The Oil Drum

This is the second of a three part series giving my view of the economic impact of peak oil.

Peak oil seems likely to make a huge change in our economic system--more than would be expected by a worldwide decline in oil production by a few percentage points a year. In Part 1, we looked at the contrast between economic systems before the industrial revolution and the current economic system. We also looked at economic studies that suggested that energy, and the more efficient use of energy, seem to be big contributors to the real economic growth that took place since the industrial revolution.

In this segment, we will look at some other changes affecting the economy besides the growth in the use of fossil fuels. We will look particularly at debt and how peak oil is likely to affect a financial system that is tied to debt. We will also look at some the stresses that the economy is currently under. Some of these stresses seem to stem from a failure of the United States to fully adapt to its own decline in oil supply since 1971; some of these stresses come from the fact that the world is finite, and we are reaching the earth's limits with respect to more than just oil.

1. Why is debt important to our economy today?

This is some correspondence between me and an an individual known here as Shunyata. Shunyata is an individual who is involved with managing financial derivatives. Shunyata's education and careers have spanned several disciplines, including actuarial science, statistics, mechanical engineering, and financial engineering. These have given him a breadth of perspective on the world's financial situation.

Dear Shunyata,

Some of the financial things I have been reading lately are downright alarming.

I keep seeing comments by people concerned that other countries will cut off the US debt spigot.

One concern is the huge amount of sliced and diced debt that has been sold around the world with very questionable assets behind it.