The Peak Oil Discussion Is Over!

Peak Oil took place in 1998! We can now get on with other business.

This is from Euan Mearns writing about relative effects of energy prices on economic activity. You can see that in 1998, returns on energy as measured in currency (presumeably dollars) was greatest.

This is another chart from Euan showing economic return on energy invested in the USA, only.

This fine chart from Mr Excessive measures oil price with the S&P 500. You will notice the absolutely greatest availability and the lowest price of oil relative to that index was in 1998- 99.

Mr Excessive contends that:

1) a relationship does exist and that a strong downtrend in affordability of energy has been underway since December 1999;

2) the peak shown in December 1999 was the true ‘peak oil’ because after that point oil is less affordable, and will always be less affordable in the future (absent an suitable alternative in sufficient volume);

3) up until 2040 the affordability of oil will continue to decline (IN S&P500/WTI terms) this will cause repeated severe disruptions to the U.S. economy

4) The U.S. is a good proxy for all oil-dependent civilisation and the rest of the world should not be complacent about peak oil or the damage which it will vent on their way of life;

Here’s another take from Chris Nelder:

It now seems possible that we have reached an inflection point in economic history, where the price at which energy is high enough to sustain new production is the same price at which things become too expensive, leaving us no option but to downsize.

This chart is from The Chartstore and Barry Ritholtz. It tracks the S&P 500 as adjusted for inflation. You will notice the absolute highest point was in (drumroll, please) 1998. It’be been downhill ever since. There is a correlation between the rise of the S&P 500 and the availability of energy.

Here’s a take from CNN/Money:

$70 oil menaces budding recovery

As oil prices rise, some say already weak consumer spending is in danger of taking an even harder hit.

Steve Hargreaves, staff writer

NEW YORK ( — Two weeks change a lot in the oil markets.

At the end of May ran a story asking if $60 oil will kill any economic recovery. ‘No,” most analysts said – consumers could shoulder $60 crude, and analysts didn’t see prices going much higher.

Now oil is touching $70 a barrel. Goldman Sachs recently said it sees crude at $85 by the year’s end. With the economy still on life support, oil is drifting dangerously close to being the wet blanket at the recovery’s party.

Many say consumer spending – which accounts for over two thirds of the nation’s economic activity – takes a big hit when crude hits $100 and gas $3 a gallon. Some say it’s more like $125 crude and $4 gas. Others say that during a recession $80 is the breaking point.

There is too much media attention paid to pump price. That cost is at the end of the petroleum food chain. While I do not know what price level causes bankruptcy but it is probably a lot lower than specialists suspect. By my observation it appears that $45 per barrel WTI that starts the damage. Oil is currently trading @ $70 a barrel.

Petroleum energy is embedded in every link of every supply chain of every good and service. Rising energy prices are cumulative. At some point energy costs drive out profits. This rise in price is a business killer.

As mentioned elsewhere, the so- called ‘Green Shoots’ period of (false) recovery took place when oil costs fell to under $35 a barrel and by appearances would decline further. Economies are designed around cheap inputs such as oil selling @ $20 or less.

Expensive energy is not only destroying business but also all structures that depend on cheap energy, such as suburban sprawl, municipal governments, national governments such as the UK and Latvia, as well as retailers, shippers, airlines and real estate developers. Eventually, all businesses will succumb to rising energy costs. This includes agriculture, military, government supported banking and finance as well as the tax revenues that support these efforts.

There is no effective means to outmaneuver this rise in price. Should businesses raise prices to maintain profits and to compensate for increased energy costs, they shed customers. As businesses lose customers, their profits evaporate. If businesses attempt to hold prices the profits disappear. No profits, no business. No customers, no business.

Sending jobs overseas was a tactic to compensate for increased energy costs. (Cheap) labor plus capital plus management expenses plus embedded energy costs leaves a reasonably priced product and a profit. However, outsourcing eliminates customers both in the producing country and among those whose jobs have been relocated.

The backdrop of economic development since 1973 has been uncertain energy availability. To hedge against this, Wall Street invented structured finance and securitization as a mechanism to utilize investor and bank credit to inflate assets so as to provide wealth sufficient to enable participants with collateral to afford energy and energy saturated goods and services at any price.

This experiment was supported by both the US government and by the Federal Reserve – with extraordinarily low interest rates for almost 20 years! While structured finance and securitization did succeed for awhile to create and sustain asset bubbles, the overall cost of the bubbles eventually exceeded both collateral worth and the ability of participants to support them.

The desperate efforts of central banks and governments both here and abroad to revive the asset bubble mechanism is the clearest evidence yet that the central issue of economic malfunction is not credit quality or credit oversupply – problems that would be eliminated by liquidations and writeoffs – but the energy constraints. Inflating credit and asset bubbles allows the creation of (imaginary) asset wealth in amounts required to hedge against the expected increases in energy costs.

With energy costs front and center, the issue now is not WHEN or WHETHER Peak Oil will take place (sometime in the future, when we can then do something about it) but rather, that the energy jig is up.

2 thoughts on “The Peak Oil Discussion Is Over!

  1. Pingback: Denial … | Economic Undertow

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