Peak Oil Baloney

Well there is a peak oil cult currently exemplified by the worriers at theoildrum.com and their latest post, relying pretty much on a correlation between dollar price and US GDP. Hence to them a high oil price equals low GDP. Hence it's basically yet another "doomsday from resource-limits" cult. Well my comment to that is below:

You may be mixing up cause and effect and oversimplifying. Yes GDP is correlated with oil price but that's partly because in a boom more oil is used and in a recession there is a cutback. While I'd accept that a price spike causes a cutback too, the short-term price spikes of 2007 were really caused by over-buying of futures contracts which then corrected the same year. But the reason everyone was buying into oil was because the debt level became unsustainable, the recession was coming, the stock market was diving and the pension fund managers stupidly thought that commodities were a safe haven. Inevitably the speculation corrected and the oil price dropped. The initial price rise from 2001 had of course been caused by the Iraq war and fears of supply.

Of course, we also have the reality that cheap oil allowed globalization by reducing shipping costs which then caused a slump in Western manufacture, so the Western GDP was then propped up only by rising house prices which were in turn based on cheap debt. And of course an economy that depends on house prices to continually rise is doomed to collapse, which is what happened. So it's all a bit more complex than your simple analysis allows for. In other words, correlation is not causation.

Indeed a higher price may actually be better for western economies because:
a) It makes cheap imports more expensive and allows local economies to redevelop their own manufacturing base, which gives real GDP growth from added value, rather than artificial growth from debt.
b) It encourages investments in extraction or gasification of shale oil and extraction of heavy oil, which are both hugely abundant, as even M. King Hubbert [the originator of the peak oil movement] noted, and which in turn ensures a future supply of oil.

Also perhaps a more important correlation is between the price of gold and the number of barrels it buys, which has hovered around 14 barrels per ounce for a century. So it's likely the variance in the price is more indicative of the value of the dollar than anything else.

Lastly, oil is largely used for transportation and plastics so a reduction in oil would not reduce electrical energy output hence it's not quite as drastic as you suggest. There is plenty of coal and gas to keep the lights on and there are also alternatives to plastics which could be used if plastics became expensive. So it's not all doom and gloom! It really depends on how you want to view things!

But there's yet one more aspect that I forgot to mention there. The fact that world oil is bought in dollars means that every country in the world has to keep a supply, so they buy more dollars as the oil price rises. This allows the US to print more dollars without incurring inflation. It's the petrodollar economy that has propped up the USA since the end of the Bretton-Woods agreement and it basically amounts to the rest of the world giving free money to the USA. This willingness for the rest of the world to soak up dollars is why the USA GDP looked so good and why the debt burden didn't seem to matter to all US administrations since Reagan. In their own words, the growing debt was a sign of confidence in the USA and indeed it was. However that confidence is lost if the dollar tanks. That of course would cause all these foreign dollars to be worthless. Hence the rest of the world are partly forced to keep propping up the dollar or lose the value of their reserves. What a dilemma! China, who hold the largest dollar stash, are coping with this dilemma by buying up all the commodities; metals, oil, uranium that they can get their hands on. Basically they will then not have to worry about any dollar crash and may even be the new hegemony in the world - ousting the USA. The Eastern politicians it seems are a lot more clever than their Western counterparts.

Its much more fascinating when you do real analysis rather than just plotting two curves, noting a correlation and dumbly assuming that A causes B or B causes A, rather than C causing both A and B. More false ideas are spread, and even wars happen, because of this fundamental error than by anything else.

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