Friday, December 17, 2010

Let's go flying in a lead balloon

So, what is going to happen? What does it matter if oil gets a bit scarce and a bit expensive? Life will carry on much as usual, won't it?

The short answer is "No".

Once oil gets past a certain price, some say about $150 per barrel, the economic consequences become nasty. At a sustained price above the tipping point, many industries become uneconomic and mass business failures result, which dumps large numbers of workers in the unemployment queues and the economy contracts. This becomes a self-feeding problem. As more incomes are lost, the amount of spending power in the economy shrinks, retailers suffer and the domino effect of business failures continues.

Of course, it is hard for unemployed people to pay mortgages, credit cards, loans: credit collapses, more businesses go to the wall and banks start to feel the heat. When things get really out of control, banks fail and, get this point crystal clear, governments will not be able to bail them out as they did in 2008/9. Governments world wide are already deeply in debt and a shrinking workforce means a shrinking tax base. It will be hard enough for sovereign debt to be serviced, without adding the burden of propping up the banks.

It goes without saying (so I will say it) that countries will start to default on debt, which will be the big dominoes starting to fall. When countries go under, there is no-one left to save them as Greece and Ireland were saved in 2010.

One of the interesting questions is "How long will it take before the USA defaults?". The American economy is addicted to oil and to credit. Either of those drying up would be catastrophic; both collapsing will be unsupportable.

There is another effect of a shrinking economy, or recession, which is not initially obvious to non-experts like me. In the economy, already awash with money backed by debt, depression is going to result in the same amount of cash chasing fewer goods and services. This will cause the number of dollars per unit purchased to increase - in other words, prices will escalate even as the economy contracts. To the Mr. Average, the cost of living will spiral upwards even as the number of dollars in his pocket shrinks. This chapter of the series 'Crash Course', by Dr. Chris Martenson, should give most of us pause for thought.

Chaos? Nightmare? Reality, according to my research. As always, I am not here to prove anything and the interested reader will be able to find the same information through diligent searching of the Internet.

So, let us assume for a moment that the worst has happened and world wide economies are in reverse gear. What will be happening to Mr. Average? What kind of life will he and his family be living?

First and most obviously, he will not be using his car very much, even if it has not been repossessed. The cost of petrol (gasoline) will be going up in the price spiral, possibly faster than many other commodities. With limited personal transport, especially in the suburbs remote from city centres, going to the supermarket to pick up the weekly groceries will be next to impossible. But that won't matter so much, because he won't be able to afford the groceries any more. Wait - there's more! Or less, in fact. Groceries will become scarce, because the transport systems will be failing and suppliers won't be supplying much of anything anyway.

So, what is Mr. Average going to eat? Big question and no simple answer. If he has been prudent, he will have turned his backyard into a vegetable garden long ago, but it takes an awful lot of vegies to feed Mum, Dad and 2.3 kids. Realistically, he will be unable to grow and scavenge enough food for very long. You know what that means: people are going to be hungry. Starving, in fact. Can you imagine what mobs of starving people will do? I expect some will riot, some will form gangs to plunder what few resources remain and many, the greater number perhaps, will just quietly fade away and die.

Yes, I am talking about large numbers of people, in the advanced economies of the world, starving to death. And not just starving, dying from disease as well. Once public amenities such as power, water, sewage disposal and communications start failing, the circumstances are ripe for the spread of diseases we thought were only found in backward countries. If you have imagined well so far, now imagine something like cholera exploding in your neigbourhood. Imagine not knowing if the water you are drinking, the food you are eating, even the air you are breathing is carrying some disease you have no immunity to and for which there is no help available. Or did I forget to mention that hospitals will be closed and medical supplies will not be getting through anyway? Getting the picture?

And this is happening all over the world. Just because there is not enough cheap crude oil to keep the wheels of industry turning and the insane expansion of debt serviced.

Sobering thoughts. And this is just scraping the surface of the collapse which might happen. Don't trust me - you go and do your own research. Show me that things will not go this way when cheap oil is a memory. Show me that life will go on much the same as it does now. I would love to be convinced.

No cute animals were injured during the making of this post.

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