We all know the story of the sub-prime crisis that had developed into the credit crisis – a flood of credit saw mortgage lenders lending to anyone, including people who couldn’t really afford the repayments. To get these potentially bad loans off their books, the banks pooled them together into new, unregulated instruments and sold their returns to others. Problem is, out these instruments turned out to be worth a lot, lot less than everyone thought because a lot more people are defaulting on their mortgage payments than was predicted.
But the question we rarely hear asked is ‘Why did more people default’? Because these people who were poor loan risks (ie, low-income) were also living in ‘energy poverty’ – more than 10% of their income going on buying energy. This made them extremely vulnerable to rapid increases in energy prices. And rapidly increase energy prices did, breaking record upon record from 2004 through to mid-2008. Petrol in the US tripled in price during this period, but oil-use is so embedded in the economy that people could not reduce their consumption in proportion. The result was that people in energy poverty were having to spend a much larger part of their income on energy even while the rising cost of transport sent the value of the houses these people had bought in the US exurbs into free-fall. More people became insolvent and started defaulting on their mortgages in larger numbers, sparking the credit crisis and sending the world into recession. It was the oil shock that sent the world into recession. The credit credit along with last year’s food and commodity price rises was just a vector of the oil shock.
Oil is so pervasive that it affects every other part of our economy. Let’s look just at food. As oil supply falls following peak oil, we will struggle to maintain the supply of food. Not only does food take vast amounts of oil to produce in modern agriculture but the fall in oil supply will put food crops into ever greater competition with biofuel crops for arable land. Already over a fifth of maize production in the US (the world’s largest maize exporter) is used for biofuels rather than food. Plastics, road surfaces, pharmaceuticals, and a huge list of other products are made from oil. With a bit of clever chemistry, they can be made from plant matter instead, which sets up another conflict with food production. In fact, having exhausted the world’s ability to supply ever larger amounts of fossilised plant matter for our fuel and materials production, we will face the choice of using current plant matter instead, setting up a three way fight between fuel, food, and materials for the world’s shrinking resource of arable land.
It comes down to a simple fact: our wealth is based on the use of energy. If the amount of energy we use shrinks, so does the economy. Therefore, to return to growth, or even maintain our per capita wealth, after peak oil we’ll need to replace the energy from the dwindling oil supply and use energy more efficiently (ie waste less of it). Problem is, there is no source of energy that could be expanded rapidly enough to replace falling oil supply, once it starts falling. The prospects for improving energy efficiency, however are brighter. That’s the topic of the next post.