Gail, Jeff Rubin , and now James Hamilton (warning- pdf) of the University of California – San Diego have produced literature correlating either this financial collapse or recessions more generally with peak oil and oil prices. The take-away message of their work is that oil prices played a fundamental role in causing the current recession and many previous recessions. In this post I, along with Steve Balogh, a fellow researcher here at the EROI Institute at SUNY-ESF, will add to this discourse.

The following applies not just to housing, but in many ways to credit bubbles in general. IMO we should expect to see graphs like the one below across a wide range of asset classes in the not too distant future.

Houses Should Not Be a Commodity

There are technical reasons for a market crash (foreclosures, credit tightening, etc.) and I have discussed those in great detail in earlier analysis posts; however, market psychology plays a large roll in how and why it all plays out. The technical factors cause shifts in psychology among the market participants which exacerbate market moves. Today I will examine the psychology of market bubbles drawing parallels between the commodity futures market and the real estate market. In this post want to clearly illustrate how and why the psychology of market participants will facilitate the ongoing price crash.

Virtual Water, Real Profits

"A typical meat-eating, milk-guzzling Westerner consumes as much as a hundred times their own weight in water every day," says Fred Pearce, former New Scientist news editor and author of When The Rivers Run Dry.

That's because it takes between 2,000 and 5,000 litres of water to grow one kilogram of rice, 11,000 litres to grow the feed for enough cow for a quarter-pound hamburger, 50 cups of water for a teaspoon of sugar and 140 litres of water to produce just one cup of coffee. The world today grows twice as much food as it did in the 1960s, but uses three times as much water to grow it. Two-thirds of all the water taken from the environment goes to irrigate crops. "This is massively unsustainable, and has led many people to conclude that the apocalypse wasn't averted, only postponed," says Pearce.

And the over-use of water doesn't just apply to food production. Every T-shirt you wear will take 25 bathtubs of water to produce. Every small car uses 450,000 litres. If what you wear or drive is imported, you in the West are helping to empty rivers across the world. Water used for growing food and making products is called "virtual water". Every tonne of wheat arriving at a dockside carries with it, in virtual form, the 1,000 tonnes of water needed to grow it, explains Pearce.

The global virtual-water trade is estimated at around a thousand cubic kilometres a year, or 20 river Niles. Two-thirds is in crops, a quarter in meat and dairy products, and just a tenth in industrial products. The biggest net exporter of virtual water is the US, which exports in grain and beef around a third of all the water it takes from the environment; Canada, Australia, Argentina and Thailand are all net exporters too.

Grass growing as potential fuel

"The opportunity exists to produce gas from grass or pellets from grass and heat buildings or even use it for transport,'' Samson told a seminar sponsored by the Frontier Centre for Public Policy in Regina Tuesday.

"This (biomass) is a very viable option for the transportation sector,'' said Samson, who's based in Quebec.

Yet governments continue to pour millions into subsidies to produce ethanol and biodiesel, which are less energy efficient than biogas produced from switchgrass, said Samson, who's been working in the field of bioenergy development since 1991.