The Near Term Economic Effects of Peak Oil

Ludi · Posted: Tue Mar 29, 2005 12:19 pm Post subject:

I have little discretionary spending I can cut out, having a very modest income. My income is also from a completely unnecessary and frivolous field, entertainment, so I can expect it to be reduced when times get tough. Health insurance is the only large expense we can cut out. We eat very cheaply as it is, rarely buy clothes (we splurged last week and bought socks and underwear - woo hoo!). I can stop using the electric clothes dryer, and we can put a timer on the water heater, which we're planning to do. I wish we could pay off our mortgage, but my husband doesn't want to put all our eggs in one basket. I think when things start to get expensive, he'll be more willing to pay it off.

j_bumble · Posted: Tue Mar 29, 2005 12:45 pm Post subject:

FatherOfTwo · Posted: Tue Mar 29, 2005 12:55 pm Post subject:

If everyone here is more or less on board that conventional oil will peak later this decade, then I think itâ€™s a bit premature to predict that peak oil will be the next event which causes widespread havoc in the worldâ€™s economies. IMO, there are at least two other macro events to take into consideration. Either of these could single handedly push the world economies into the toilet, pushing out peak oil a bit, and even possibly allowing the world to slide past the peak without seeing clear signs of it. To me, a pushed out peak which is obscured by other events is an entirely different ball game.

For me the macro event which is potentially more imminent is a significant US recession. A US recession could easily be brought on independent of, or in conjunction with, already high oil prices. It might take a bit to show up, but the US is so close to a recession now that it is clearly teetering on the edge of the cliff. A US recession, in general, means a world wide recession. A world wide recession means a big drop in demand for oil. Such a recession could serve as the appetizer before the coming Peak Oil entrÃ©e. In this scenario I see the US obviously being hit hardest (in terms of GDP % drop) with the rest of the world taking it on the chin. Everyone would be impacted across the board, and importantly, no rethinking of the status quo with relation to oil dependency.

Another macro event is a major oil supply disruption due to terrorist activities. But unlike a US recession, this would have the opposite effect on the price of oil. Here the effects are similar to Peak Oil, but distorted somewhat because it isn't clear it's a true geological supply problem... thus no fundamental rethinking of the status quo.

As for the situation where PeakOil kicks things off, then I think this will start by manifesting itself as micro events, leading in turn to major economic recessions. I think we can extrapolate out individual actions to see a big picture of how things might play out. People who lose their jobs and/or are over leveraged are going to have some very difficult decisions to make. While these people will suffer greatly, percentage wise, they wonâ€™t trigger the flood. It is the rest of the people who only experience an initial belt tightening who will dictate which dominoes fall first. Everyone in this group will approach things in slightly different ways. Some will end, or greatly curtail, their â€œluxuryâ€ spending (eating out, new electronic gadgets etc.) Others will look to make a bigger impact by addressing their biggest bills, such as their mortgages and/or car payments. But all of these decisions taken as a group lend themselves toward a significant drop in demand in specific industries. Real estate/housing, auto, airlines etc. The giants most dependant on cheap oil (and easy money) will be the first to fall.

The moral of the story is this: everyone needs to reduce their debt, or preferably eliminate it. If reducing your debt wonâ€™t allow you to still service what remains at 2-4 times the current interest rate (and this is assuming you keep your job) you need to reduce more while you can. Everyone should also start examining what they buy, and why. Those who are in industries which are vulnerable (eg. airlines, luxury goods, the automobile sector) should see if there skills canâ€™t be transferred to another industry which will be more resistant to the decline (think essential services & goods oriented). Those who are very specialized for the industries in jeopardy need to change now, or take a look in the mirror and see if they can look themselves in the eye at the idea of placing all of their money on red-16 and hoping for the best.
_________________
Do not underestimate the difficulties of surviving the transition of peak oil, nor the dangers of global warming. We must embrace nuclear energy and renewables.

JoeW · Posted: Tue Mar 29, 2005 1:12 pm Post subject:

Where will US consumers cut expenses? I can only guess, but here goes
Short list:
1) Credit card payments
2) Entertainment
3) Dining out
4) Vacation
5) Phone/Cable/Internet
6) Insurance
7) Downsize auto/drive less
8) Move into modest home/relative's home or closer to work location
9) Groceries
10) Cheat on taxes

Explanations:
1) Their budget will first get to the point where they can no longer afford their credit cards. Only then will they go to #2.
2) Time to start renting movies instead of going to the movies. Other entertainment items will be cut as well, including video games.
3) With little spending cash and no valid credit cards, they will finally opt for the supermarket over TGI Friday's, Applebee's, Outback Steakhouse, or whatever.
4) That's it, we're canceling the annual vacation to save that $5000 for needed expenses. My Visa is no longer everywhere I want to be anyway.
5) If the budget tightens more, it's time to get rid of the cell phones, internet, pay channels, or cable entirely, in order of preference. Getting rid of the phone is a great way to stop those annoying phone calls from debt collectors anyway.
6) Car insurance and life insurance? For suckers.
7) It's finally time to downsize from SUV to smaller car, or just add a smaller car to the fleet. Who cares since you stopped paying your car insurance anyhow?
8) If the smaller car still costs too much to commute, it's time to move closer to work, even though it's in the ghetto. Downsizing the house/ moving in with a relative/renting out a room is another option.
9) Time to take a closer look at the grocery bill. DPC becomes a popular acronym at the supermarket (Dollars Per Calorie).
10) Mis-report income or deductions at tax time and hope that Uncle Sam will look the other way. It's not like it's champagne and limousines around here these days.

nero · Posted: Tue Mar 29, 2005 1:49 pm Post subject:

I think near term people will delay their car replacement purchases. Replacing your old car with a new car is I think one of the largest discretionary purchases around. People can easily convince themselves that it isn't necessary yet. The added bonus to this sort of economizing is that you aren't continually tempted to go off your diet. In contrast restaurants won't loose too much business because they are so very convenient. Many people don't know how to efficiently cook everyday appetizing meals (myself included) so to them restaurants are a continual temptation.

The third car in the household for the teenagers should also be an easy way to economize. I don't know if the teenager's personal car hasn't already been killed off by insurance costs but teenagers are probably one of the only groups whose driving habits are really sensitive to gasoline prices.

SidneyTawl · Heavy Crude Joined: Mar 24, 2005 Posts: 322

Depends on the car they drive I think. They will make financial decisions based on using the same dollars each month for a vehicle. If they can unload an SUV at the dealers and pick up a better gas mileage vehicle they will do that as long as the payment dollars are about the same. They will also rationalize that they will have extra money from the better gas milage to add to their available funds. They expect down the road that the extra gas dollars will start to be a plus.

I can see a glut of horrible gas mileage used vehicles starting to pile up on dealers lots as they do trade ins for another models.

The Used car market will be something to watch as the gas prices start to hit. Those that wait to sell-off excess vehicles will find it a buyers market. I have a feeling its getting to be that way now. Why I am going to go ahead and sell my toys.

I have a 66 pontiac lemans convertible with a rebuilt 389 that I will still have an edge with. I have rebuilt this car from the ground up. Pulled it out of a cotton field 20 some years ago at least. Only the body was there, no motor, transmission, no interior, no, no no. he he. Some of you understand what this means. Truly letting go of these automobiles will be the day I know I really completely understand PO is coming and this is the smart thing to do. I still can think of tons of reasonss to keep them also even with PO. LOL some of you guys understand my "dilema".

My 93 Dodge Stealth (everthing but not a turbo) with only 73,000 miles, new tires, new brakes, will be a tougher sell for the money I want and think it truly deserves. Its gonna break my heart to sell both of these. The stealth in its Econo mode (about 2 -3 miles difference) gets around 20 on the highway and 18 in the city. Not that bad, but it takes PREMIUM> that is gonna be the kicker.

The new car manufactors will be really small in the future as they get smaller and used cars will be everywhere. If only one of them would tool up for something like the Smart Car immediatly they might have a future in making some sales and hanging around for a few years.

kochevnik · Intermediate Crude Joined: Aug 20, 2004 Posts: 881

FatherOfTwo · Posted: Tue Mar 29, 2005 3:18 pm Post subject: Re: Car glut

LogicMan · Tar Sands Joined: Jan 25, 2005 Posts: 24

Near term I think price increases will first follow the direct fuel pathways, gas, diesel, heating oil. Much effort will be made to conserve these but the rich will continue to use a disproportionate share and really inflict pain on the less wealthy. This will be followed by WW II style rationing. The IEA stuff just won't happen up front, odd - even bans etc all favor the rich. An "A" fuel sticker, based on the average fuel usage instantly limits everyone without a real reason to have a "B" or "C" to use no more than the current average. This is how it was done way back when and it worked very well. If the average driver currently uses 15 gallons per week, that's the limit. You can't buy more. If you're efficient, you all set, if you're not you quickly find a way. This progresses to lower volumes of fuel over time.

Same thing goes for heating oil.

In terms of products and manufacturing, far more energy is spent on lights, heating, and air conditioning in plants than on running the actual machinery. These businesses are going to want to stay in business. This means keeping costs down. It's far better to scale back the facilities than to stop the machinery. Products will not rise as quickly as the fuels due to conservation like this. Sadly the massive service industry of the USA will likely decline as people adjust their purchases to center on things that give them a durable tangible product and not something like a massage that's gone the moment it's done.

Other aspects of our plight like asset bubbles and debts may throw us off the cliff but oil will be more slow. This doesn't mean that a full final correction doesn't happen, it most certainly does. I just don't think the near term, (of problems due specifically to peak oil) holds this extreme misery in store.

MonteQuest · Posted: Tue Mar 29, 2005 11:38 pm Post subject:

So, letâ€™s get something clear here, folks. If we institute conservation, it will cost jobs. Those lost jobs can become new jobs creating energy efficient goods and services it has been suggested. Ok, but have you used less energy? No, you have just redistributed it.
Hereâ€™s a quote from Aaron on his Jevonâ€™s Paradox: Death by Conservation thread. http://peakoil.com/fortopic50.html

sventvkg · Heavy Crude Joined: Oct 28, 2004 Posts: 124

I think we need to blame the Rich for knowing about this impending catastrophe for 40 years and not only doing nothing about it but conspiring to make as much money off raping the regular people for as long as possible. We could have been tooling up, inventing alternative technologies, and getting ready for Peak oil and it's ramafications all along had The powers that be, admitted it to us. I think we can safely assume big business has conspired against the common man and sold us down the river for their own gain. The rich are the first we should go after to take everything they have and ration it out to everyone else. There is no other reason why it had to come to this other then the greed of the Elite. This is what I would like to see.

Wildwell · Fission Joined: Feb 03, 2005 Posts: 2080 Location: UK

The whole Jevonâ€™s Paradox theory is a rather simplistic economic theory because it doesnâ€™t adequately internalise the effects of conservation. For example, if oil use remained high there might be external pollution costs which are imposed on society, congestion costs and road accidents and so on. The demand for oil could create resource wars which have a sink effect for resources, manpower, fuel etc.

Whereas I think itâ€™s a bit silly getting rid of cell phones and TVs etc a move to fuel efficiency is a good thing â€“ because it saves consumers money. So $50 a week saved could be spend in other areas of the economy, so you would actually create jobs. Those jobs may require very little energy so I donâ€™t agree you are just shifting requirements elsewhere.

In addition switching away from oil sends out a clear message. And if demand is high enough for alternatives itâ€™s more likely that they will be provided. So the limits of mass transit also donâ€™t apply. Moreover if that mass transit used electricity created from hydro or wind sources youâ€™re switching away from the resource that is causing the problem. As the earth is not a closed energy system diminishing returns does not apply. In parallel with this, more demand for alternatives may produce economies of scale, reducing prices saving more money which can again be spent elsewhere.

High oil prices would reduce jobs in the long term, because of rising prices. Okay, so lower prices may lift demand in other countries, but in this situation the countries that switch away will gain and those that don't will suffer.

Wildwell · Fission Joined: Feb 03, 2005 Posts: 2080 Location: UK

And wasting energy doesnâ€™t benefit anyone much. When I had my car I used to go for a lot of pleasure trips that didnâ€™t benefit anyone other that a bit of tax for the government and a couple of pounds for the oil company. The money for the tax would go toward paying for the road damage that was caused and the access charges. I imposed congestion on other people too and wore the car out.

That same energy would have been used for someone going to the shops and spending money or in a piece of industrial machinery doing work and creating more money. So these arguments are rather simplistic to say the least, quite typical of economists really - science of nerds to make sense of the real world.

holmes · Fission Joined: Oct 12, 2004 Posts: 2415

I am liquidating everything. all "unneccessary commodities".
Use the back pack and bike predominately. Bike to work. Live out of the truck sort of. Spend all extra money on supplies to build TMES and garden.

Roy · Posted: Wed Mar 30, 2005 12:21 pm Post subject:

I have a 1967 Camaro RS/SS 350 that I'm parting with. I;ve owned it for almost 20 years, and have completely rebuilt the car from the ground up. It, much to my dismay, must go before the demand drops.

I think once the middle class starts feeling the pinch, the market for muscle cars will nosedive. You know, less discretionary cash and all that.

My car buddies think I'm crazy. So does just about everyone I've discussed peak oil with. Sad

I guess time will tell.

I know that when the Camaro's gone I'll be getting a small dual purpose motorcycle for short trips.

We just traded in our Subaru Outback Wagon (24mpg) for a Jetta TDI wagon (47mpg). The note is less and we got a really good trade on the Sube. Interestingly, I attempted to trade that car in about 2 years ago (owed $19k then) and was offered at best $10k. Needless to say I didn't take that.

My first offer on the Sube was $14k last Saturday (owe $9k). Are we already seeing an increase in demand for fuel efficient vehicles (relative to SUVs)? I think so. The VW dealer told me that the TDI cars were "flying off the lot".

We decided to get one before demand began exceeding supply.

Roy