There are many reasons an economy can boom and, as we all know now, many reasons it can go bust. One area that receives a shockingly small amount of coverage is the impact of oil prices on economic conditions. I would argue they have a large impact and, further, that we are about to enter a period where they spark an economic rollercoaster.
Mighty Oil
Think oil is bad, an evil fossil fuel that causes pollution and a host of other evils? Think again. Without oil, you would not be reading this brilliant [!] article and sitting in that comfortable chair. In fact, there is a good chance you might not even exist. How can I suggest as much? Well, oil is a critical element of everything from plastic to pesticides in food to gas in your car to, well, just about everything. For instance, it is believed that the planet can support between 1.5 and 2 billion people with natural farming. Obviously, we have many more people than that and it is thanks to petroleum based pesticides that keep plants from being eaten by bugs, petroleum based fertilizers that help plants grow in poor soil, oil based materials used to pour roads and petroleum based gasoline that gets the food long distances to your local store. Next to water and sunlight, there is nothing more critical than oil.
Dangerous Reliance
The magic of oil also makes it dangerous because we have become so reliant on it. Frankly, our entire civilization is built on it. If the web disappeared tomorrow, we would go on living. If electricity disappeared tomorrow, we would go only living for the most part. If oil disappeared tomorrow, roughly four to five billion of us would die for a lack of anything to eat. All because of oil.
The problem we now face is there are real questions about whether oil production can continue to meet world wide demand. If not, prices will shoot up. We've already seen the impact that can have. Remember late 2007 and early 2008 when prices went to $140 a barrel? What happened? We went into a major recession. I would argue that the recession was not caused by the housing market and banks. They were a result of an economy that suddenly contracted as people became frugal given their energy costs.
There is one basic pillar that supports our capitalistic ways - there must always be an expansion of credit and, in some ways, growth. When oil prices rise dramatically, that pillar is attacked because people simply do not have the money to spend on goods and services. This is a huge problem moving forward. While the 2008 oil price jump was partially due to speculation, the fact is we are looking at future oil price shocks as demand starts to outstrip production rates. When these occur, recessions will be the result. The question is how many "2008s" can we stand before there is irreparable damage?
I fear we are soon to find out.
Patrick Sampson writes about peak oil and other energy issues for ThePeakOilQuestion.com.
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