Signposts on the Back Slope

Well, things really are speeding up on our trip down the back slope. I hesitate to use such worn out phrases as 'tipping point' and 'paradigm shift', but it is hard to avoid the sense of a discontinuity having occurred

Katrina has already been the catalyst for a sobering dose of the absolutely indispensable nature of oil in our lives. From the rocketing prices at the pump for gasoline to the mushrooming gas lines in the US, it is clear that the immediate effect of Katrina is going to be significant. But the reality of our changed situation will only emerge with time. Here are a few of the signposts on the slope:

1. Along with oil and gasoline, there has been a bitterly steep rise in the price of natural gas in the US, and along with it the price of electricity. Remember, of course, that there is no equivalent of the SPR for natural gas, and the lost production from the Gulf will take a long time to restore. Moreover, there is little or no chance of making up for lost production by importing gas from foriegners. This brings to mind Richard Duncan's Olduvai Theory with his insistence that the real difficulty comes when the lights go out, which is becoming a distinct possiblity for the US.

2. The sheer monetary cost of the disaster and the effect this is likely to have on some of the large insurers and re-insurers is at the moment still very unclear, but when one hears numbers like 100 billion dollars being bandied about, it certainly gives pause for thought.

3. The last few days have seen a steep drop in the US dollar index. Some of this could be chalked up to rumours that the fed will put their rate hikes on hold, thereby dissuading buyers at the margin. However, this comes not long after a report about the inherent instability of the forex market and the possibility of a run on the dollar. To add fuel to the fire there is this report about the possibilty that Saudi Arabia would look to switch out of their peg to the US dollar.

4. While petrol is the big concern at the moment, and I think we can safely say that significant price rises will spread a lot further than the shores of the US, there is still the pressing issue of will the supply of crude hold up. Disturbingly, there were reports yesterday that explosions in Iran and Iraq have closed production facilities in both countries. It is hardly worth mentioning that this would be very opportune time for terrorists to strike at the West's achilles heel by bombing oil facilities.

5. An e-mail is circulating around the world at the moment, in many different national guises, urging people not to buy oil on the 5th of September, in order to "Stick it to the oil companies". While the whole thing is patently very poorly conceived and will not only acheive nothing, it is focussing on the wrong thing. People should be avoiding buying petrol, but they should be doing this by cutting down on the amount they use their cars, not simply waiting a day before filling up. This sort of thing is probably going to develop into more strident protests about the profiteering of the oil companies and the gouging of consumers as the shockwaves from Katrina bounce through the market. The anger is totally understandable and it certainly does raise the question, should we not be considering some kind of windfall-profit tax? But it is also delusional about the ultimate cause of high prices. After all, if we were all neatly constructed economic rational actors we would respond to high prices by reducing our demand, right?

6. The words "peak oil" were uttered at 7.30pm Sunday on the most popular free-to-air channel here in New Zealand. They were carefully linked to the word "doomsayers" to ensure the viewing public could be clear what they should think of such notions as the inevitable decline of oil production, but nonetheless they made it onto the airwaves. The piece was a reasonably informative one, talking about what measures the government might take in the event of an oil crisis (carless days, etc) and wasn't too inflammatory.

7. Bush admitted (to all intents) that they went to Iraq for the oil! The scales have fallen from my eyes. All is clear now. Sheesh!

It's going to be a hell of a bumpy ride. Keep watching the skies.

Tchnorati: peak oil energy decline gas prices