Circularity of increased energy expenditures?

Duende

We here on Peakoil are concerned about the affordability of energy and the stresses it will put on businesses and consumers, now and increasingly in the future.

Some of us believe that as these various consumers of energy spend a greater and greater percentage of their income on energy that the economy will slow, or even crash.

Sounds like common sense. However, what I realized when I attempted to 'complete the circuit', I wasn't so sure:

I spend more money on energy. It goes to the energy company, big oil, and the Saudi's. But the money just doesn't sit there; it is re-invested back into the world economy. I mean, it's not like the Saudi's are stuffing greenbacks under their mattress, right?

That re-invested money eventually makes its way back into the US economy as investments as venture capital, thereby financing the scaling-up of potential alternative fuel sources.

Just stop me cold where my line of thinking is going wrong, maybe I'm missing something...

I suppose if anything that this means less capital will be concentrated in the US economy due to the fact that a great portion will not make its way back to the U.S.
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Cochise · Coal Joined: Jun 13, 2008 Posts: 11 Location: LA

It depends on how you define economy.
If you define it like the ability to buy what is superfluous then yes, the economy is certainly going to crush. The more money you need to buy necessary things (food, heating/cooling etc) the less money is left for frivolous things.

Kingcoal

That's a simplified, but mostly true analysis if you have an financial structure worth the reinvestment. However, the problem we have is a failing stock market and more importantly, a vastly depreciated currency. The Euro looks pretty good right now to invest oil profits into. PO would be easier on our economy if we had a strong currency, and no banking crisis. Right now, the US sits among many places to put your oil profits - that wasn't the case years ago.
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"That's the problem with mercy, kid... It just ain't professional" - Fast Eddie, The Color of Money

Duende

Cochise wrote:

AlterEgo

It's not circular, Duende, because we are trading our fake fiat paper which is backed by nothing by 'Merican promises for increasingly short oil, which runs everything. So the paper comes back to Wall Street and gets spun up into all kinds of pretend investments, which then blow up. So it's not circular, because half of the equation is make believe. It's more like a death spiral.
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MrBill · Expert Joined: Sep 15, 2005 Posts: 4999 Location: Eurasia

Globally,

Current Account Surplus = Current Account Deficit

where

Current Account (surplus/deficit) = Trade (surplus/deficit) + Budget (surplus/deficit) + Balance of Payments (surplus/deficit)

while

Trade Surplus = Trade Deficit

and

Balance of Payment Surplus = Balance of Payment Deficit

therefore, your analogy is essentially correct. High energy prices are a net export of wealth from consuming nations to producing nations. Some gets lost along the way in the form of fees, etc., but the remainder either gets invested domestically (say in GCC) or gets exported back into global capital markets. It is a closed system.

However, the hack is that just because the GCC are exporting crude the USA, for example, does not mean that the GCC are buying anywhere near that export amount in imports from the USA. There is a trade gap. So it is a net outflow of wealth from the USA. The USA is forced to borrow from capital markets to cover that gap. So they have a current account deficit instead of a surplus.

The problem is further exacerbated when the balance of payment also turns into a deficit. Then the USA is a net importer of goods/energy AND a net exporter of interest income on that debt. Add in budget deficits, and unfunded future liabilities, and the USA is not importing surplus capital to make new investments, but simply to service existing debt. And, of course, the less credit worthy the USA becomes due to those large, outstanding debts, and a weak currency, the less attractive the USA becomes as a destination for investment. That is the death spiral that AlterEgo (or Iaato) is speaking about.
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Duende

MrBill wrote:

MrBill · Expert Joined: Sep 15, 2005 Posts: 4999 Location: Eurasia

"The patch-and-pray approach simply won't succeed," said David Mongan, head of the American Society of Civil Engineers.