by Joseph Robertson

Created on: July 19, 2008

Oil Shock: the Coming Economic Unraveling & How We Can Adjust

Petroleum is the most pervasive base resource other than water in the global economy of the 21st century, and as demand is exploding, production is nearing its geological peak, and untenable price increases are hitting a strained economy hard. Oil prices could be in a stagflation lock, unable to readjust to consumers' means, unable to compete as emerging energy sources repeatedly slash development and commercial prices. Whatever factors are at play, crude oil prices have jumped over 900% since 1998, and it looks like production cannot meet global demand.

Security factors, including mounting tensions with Iran, are playing a role in driving prices up, but they are also playing a role in provoking serious thought about how to best speed the shift away from petroleum as a fundamental economic resource. Burning petroleum-based fuels is not only bad for the environment, it is propping up regimes whose legitimacy is questionable by democratic standards and whose record on human rights, transparency and corruption is of serious concern.

After Israeli military exercises that many observers said appeared aimed at practicing for a strike on Iran, the Iranian government said it would "close" the Strait of Hormuz, cutting off perhaps 20% of all global oil exports. Washington says it would move to keep the Strait open, suggesting military confrontation, which in itself would reduce commercial shipping and drive the price of crude still higher.

The New Scientist magazine, in its 28 June 2008 edition, ran a feature on the coming "oil shock", claiming "the real crisis has yet to hit". Quoting the director of Boston University's Center for Energy and Environmental Studies, Cutler Cleveland: "Much of the economic expansion of and growth of the human population in the 20th century is directly tied to the availability of large amounts of cheap oil." Cleveland added that "There isn't a single good or service consumed on the planet, except in rural economies, that doesn't have oil embedded in it. Oil is the lifeblood of the global economy."

The worrying gist of the comments is that, should anything cause a serious interruption in the supply, the global economy would slow down at perhaps unprecedented rates, or worse, enter a period of chaos and collapse. Major organs of the global economy could shut down as they are drained of that "lifeblood", and political and strategic balances could be thrown off kilter or wasted altogether.

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