2008 all over again? (from Richard Heinberg’s blog)

(see the original blog post by Richard Heinberg here)

As oil prices reach $100 a barrel for the first time since 2008, many people are wondering whether 2011 will see a replay of crashing car sales, nose-diving airlines, and fuel-starved farmers. Food prices—which these days move almost in lockstep with oil prices—are already at frightening levels, leading Lester Brown of Earth Policy Institute to warn of “The Great Food Crisis of 2011.” 

But there are differences, now versus then. In 2008, the US economy was in the early stages of the biggest credit unwind in world history. Financial wizards had built an upside-down pyramid consisting of giant layers of derivatives (hundreds of trillions’ worth) resting on smaller layers of mortgage-backed securities, themselves balanced precariously on a capstone consisting of millions of home mortgages taken out in recent years by American families. House prices shot upward in the early years of the decade, based largely on the availability of no-doc and subprime loans, and rising home equity enabled households to spend the US economy into a brief bout of ersatz consumer prosperity. When house prices leveled off and started to decline and many home loans went sour, the entire pyramid shook and shuddered. It was saved from total, crushing annihilation only by the injection of trillions of dollars’ worth of government bailouts, stimulus packages, and loan guarantees. The creaking edifice is still teetering.
 
As that financial drama unfolded, speculators fled for safety toward commodities (including oil and wheat), helping drive up prices. But $150 oil dramatically worsened the credit unwind, as the car companies and airlines neared insolvency.
 
The year ended with the world economy on life support, energy demand way down, and oil prices at $35. It was a rollercoaster ride nobody wanted to repeat.
 
Now, in 2011, the global economy is still feeble. The “recovery” seen in the US over the past few months (amounting to about $700 billion in GDP growth) is entirely accounted for by government transfusions of about $700 billion in stimulus and bailout money. But further cash injections are politically contentious as interest payments on government debt add up. Meanwhile state and county governments are laying off workers by the thousands due to falling tax revenues. Even without another oil spike, the US economy looks fragile at best.
 
Greece and Ireland have required bailouts from the EU (read: Germany), and it looks as though Portugal may be the next patient in line. But Germans are wary of refinancing more neighbors’ debts.
 
The only bright spot (if you call massive CO2 pollution bright) has been China, with its 10 percent annual GDP growth. Yet that country has a giddily unsustainable energy economy based on only temporarily feasible rates of coal consumption . . . as well as a home-grown real estate bubble. The whole project is based on an export-led economic model pioneered by Japan—a country whose legendary growth ended in a spectacular stock market and real estate crash followed by two decades of deflation.
 
Now, add political unrest in the Middle East. The nations in this region are largely barren, and able to support only a small percentage of their current (in most cases rapidly growing) populations with indigenous agricultural production. Autocratic leaders—most of them traditionally supported by the US—have been living on oil wealth, largely kept for their personal benefit, while doling out just enough goodies to keep the rabble placid. 
 
Skyrocketing oil prices have put excessive wealth into these leaders’ pockets, while making food and fuel less affordable for the masses. The result: riot and revolt.
 
Meanwhile, the bailing out of fabulously wealthy bankers at the expense of social service payments and government salaries and benefits has led to similar expressions of public displeasure in Greece, Ireland, and Wisconsin. More of this is sure to come.
 
Altogether, 2011 looks to be potentially an even more crucial year than 2008. Libya’s oil production will likely fall to near zero, whatever changes in government occur. The Saudis promise to replace that 1.5 million barrels per day of production from their own spare capacity, but recent history leads some observers to question whether they really can. And Saudi Arabia faces its own potential for domestic unrest (hence the announcement of $36 billion in new social spending in that country just two days ago). We may again see a brief oil price surge to $150a barrel—perhaps even $200—this year, but if this occurs it will trigger a massive recession and financial crash that will prompt further revolt and revolution around the world. But of course the recession will dampen demand such that oil prices will once more collapse, causing further instability in the Middle East.
 
These times just get more and more interesting.
 
(Some of the ideas in this essay are borrowed from an email exchange with Colin Campbell, to whom the author extends his thanks and best wishes.)
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  • http://overthepeak.com/wordpress/ Mystic

    2010 was surprisingly stable. Many people had the feeling – `things are too quiet, something is going to go wrong`.
    Well 2011 is here and the Arab World is `going wrong`.
    For most people it is enough to point out the ramifications of this new `going wrongness`.
    But, I would just like to say that I think things are still too quiet…..and I fear more things going more wrong.
    Hello Linda.
    Funny things people, aren’t they~?

    • Anonymous

      Hello, Nick.

      Yes, we are that, aren’t we? We are at least that… ;-).

    • Anonymous

      The calm before the storm…

  • http://overthepeak.com/wordpress/ Mystic

    2010 was surprisingly stable. Many people had the feeling – `things are too quiet, something is going to go wrong`.
    Well 2011 is here and the Arab World is `going wrong`.
    For most people it is enough to point out the ramifications of this new `going wrongness`.
    But, I would just like to say that I think things are still too quiet…..and I fear more things going more wrong.
    Hello Linda.
    Funny things people, aren’t they~?

  • Stevo

    In 2011 I’m particularly taking an interest in seeing how corporations behave towards each other.

  • Anonymous

    Just a few quick thoughts about how reduction in Libyan oil might or might not lead to a monetary crisis similar to 2008:

    It’s the Euro this time

    Most of the Libyan oil is sold to European nations (see http://dawnwires.com/wp-content/uploads/2011/02/20110226_WOC263_0.gif). Twelve of the fifteen top US suppliers are outside of the Middle East. I believe that most oil contracts are for future delivery at a given price. U.S. oil supplies more secure and are not going to be squeezed like the European oil supplies.

    Spare capacity my ass

    OPEC is believed to have 5 million bpd of so-called spare capacity. Most of that space capacity is the 3.5 million bpd claimed by Saudi Arabia. Let’s do some math? The Saudis are producing about 9 million bpd and claim to be able to produce about 12.5 million bpd. In the last decade, the Saudis have not been able to produce much more than 9.5 million bpd (see http://static.seekingalpha.com/uploads/2010/7/27/saupload_saudi_arabia_crude_oil_production_2001_2010.jpg). Spare capacity is being overstated by the Saudis and everyone else too.

    Sweet or sour

    Libyan crude is light sweet crude. The ERoEI on light sweet crude might be 30:1, but on heavy sour crude it might be 10:1 or as low as 3:1. It will take spare capacity of between 5.1 million bbls and 17 million bbls of heavy sour to replace Libya’s 1.2 million bbls of light sweet.

    Almost all of that Saudi spare capacity is sour crude. The Saudis pre-refine their sour crude to sweeten it. The alleged spare extraction capacity may be a secondary issue to their pre-market refining capacity.

    Refining it

    As I understand it, 45% of worldwide refineries can handle sour crude; 75% of U.S. refineries can handle sour crude. Sour crude refineries are already working at roughly 90% of capacity and can increase production much past 96%. Handling sour crude doesn’t just require more energy, but it slows down the refining process. Rapidly increasing capacity using sour crude may not be possible.

    It isn’t about the oil, it is about the money

    Oil is such a fundamental and large part of the economy that even small increases in price, whether they are due to actual interruptions of supply or mere speculation, can trigger a rapid and massive demand for addition credit; that is what happened in 2008.

    All of those U.S. dollars setting around in European banks will now be needed to buy high-priced oil from OPEC nations. If Europe needs more U.S. dollars, they will need to expand their own money supply (aka expand credit) and buy dollars off the world market. The U.S. dollar will gain strength on the world market which will defeat the best efforts of the Federal Reserve to devalue it and restore the trade imbalance.

    OMG, this gets complicated fast!

    The European central bank appears to be maintaining a tight money policy. The scramble for Euros is on and the Euro looks strong but it isn’t … if this policy is maintained it will destroy Europe! On the other hand, if they loosen up the thumb screws and let the speculators loose on the oil market that might destroy Europe too. I’m sure the Germans will come out of this ok, even if the PIGS get butchered and served up dinner.

    The Fed is doing its best to expand U.S. credit and the dollar looks weaker than it is. The U.S. money lenders will cash in as they rent money to the world to buy oil at a higher price. This won’t help common people in the U.S. but the wealthy will get wealthier and the capacity of the U.S. to buy stuff abroad will go up even as the capacity of the U.S. consumer to consume it goes down. I guess the wealthy will have to consume more to make up for what the rest of us can’t afford.

    Maybe I am overanalyzing this? Time for my meds again!

    • Anonymous

      Thanks for the numbers