Baraka_Guru

This week I heard an interview of Jeremy Rifkin on the CBC. He recently wrote a book entitled The Empathic Civilization: The Race to Global Consciousness in a World in Crisis.

For those of you who don't know, Rifkin is a high-level adviser for both U.S. public policy and the EU with regard to a number of issues (see below).

One of his claims: peak oil prices are to blame for the economic crisis. When oil peaked at $147/barrel, the current world economic system started grinding to a halt until the prices dropped again.

He coins the term "peak globalization," which refers to the situation where, back in the '70s, if we were to divide up all the oil reserves equally to everyone on the planet, this equal share would have hit its highest value. The problem? The population is growing faster than oil reserves. As time goes on, we have less oil available to us per capita. This is different from "peak oil theory," and I think it's more significant, and it helps explain what happened when oil hit its peak price and the markets recoiled.

He explains this and more in this fascinating speech he conducted at Google:

To go into his ultimate position here would take too much, so I suggest simply watching the video and maybe commenting on what strikes you.

Also, have a look at this:
Energy and Our Future | Jeff Rubin: Oil Prices Caused the Current Recession

You will see a chart showing the correlation between oil prices spiking and global recessions. Jeff Rubin is another interesting figure on the topic of oil and our future. He used to be a high-up economist for a major bank in Canada before he quit to publish and promote his book Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization.

Both of these guys are making similar claims: the world as we know it must/will change, and this change is rooted in oil and how we use it.

Rubin's claims include oil reaching $200/barrel (his many economic predictions have come true, with a few exceptions). When this happens, he sees globalization collapsing and localized industries taking shape, i.e. no more glut of cheap Chinese imports.

It's not peak oil we should worry about; it's peak globalization.

• What do you think of all this?
• Do you believe globalization is at risk?
• Do you think we, as a species, are capable of mass change to accommodate these predicted challenges?
• What out of all of this strikes you the most?
• Are they as interconnected as they seem?
• Do you have anything else to add?

Do you see the end of our current industrial age and the ushering in of the Third Industrial Revolution (Rifkin)?

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

ASU2003

I'm still not 100% convinced it wasn't the investors and speculators who drove the price of oil up that high. There was a lot of money that needed to go somewhere once housing started looking maxed out.

But, I think this is a reason why we are seeing the government, energy companies, and individuals investing in renewable energy generation. The problem is that when I stop using gas, it will just lower the price for someone else and will let them consume more.

Baraka_Guru

This is a good point; even still, you get this situation where it's likely that price pressures result from a) investors and speculators, b) peak globalization (i.e. a diminishing oil per capita), and c) emerging markets (such as BRIC).

This essentially means that $147/barrel is still a distinct possibility. If it happens again, what will the effect be even after a post-subprime economy? The impact of costly oil (and demand will pick up when the global recovery expands) will rear its ugly head again unless we do something about it.

But is this a bad thing? I think we must admit there will be a transition stage where people will stick to oil while many move on to renewable sources. I think it's inevitable. You can't expect to get everyone on board. We're still using coal, after all.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Willravel

That book's been on my list. I can't wait to finish what I'm reading now so I can jump into it.
I like Rifkin a lot, but I've been following the economic crisis almost obsessively and I haven't found any indication that peak oil was critical to the crisis.

Just briefly, as I don't want to jack Baraka's thread, I'll try and explain what I interpret is the problem:

Let's say you have two mortgages (or any loans, really) of equal value and risk. There's a 90% chance that the loans will be paid in full, and the loans are each for $1,000. Anyone familiar with financing will know that a 10% chance is quite risky. Because these are two different homes in different states in different income areas, it's safe for me to consider them independent. And, of course, the odds are the same for both mortgages. I, a bank, own these and have priced them at $900. Not a very attractive investment, right? Too much risk for not a lot of reward.

Aha! Securitization... I put my two mortgages into a portfolio and apply delicious mathematical statistics. There's an 81% chance that all $2,000 will be paid, an 18% chance that $1,000 will be paid, and there's a 1% chance that nothing will be paid. Using my portfolio as a backing, I can—via securitization—create two new bonds, which are claims on the portfolio. The first bond pays the holder $1000 based on the original portfolio. The second bond pays $1,000 if the first bond pays off completely and there is still $1,000 more. I've created two different securities, a very attractive security and a rather ugly security. You see the probability of the beautiful bond being paid is 99%, whereas the ugly bond has a 19% chance of defaulting. Ouch.

These beautiful bonds will undoubtedly be rated AAA (or the highest rating; a very, very, very low default rate). On top of this, I can buy insurance on these 1% AAA bonds, which means that, in the event of default, the insurance will pay. Who am I using? A big, stable insurance company like AIG (what are the odds AIG goes under?!). The ugly bonds, on the other hand, would probably be something like BA, or below investment grade. It's actually illegal for entities like pensions, insurance companies, and money market funds to purchase these BA rated bonds.

So from two unattractive bonds I've created a truly gorgeous bond which will make me rich, and I've made ugly bonds which will be bought up by hedge fund managers that are hungry for rolling the dice. Hedge fund managers can get a 20% rate of return if they get lucky, which is like getting a straight flush.

What could possibly go wrong? One of my assumptions was a mistake. You see, there are correlations between these two mortgages even though they're separated by thousands of miles and in basically every way distinct. When the national housing market starts heading downward, suddenly there are nearly direct correlations between otherwise independent mortgages. That means the AAA bonds and the BA bonds have the same odds of failure, around 10%. Hedge fund managers are doing GREAT, but those who jumped on the AAA bandwagon—banks, insurance companies, hedge funds—are screwed. AIG, unable to back all the securities, is screwed. The market breaks down.

Why did the housing market drop? The bubble that started 20 years ago inevitably popped (something which I doubt was caused by gas prices).

Sorry, that was a bit longer than I anticipated. If you want more info, google Dr. Andrew W. Lo of MIT.

• What do you think of all this?

I think globalization is a massive risk, but I'm not convinced that it's as big a threat as simple growing population vs. our ability to deal with the consequences. That, above all else, is our greatest threat. We have met the enemy, and he is us.

• Do you believe globalization is at risk?

Certainly. Until we are a well-established interstellar community, globalization seems premature.

• Do you think we, as a species, are capable of mass change to accommodate these predicted challenges?

Capable? Yes. Will we? Almost certainly not. As capable as we are, we also have a magnificent talent for self-deception and cowardice.

• What out of all of this strikes you the most?

I need to get to work on my garden and rainwater reclamation a bit sooner than I'd planned.

• Are they as interconnected as they seem?

No, but I still think they're both very important.

• Do you see the end of our current industrial age and the ushering in of the Third Industrial Revolution (Rifkin)?

Not without collapse.

Baraka_Guru

I think the basic argument that Rifkin and Rubin make is that oil prices affect the prices of many things: gasoline, food, clothing...basically anything that requires transportation. This also includes anything that requires energy for production. This also includes anything that uses oil or oil products as materials...etc., etc.

Rifkin specifically states that the spike in oil prices led to a spike in the cost of living. If your cost of living spikes, it becomes difficult to pay your mortgage, especially if you lose your job.

The mortgage crisis was a huge factor in the economic meltdown, but I'm becoming more convinced that oil prices triggered the problem. Remember when people were complaining about gas prices? Remember businesses becoming concerned about people not travelling/vacationing, etc. Remember when rice prices hit news headlines?

These things are more connected than I previously assumed.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Willravel

To a certain extent, everything is interconnected. Still, oil itself did not cause the mortgage bubble or subsequent collapse. The mortgage bubble's main cause would be deregulation in the 1980s and the subsequent moves by financial institutions to turn homes into risky investments; things to be toyed around with en masse via the market. That, more than anything else, set us on our course which always was going to end with a burst bubble with or without the oil price spike in July of 2008. Remember, oil prices were rising more steadily until mid 2007 when they started to skyrocket. While this could be an indication that Hubbart's Peak is upon us, it's connection to the financial collapse would seem to be chronologically off.

Baraka_Guru

I think the mortgage bubble is a huge factor, but I also am increasingly believing that it was burst by the fact that the CPI spiked when oil prices did. I remember when rice prices hit the headlines and it was causing turmoil. I remember near-daily news articles of people griping about how oil/gas prices where making it difficult for them financially. Couple that with a mortgage that you can barely afford to begin with, and it won't take much to get into a tight spot. What were interest rates like at the peak? I can't remember, but a boost in rates coupled with peak oil prices would be a recipe for disaster for many already stretched too thinly.

Yeah, the combination of peak oil and peak globalization puts overall economic growth at risk. I'm interested to see what happens when the global economy gets back on track and demand for oil increases again. Let's see what the summer months bring.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

Willravel

I'm not sure it will get back on track, at least the same track we were one. People (online, so take this with a grain of salt) are saying summer of 2010 could be the same as summer of 1931.

Baraka_Guru

Well the price of oil has already recovered nearly half of its drop from 08/09, and to think there's been a recession going on. What will happen when things are "normal"?

I'm curious to know if problems will arise if it hits an all-time high again. There isn't anything indicating that the price of oil will remain at this level for long....mostly pressures for it to rise.

__________________
Knowing that death is certain and that the time of death is uncertain, what's the most important thing?
—Bhikkhuni Pema Chödrön

Humankind cannot bear very much reality.
—From "Burnt Norton," Four Quartets (1936), T. S. Eliot

twiligh1720

we were warned about global warning but whats the latest news, a mini arctic age is in progress.

ASU2003

Record High Temperatures Far Outpace Record Lows Across USA

It looks like it is still hot here, even with the solar load at a minimum. Let's see what happens when there is more radiation from the Sun in a few years.

Ourcrazymodern?

RESERVATIONS FAR OUTPEAK GLOBALIZATION:

We've been doing it
without what we need intact,
so listen to this:

reckoning values
while discounting your payees
will lighten the bag.

__________________
BE JUST AND FEAR NOT