01 June 2009

Geologist Colin Campbell made a number of astute observations in this 2005 video interview (below) about oil and the financial system. We have to wake up to the fact that we are nearing or at the end of growth.

The boom time of the last 50 years was based on cheap oil which is now coming to an end. The end of growth threatens to bring down our debt-based monetary system which is founded on economic growth to pay off interest-bearing debt obligations.

We can expect decade-long, unprecedented market gyrations and volatility as central bankers resort to every trick in the economic textbooks and their magic bags to starve off a recession. They will ultimately fail because unlike credit, they can't create oil and natural resources out of thin air.

Dear bankers, welcome back to biophysical reality.

Unfortuantely, the growth mentality is still deeply entrenched in our government as can been seen from the Prime Minister's speech in Parliament (27 May '09):

At the broadest level, our approach to economic development and to growth remains valid. We have to stay open to trade and global competition.

So the question is how do we encourage energy conservation to grow more sustainably and to be less affected when energy prices go up from time to time, all in the long term?
The opposition leader Low Thia Khiang, seemingly oblivious to the relationship between cheap oil and globalization, fares no better:
The Workers’ Party chief and Hougang MP defended the long-held growth model, saying in Mandarin: ‘I believe it is correct to attract foreign investments to encourage competition in a free market, to open up our market and to go global and…integrate with the global economy.’
It won't be easy to discard this mentality until we hit a more severe oil crisis of some kind in the near future to awaken us.

Two economists, Jeff Rubin and James Hamilton, have concluded that the current recession was caused by oil spikes.

Graph Source: http://www.theoildrum.com

Colin Campbell Interview:

The first half of the age of oil saw the rapid expansion of industry, transport, trade, agriculture - all of those things allowed the population to expand six-fold. So you have this enormous and brief chapter in history of this rapid expansion, and included in that thing is financial capital....

..the banks lend more than they have in deposit...the banks had confidence that the resulting expansion of all of this investment in debt and loans and everything was sufficient collateral for today's debt...

So expansion tomorrow covered the debt of today.

..But unseen by anybody or unrecognized was that this expansion was not just money. It was the good old cheap energy (oil) to make the wheels turn and do everything. So we now face a situation when the bankers begin to wake up and say "well this expansion cannot go on anymore without the cheap energy to make it happen". That means that the massive amount of debt throughout the world is loosing its collateral...

...[Bankers] will wake up and say "we got bad debt on our hands"....

Every single company market quoted on the stock market have a tacit business-as-usual assumption of continuing cheap easy oil such as they have known in their business. So once you realise that this cheap abundant easy oil isn't there, that tells you that virtually every company quoted on the stock market is now overvalued. There has to be some radical readjustment and capital really has to be reduced in some way to match the declining energy supply that on which it eventually depends. So this is the kind of crisis that is staring us in the face...