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Definancialisation, Deglobalisation, Relocalisation
June 19, 2009 6:32 AM   Subscribe

In a talk titled Definancialisation, Deglobalisation, Relocalisation given at The New Emergency Conference, Peak Oil activist and writer Dmitry Orlov (previously 1 2 3) shows how he has come to the conclusion that the oil price spike of summer 2008 was the trigger for the financial collapse that occurred later on in the fall. He goes on to summarize (from his point of view) pretty much everything that has been happening in the past year or so, and what he thinks is coming up next.

This is a long one, so here are some quotes:

"Now that the reality of Peak Oil has started to sink in, one commonly hears that "The age of cheap oil is over". But does that mean that the age of expensive oil is upon us? Not necessarily. We now know (or should have learnt by now) that once oil rises to over 25% of global GDP, the world's industrial economy stalls out, and as soon as that happens, oil ceases to be particularly valuable, so much so that investment in maintaining oil production is curtailed. The next time industry tries to stage a comeback (if it ever does) it hits the wall much sooner and stalls again. I doubt that it would take more than just a couple of cycles of this market whiplash for all the participants to have two realisations: that they cannot get enough oil no matter how much they pay for it, and that nobody wants to take their money even for the oil they do have."

"One person I would like to have a close encounter with the brick wall is this fellow, Myron Scholes, the Nobel Prise-winning co-author of the Black-Scholes method of pricing derivatives, the man behind the crash of Long Term Capital Management. He is the inspiration behind much of the current financial debacle. Recently, he has been quoted as saying the following: "Most of the time, your risk management works. With a systemic event such as the recent shocks following the collapse of Lehman Brothers, obviously the risk-management system of any one bank appears, after the fact, to be incomplete." Now, imagine a structural engineer saying something along those lines: "Most of the time our structural analysis works, but if there is a strong gust of wind, then, for any given structure, it is incomplete." Or a nuclear engineer: "Our calculations of the strength of nuclear reactor containment vessels work quite well much of the time. Of course, if there is an earthquake, then any given containment vessel might fail." In these other disciplines, if you just don't know the answer, then you just don't bother showing up for work, because what would be the point?"
posted by symbollocks (41 comments total) 11 users marked this as a favorite

 
Uh this dude might want to go back and read a paper or two.

You are aware that the US real estate market - which is what blew up the US financial system - actually began to decline in the Fall of 2006. When oil was in the high 60's.
posted by JPD at 6:41 AM on June 19, 2009 [1 favorite]


You are aware that the US real estate market - which is what blew up the US financial system - actually began to decline in the Fall of 2006. When oil was in the high 60's.

He's saying that this is what caused the collapse to blow up so much in the fall, not that the real estate market wouldn't have declined without the price spike.
posted by symbollocks at 6:43 AM on June 19, 2009


Just saying, and I am enjoying the read, but ol' Dmitry could do his bit in reducing my fossil fuel burn by trimming down the weight of the 8.5+ unnecessary megabytes of images this page hosts.
posted by mattoxic at 6:44 AM on June 19, 2009


Actually, the history of engineering is littered with examples of projects that failed precisely because our knowledge of engineering was incomplete. When the Tacoma Narrows bridge broke, engineers determined the root cause, improved new designs and retrofitted existing designs.
posted by b1tr0t at 6:45 AM on June 19, 2009


Confirmation Bias

–OR–

Oh, Crackpots! What Can't They Do?
posted by slogger at 6:48 AM on June 19, 2009 [2 favorites]


He's saying that this is what caused the collapse to blow up so much in the fall, not that the real estate market wouldn't have declined without the price spike.


The financial markets were gleeful from the huge spikes up in commodity prices. Guys were making money hand over fist. All you had to do was buy any company that had anything to do with any commodity. Any company located in a BRIC was a layup.

This fall was just the peak of a gradual realization by the markets that the 02-07 time frame was unsustainable. This process began when the first Sub-Prime mortgage originators began to implode in Feb '07. It took everyone a really long-time to realize how deep in to the recess of the financial system the housing related rot had spread. It was this that led to LEH, AIG, FNM, FRE, etc, etc.
posted by JPD at 6:52 AM on June 19, 2009


I'm sure it had nothing to do with the trillions in unregulated derivatives.

Wait, does this mean that we can start buying subprime mortgages again? Because I totally missed my chance to make millions of dollars and then get bailed out by the government.
posted by Afroblanco at 6:59 AM on June 19, 2009 [1 favorite]


I'm sure it had nothing to do with the trillions in unregulated derivatives.

I'm not sure he's saying that had nothing to do with it. He's saying that was the bullet. The price spike was the trigger.

As Warren Buffet once said, "It's only when the tide goes out that you learn who's been swimming naked."
posted by symbollocks at 7:03 AM on June 19, 2009 [3 favorites]


Commodities going up wasn't the trigger of the August-September 2008 acceleration of the crash (which as JPD noted, began in 2007). Commodities going back down did contribute to it, insofar as it was one source, among many, of pressure to sell non-commodity credit assets (mortgages and loans) to get the cash to cover margin calls on leveraged long commodity positions, when the decline in price in the commodity caused the position to have negative value).
posted by MattD at 7:15 AM on June 19, 2009


I haven't RTFA yet, but my quick two cents: From my own experience, I do think it's possible that the gas price spikes at least contributed to the increase in foreclosure rates.

You may have all forgotten this by now, but ordinary people were genuinely struggling to make ends meet when the prices at the pumps were at their peak (even my household was coming up short every month for a while, and we have a decent mid-middle class income and are thrifty by most standards).

I don't doubt for one second this led to an uptick in distressed loans and foreclosures--especially among subprime borrowers, who were likely on shaky ground to start with.

As for whether that triggered the crisis or not, I don't know. You tell me. Did abnormally high home loan default rates trigger the crisis? If so, then yes, it seems possible oil price spikes were a contributing factor.
posted by saulgoodman at 8:05 AM on June 19, 2009


Oil activist blames oil for world's problems
posted by Pants! at 8:18 AM on June 19, 2009 [2 favorites]


except that the increases in defaults began literally months before the gas price spike. Add to that it would take about 6 months for any impact from higher gas prices to actually show up in foreclosure data, so any foreclosures that were the result of the spike would have started showing up in Nov, Dec - well after the crisis peaked.


Although I don't think you point about gas prices and household budgets is unfair. I do think the spike probably killed GM. No one bought SUV's.
posted by JPD at 8:20 AM on June 19, 2009


Forgot to add. The exurb that is the poster child for excess gas consumption - Riverside County - was actually the first housing market in the US to implode.
posted by JPD at 8:22 AM on June 19, 2009


Commodities going up wasn't the trigger of the August-September 2008 acceleration of the crash (which as JPD noted, began in 2007). Commodities going back down did contribute to it

I think this is about right. A lot of people on wallstreet bought into the whole peak oil thing and were heavily invested in energy and oil. When credit froze, industry locked up, and the demand for oil plummeted, thereby making their already bad balance sheets even worse.

Anyway, while the price of oil may be a factor in overall industrial output, I think the common explanation: That the crisis was caused by over-leveraging in the housing market and derivatives based on that is more realistic.
posted by delmoi at 8:33 AM on June 19, 2009


I'm not sure he's saying that had nothing to do with it. He's saying that was the bullet. The price spike was the trigger.

Even many not-insane commentators on the world economy would agree with that much. Causes and Consequences of the Oil Shock of 2007-08.

However, I didn't RTFA either, except to confirm that "$150/bbl. which is something like 25% of global GDP" is wrong by a wide margin. It'd be something closer to 8%. Which is surprisingly high, still, and it's going to be a real problem. But his numbers are based on assuming that oil is the only energy source in existance. Such a mistake being one of his "key points" does not improve my opinion of the value of Orlov's "peak oil activist" speculations.
posted by sfenders at 8:34 AM on June 19, 2009


A lot of people on wallstreet bought into the whole peak oil thing and were heavily invested in energy and oil.

Or thought "Oh this is a great story. I gotta get on board"

Why yes I am cynical about my business
posted by JPD at 8:37 AM on June 19, 2009


except that the increases in defaults began literally months before the gas price spike.

Thanks for that clarification. Thought it went the other way around.
posted by saulgoodman at 8:46 AM on June 19, 2009


As someone who did read the fucking article a couple days ago, I thought this presentation was pretty good, and don't get a lot of the snark going on here.
Thing is, oil IS going to run out at some point, and neither stockpiling beans or continuing as if everything's normal is going to fix the problem. The world is going to enter some serious deglobalization and we're going to be wishing we could make the things we need at home.

We can't calculate, remember, or spell, but we can text and tweet.
Yes, yes, yes.
posted by dunkadunc at 9:26 AM on June 19, 2009 [1 favorite]


However, I didn't RTFA either, except to confirm that "$150/bbl. which is something like 25% of global GDP" is wrong by a wide margin. It'd be something closer to 8%.

Orlov got the ~$600/bbl = World GDP figure (thus ~$150/bbl = 25% World GDP) from this report. Could you point out what was wrong with that analysis, or at least how you came up with the 8% figure?
posted by symbollocks at 9:29 AM on June 19, 2009


I think he has cause and effect mixed up.

Financial institutions which saw they were headed for failure because of collapsing mortgage-backed securities attempted to save themselves by buying oil (and other commodity) futures-- with the full understanding that their grotesquely overstated values gave them the power to drive up the market-- then selling those futures and buying more, etc.

Possibly they failed to anticipate, however, how much these manipulations of the oil market would accelerate the collapse of the mortgage-backed securities by forcing ordinary consumers to have to choose between filling their tanks and paying their mortgages.
posted by jamjam at 9:38 AM on June 19, 2009


Please. This article makes absolutely no good points. It is just more schadenfreude porn for people who think their genius hasn't been embraced by the world. Or whackjob libertarians who never read Hobbes.

Orlov got the ~$600/bbl = World GDP figure (thus ~$150/bbl = 25% World GDP) from this report.

That is some seriously funky analysis to answer a problem that is pretty straight forward.

lets try this on for size (I am not the person who made that original comment I'm just intrigued)

Total Oil Consumption (source EIA) 83.2 Million barrels per day is the '09 forecast. So 30.4 billion barrels of Oil per year.

World GDP is 60.7 Trillion USD (source IMF). so 30.4Bil * 150 = 4.56 Trillion = 7.5%

Course this is a moving target. I'm thinking oil at $300 would do some pretty funky things to GDP and oil demand.
posted by JPD at 9:48 AM on June 19, 2009


Orlov got the ~$600/bbl = World GDP figure (thus ~$150/bbl = 25% World GDP) from this report.

I believe he got it by mis-reading that report, which appears to say that if all the energy in the world (oil, gas, coal, nuclear, wind, zero point modules, etc) were priced at $600/BOE (converting all the energy quantity units to barrels of oil), then at present rates of total world energy consumption it'd be roughly equal to world GDP. It is not so useful, because oil is among the most expensive ways to get 1kWh of energy.

To get my rough estimate of how much world oil production is worth: multiply 80 million barrels per day (plus or minus exactly what liquids you're counting as "oil") times 365 days a year, times $150/bbl (assuming that's the average for all the various prices oil trades at), and compare to world GDP of somewhere around of $54 trillion.
posted by sfenders at 9:58 AM on June 19, 2009


Orlov got the ~$600/bbl = World GDP figure (thus ~$150/bbl = 25% World GDP) from this report. Could you point out what was wrong with that analysis, or at least how you came up with the 8% figure?

Snip>>

He got his units mixed up, in a way. He's saying that *all* the world's energy is coming only from oil @ $150/bbl, which is confused at best, and disingenuous at worst. It's like saying that you get all your calories from only one form of food, and thus if the price of that food rises, you will starve, ignoring that you'd probably switch to other food.

It seems strange that he claims the quote was spawned by an econ prof, as an econ prof would (I hope?) understand substitution and general equilibrium effects: as oil becomes more expensive, people switch to cheaper forms of energy (coal...).

Using:
link, we get oil consumption of 85,085,664 bbl/day. At 150/bbl, that's:
(A) $1.275e10/day

Global GDP is (per WB, lowest estimate - cite):
54,347,038e6

So per day:
(B) ~$1.48e11/day

A/B ~= 8.5%

FWIW, I agree w/ JPD. The timing is wrong. I'm sure the sharp rise and fall was a factor in some of the craziness, but to call it the trigger is pretty sharp. To a hammer, yada yada.

(or, on preview, what sfenders said)
posted by rider at 10:01 AM on June 19, 2009


The world is going to enter some serious deglobalization and we're going to be wishing we could make the things we need at home.

Good thing there are already rumblings about bringing manufacturing back home, then, and a whole lot of very desperate unemployed to man the factories for Chinese-quality wages.
posted by five fresh fish at 10:19 AM on June 19, 2009


Also, is not the guy's main point that oil is on its way out, that most of our gains over the past century are due to cheap oil, and that we're gonna face radical change? That's how I read it, at least, by ignoring the more obvious crackpot crap.
posted by five fresh fish at 10:21 AM on June 19, 2009 [1 favorite]


Deglobalization is going to happen if energy prices go up high enough, but I wish people wouldn't be so fucking gleeful about it. Nothing wonderful about poverty and starvation, chicken little.
posted by grobstein at 10:23 AM on June 19, 2009 [1 favorite]


The price of oil is going to be fascinating to watch, because supply and demand isn't the only equation with oil any longer. Some global warming scientists have said that we dare not use more than 25% of the current proven oil reserves, else we risk catastrophe down the line. So there isn't really much point in exploring and looking for more, when we already HAVE four times as much as we should use, at least during the next century. So how does that affect the price of oil? Nobody knows, because we've never had a commodity that is valuable, indeed vital, and for which there is plenty of supply...but which we dare not use. Who gets to use the 25% we CAN use safely? Who gets to sell that 25%, and who gets to buy it, and how is that determined?

Gonna be an extremely interesting rest of this century. And probably not interesting in a good way.
posted by jamstigator at 10:42 AM on June 19, 2009


Some global warming scientists have said that we dare not use more than 25% of the current proven oil reserves, else we risk catastrophe down the line.

Oil could rape your dog and give your kids cancer and the world will still drill and burn every last drop it can find, right up to the point where the remainder is so difficult to extract that the "crippling" cost of alternative energy is finally cheaper. Oil is free energy, which is free wealth. There are no consequences which are going to convince a nation, its politicians, or its people, that they should willingly forgo free wealth and embrace poverty when it holds that "if we don't use it, some other country will".

Coal I'm not so sure about - it's also "free" wealth (free in the traditional economic sense that we get the energy while paying neither the paying the costs of generating it, nor the downstream environmental consequences of using it), but it's not as useful as oil and has more alternatives, so there is less need for it and more competition, so perhaps its dirty nature will be sufficient that interest in coal will someday start to wane.
posted by -harlequin- at 11:23 AM on June 19, 2009


Getting to this (very interesting post) late, but I've got some data corroborating views upthread that the decline in house prices predates the oil shock.

Disclaimer: this data isn't vetted (at least not for the purpose that we're discussing) and is presented as is. I was using these series (amoung others) to track change in various illliquid assets (house prices included) against some commodities I'm interested in.

House prices are from the S&P/Case-Shiller Home Price Indices. Oil was sourced from Illinois Oil & Gas Association and reflects monthly spot for Illinois Crude averaged together for each year. THe spreadsheet presents both nominal and inflation adjusted (the latter for something I was doing), but I looked at nominal only for the purposes of this fast MeFi specific presentation I've put together. I did this quickly and the series need some work.

A single jpeg chart is presented here, and the complete spreadsheet is here but since GoogleDocs sometimes steps on spreadsheets, I've also dropped it here as an Excel file.

Have fun!
posted by Mutant at 11:41 AM on June 19, 2009


the decline in house prices predates the oil shock.

Well, sort of. Personally I wouldn't argue that oil prices were "the" trigger for the crash, only that they were a significant contributing factor (and perhaps elminated any chance of easy and quick recovery from the housing bubble.) To some extent both price rises were enabled by some of the same things going on in the world, no mere coincidence that they look somewhat simultaneous on your chart. But oil had already traded up to $80 shortly before house prices peaked, which people did find quite shocking at the time.
posted by sfenders at 12:38 PM on June 19, 2009


Mutant: From the jpg, it looks like the top of the housing boom predates the oil price runup, then there's a period of more or less flat housing prices (roughly the second half of 2006 and first Q of 2007), and then the final oil spike and the drop in housing prices start at virtually the same time.

Some others upthread have speculated that the sharp rise in energy prices finally drove household budgets off the cliff they'd been teetering on, and triggered (not caused, mind you, but triggered) the final collapse in home prices that was already clearly inevitable. That seems like a perfectly valid interpretation of your graph.

I'd be interested to hear how others read this.
posted by rusty at 12:45 PM on June 19, 2009


Another thing I just remembered: wasn't there a lot of inflation, generally, in the cost of basic household staples and other commodities, corresponding to the spike in oil prices, even before those prices necessarily had an impact at the pump? I seem to remember grocery trips suddenly becoming more painful.
posted by saulgoodman at 12:58 PM on June 19, 2009


Orlov has responded in the comments:

I said "oil" whereas I should have said "energy". François Cellier's analysis talks about actual energy use and cost, not oil specifically. Plus, Cellier rolls exporting and importing countries together, ignores the fact that much energy is bound up in various long-term contracts, barter agreements, and so on.

I don't care about arithmetic very much at all. The point I make is that when the oil price exceeds SOME NUMBER the economy crashes, and then oil is no longer in much demand, until SOME NUMBER (or SOME OTHER NUMBER, whatever) is exceeded again. I used 1/4 instead of just saying x, thus leaving an opening for the arithmeticians to start plying their exciting and useful trade.

posted by symbollocks at 12:58 PM on June 19, 2009


Fuck this guy. What a jerkoff. He quotes a number. People say "That numbers bullshit" and he responds "Eh Arithmatic is for the little people"

You people don't need to put up with this from your crackpots.
posted by JPD at 1:08 PM on June 19, 2009


Fuck this guy. What a jerkoff. He quotes a number. People say "That numbers bullshit" and he responds "Eh Arithmatic is for the little people"

What? Did you even read what he said? Why so emotional? Calm down and have a look at what the man is saying. I know he can be as insufferable as Kunstler, but have a little patience.

I'll distill that comment down to the nitty gritty for you:

The point I make is that when the oil price price of energy exceeds SOME NUMBER the economy crashes, and then oil energy is no longer in much demand, until SOME NUMBER (or SOME OTHER NUMBER, whatever) is exceeded again.
posted by symbollocks at 1:18 PM on June 19, 2009


Mutant: From the jpg, it looks like the top of the housing boom predates the oil price runup, then there's a period of more or less flat housing prices (roughly the second half of 2006 and first Q of 2007), and then the final oil spike and the drop in housing prices start at virtually the same time.


You can't compare a graph of oil prices to a graph of Case-Schiller numbers unless you build in a lag. I.e. The C-S index reported for May is sales that closed in May, but the contracts were signed several months ago. You would really need to compare it to January oil prices or something like that.

Its similar to the reason why you can't look at foreclosures during a time period and make a comparison to that same time period's oil price. In most parts of the US a home that is "In Foreclosure" actually stopped making mortgage payments at least six months ago, and even longer then that in States with strong consumer protections (it basically takes a year in NY for example)
posted by JPD at 1:27 PM on June 19, 2009 [1 favorite]


I'm not the one defending a crackpot. And believe me if I could express "Fuck this guy" with somekind of diacritical mark meaning "Makes jerking off motion with hand, takes sip of water, contemplates mocking coworkers Nantucket Reds" I would.
posted by JPD at 1:45 PM on June 19, 2009


The point I make is that when the oil price price of energy exceeds SOME NUMBER the economy crashes, and then oil energy is no longer in much demand, until SOME NUMBER (or SOME OTHER NUMBER, whatever) is exceeded again.

Don't know how much energy prices really figures into things, but interestingly, both major financial crises in US history were preceded by enormous real estate bubbles bursting in Florida.
posted by saulgoodman at 1:47 PM on June 19, 2009


It's not so much SOME NUMBER vs. SOME OTHER NUMBER that turned me away from taking Orlov seriously, it's the general attitude represented by the fact that when confronted with a number that ought to have been on its face implausible to anyone who knows enough to make an attempt to chart the future course of the world economy and global civilisation, a number rather centrally important to his thesis that it was oil scarcity that caused the latest crash, he accepted it whole-heartedly and repeated it several times, instead of being cautious and skeptical enough to do a bit of simple arithmetic first.

Anyway. Certainly some interseting feedback loops with oil and house prices. For example I guess a credit bubble in the US can be said to have helped fuel rapid economic growth in China, which created enormous demand for both oil and US financial assets. Of course this and the whole global economy had some momentum left after they ran out of would-be owners of luxurious new mortgages, and so rising house prices helped push up the price of oil, before it eventually pushed back hard enough.
posted by sfenders at 2:07 PM on June 19, 2009


Oil is free energy, which is free wealth.

This is an exceptionally important thing to understand, IMO. Orlov's claim
Financial assets are only valuable if they can be used to secure a sufficient quantity of oil to keep the economy running. …To a large extent, the end of oil means the end of money.
strikes me as commonsense.

Further, the end of oil means the end of life as we know it. Almost everything you see around you right this moment has roots in oil. Almost everything you see around you, then, is not possible or is not cheap without oil.

And that should be alarming.
posted by five fresh fish at 5:47 PM on June 19, 2009 [1 favorite]


Oil is not free energy. The key thing about hydrocarbons isn't that they're "free" (certainly not!), but that the energy yielded from their extraction exceeds, by a large multiple, the energy needed to do the extracting (and processing, and delivery, and so on and so forth). But you still have to make the initial investment of energy. Possibly one of the most useful things we could do with hydrocarbons is building a much longer term sustainable energy system.

As for the claim that money is only valuable insofar as it secures oil, that's trivially untrue (else there wouldn't have been any money prior to the late 1800s and I'm pretty sure thats not the case). That money may only be valuable insofar as it secures energy generally is a less trivial. Constanza's 1980 Science paper was seminal in establishing the strong relation between GDP and energy. But while there is a strong relation, the energy intensity (joules per unit of GDP) of the world economy has been declining for some time.

There is a very interesting argument to be had as to whether economic growth is possible even if the size of our energy system plateaus. This guy Orlov ain't it (for one thing, a little arithmetic is actually necessary).
posted by bumpkin at 6:59 PM on June 19, 2009


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