Wednesday, January 05, 2011

The Financial Crisis was NOT caused by Peak Oil

Personally, I mark the "public" moment of this financial crisis to July 2007, when two Bear Stearns hedge funds were both completely wiped out. Neither had anything to do with oil or oil trades. Both were highly leveraged funds that were simply in way over their heads. And those funds were symptomatic of the entire financial industry at that time.

The signs of the impending collapse had been building for a while. A few people had been pointing to the "Greenspan bubble" as early as 2005. I freely admit that I missed those calls in the 2004-2005 period but I won't deny that some people did make them. And that was well before oil prices spiked. So the fix was in long before.

The Greenspan bubble (or the last Greenspan bubble) came in response to the dot-com bust which was caused by the prior Greenspan bubble. See a pattern here yet? That prior Greenspan bubble happened during the era of $10 oil. Peak oil didn't burst that bubble either. The bubble popped because all such bubbles pop. And the reason it popped was nothing to do with oil prices and everything to do with herding behaviors as the herd recognized in a very short time frame that they had been sold a bill of goods.

Likewise the current bubble burst as toxic mortgages began failing causing the MBS based on those securities to fail, leading to catastrophic losses, starting with (for example) some of those hedge funds I mentioned. Again, this had nothing to do with peak oil and everything to do with herding behavior, as the holders of MBS began to realize that these securities would never pay back the capital invested in them, let alone the interest promised. None of these people cared about peak oil or were formulating positions based on peak oil. They were simply interested in recouping their capital and hopefully their promised profits, but if not, at least their capital. Instead they suffered massive losses of capital and zero profits because the financial instruments involved were created deliberately as acts of fraud by the banks that created them.

Did Peak Oil cause the Great Depression? Did Peak Oil cause the dot-com bust? Did Peak Oil cause the Tulip mania? Did Peak Oil cause the large recession after the Civil War? If it did not (and it did not, trust me) then why should I believe that "this time it's different"? The onus of proof is on those making the extraordinary claim that Peak Oil caused this recession. Yet I have never seen real proof that this is so. Sure, you can point to some correlations between oil price and financial crisis, but I can point to correlations of oil price and prior financial crisis before oil peaked in North America. Correlation is not causation. To establish causation requires a whole lot more work than just plotting a graph showing correlation and then proclaiming "See!" And that, so far, is all that anyone has done.

Peak oil will place a hard cap on the scope of recovery of the global economy, since the global economy is based on fossil fuels (primarily oil). That hard cap will limit and frustrate all political responses to the financial crisis and in the end, peak oil may be part of the cause of the fall of some governments over the next few decades. The natural limits to growth that we are approaching are going to affect us. Those limits were already impacting businesses that deal with energy and will slowly creep out to impact all of society. But peak oil did not cause human greed to run rampant. And peak oil won't stop human greed from trying to run rampant yet again someday. Remember that.


Pops said...

It's easy to make blanket statements either way.

In the Central Valley of California, cheap gasoline prices through the '90s allowed the drive-till-qualified leap-frogging to extend from San Francisco all the way down the valley to Merced county 2 hours away. Each successive community saw their property values skyrocket as the previous boom-town residents decided to commute from a bigger house.

I'd have a hard time believing that gas prices there rising from 98¢ to $4 a gallon had no effect on making that one of the biggest home value black holes in the country.

Greyzone said...

While it may be easy to make statements either way, the fact remains that there are trillions of dollars in outright fraudulent Mortgage Backed Securities that were sold to the public by a financial industry that knew they were fraudulent and toxic.

That factor, by over an order of magnitude, is the primary cause of the recent economic troubles. Could oil prices have been the "pin" that pricked the fraud balloon? Possibly, but eventually that balloon was going to pop one way or another. And, in fact, the balloon began to pop clear back in mid-2007, long before we'd reached the heights of oil prices, as those two Bear Stearns hedge funds that lost 99%+ of their capital were the first casualties of the financial fraud bubble bursting.

I am not saying that peak oil is unimportant. It's very important but it was not the primary cause of the recent financial crisis. Greed and fraud were the cause. Peak oil now simply sets a ceiling under which global civilization is stuck.