of these assets will deflate.
As this
occurs, there will be far fewer wage-earners putting up additional
houses, fewer furniture sales, fewer trips by delivery truck drivers
and fewer tile-jobs in the McBathrooms.
This is why I view
the fall melt-up of the stock markets as a swan dive. We're at the
apogee now, just as the world is at the apogee of its oil production. I
confess, I thought the reality of our economic predicament would be
recognized by the playas and their markets sooner than it has. It turns
out the the chief luxury of the final cheap oil blowout has been the
artificial support of unrealistic hopes and expectations.
LINK: Clusterfuck Nation
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