The talking heads on television are the leaders of an
overwhelming chorus of opinion that says, this financial crisis was
caused by loose lending practices.
But what caused loose lending practices?
The answer will be obvious to those who specialize in risk
assessment. Overall loose lending practices are
caused by a loose belief that overall growth is inevitable.
But here comes the fringe peak oil crowd warning of doom and
gloom when it comes to infinite growth. In fact,
the crowd can even now prove that cheap oil production has likely
peaked in all but three countries in the world: Kuwait, Iraq and
Saudi Arabia.
The immediate assumption is that this should cause oil prices to
go up. But hold on to your hats, crude oil
prices have actually collapsed.
To understand this, one must go back to 1980 and investigate
production and consumption reactions to weak
economies. According to the United States Energy
Information Administration, consumption dropped 7% from 1980 to
1983 and did not recover until 1987, where consumption rose
consistently until now. During the period from
1987 to 2007, consumption rose about 36%.
On the production side, in the period from 1980 to 1983,
producers managed to drop production at an even greater rate to
demand, by 11%, suggesting that there was significant flexibility
at that time. However, in that same period from
1987 to 2007, production rose only 29%, suggesting that production
has not kept up with demand since then. This is
despite America’s increased influence in countries such as
Kuwait.
The long term picture shows a production rate that will
ultimately not keep up with consumption at the current
rate. The short term picture should remind us of
the period around 1980, where a temporary loss of yearly demand
caused a multi-year fall in oil prices.
But the pundits have lost an irony in all
this. It was clear around 1980 that there was an
“oil crisis” which helped cause an overall financial
malaise. Today, it has been particularly lost on
the crowd that soaring oil prices was what began this entire crisis
to begin with. $150 oil put the brakes on
economic growth and ultimately led to a financial catastrophe.
Today, as a result of worldwide deflation and an economic
slowdown, oil demand has dropped and may continue to drop as long
as the economy remains weak. Crude oil prices
could continue to stay low and cause an even greater apathy when it
comes to energy concerns.
Meanwhile, if production quietly peaks in Saudi Arabia, the next
time oil demand rises – however distant that may be - the
world will finally come face to face with the reality of permanent
expensive crude oil. But hey, the point is we
may still have years and years before that becomes a reality.