And that is the billion dollar question! Dilemma is a much milder word than I would use. When do we see the realization amongst the market players that we are at or near peak? I don't think we are there yet, still daily and weekly plays to maximize hedge fund returns and short term profit taking with little regard to the underlying cancer of depletion and lack of discovery. Even with a recession I would think that as supply crises crop up it will not allow the destruction of demand to bring down prices like the flat earth economic boys say should happen. It's really almost impossible to predict, but intuitively I kind of agree with Threadbear. Inflation won't be curbed, in fact it could become a real ecomoic problem for the whole planet, leading to likely worldwide collapse or at best a depression. At some point, and this is the real dilemma, runaway inflation will be what pushes us over the edge. Where is that point? Damned if I know, I don't think anyone truly does. There are too many factors which can swing things in different directions to predict with any clarity or accuracy. I would bet as things get hairy it gets even harder to guage.

I have seen nothing to indicate that we are at the peak right now. There is no shortage of oil, if anything there is only a shortage of refinery capacity.

I find it much more likely that oil is just another bubble. A shortage of gasoline refining capacity does not explain a rise in oil prices. It's clear that a lot of people are speculating on oil right now. That speculation, just as with stocks and housing, drove prices up.

Note I use the past tense there. As usual, the media frenzy and the public's awareness of the jump in oil prices seems to have hit a crescendo just at the peak. I think this next fall in oil prices will drive them down to the 60/bbl area. Below that, oil is likely to fall much farther. That fall will probably crush hedge funds, and thus bring the stock markets and other commodities with it.

Yes things are about to get bad, but they are about to get bad for reasons that very few can see.

Thanks, I regularly felt this degree as a failure now, I just realize that I have an other look to reality. I was just too young to understand it 10 years ago.



As a canadian getting some part of my bonus in US stock option, I was hit badly with the drop of the USD. I decided to move all my investment out of the US Dollar before learning about PO and the housing bubble. I just felt that something was wrong with complaints over outsourcing, the massive debt and the recovery without job. I was pretty sure a the time that US auto makers were screwed.

The first time I heard about americans using their house as ATM, I searched what was that and I found the answer on Financial Sense. This is where I learnt about peak oil. I never regretted my initial feeling.



I wouldn't count on the stability of the dollar. When I suggested to my friends and my family to get their money out of the US, they were suspicious, they were all thinking that the USD will go up again someday. Now that gas price are rising, I have a lot more question about where to invest, they just realize that I was more accurate in prediction than their financial advisor, especially with the GM prediction. I'm probably not alone and when signs of recession will begin, I think a lot of foreigners will try to move their money.

If you convert US GDP in canadian or euro, you will see a different picture than the bulls in the us show you. This is what we see as foreigners, we see our investment performance in local currency and a 10% return in USD can be a loss in euro.

Shady28, as usual, I mostly agree. Oil prices at the moment are partly a speculative bubble. But we are close to the limits of production. Another year's growth in demand in economically booming China and the US (if the boom continues) and a little more refinery capacity, and we will be right at the current limits of production. Still, I agree with you that this looks like a bubble, based partly on a recognition of this situation.



Plausible.



I am curious why you argue this? I do not see a sharp drop without an economic recession. Because if growth continues at its present pace or even a slightly reduced pace, we will be right at the limits this time next year. We will be seriously stretched over the next few months as refineries struggle to produce enough heating fuel to meet winter demand while continuing to supply the demand for gasoline/petrol. I see a possible moderation in price around February or March, when refineries are finished making heating fuel and not yet having to gear up for the summer "driving season," but not much below $50 without a recession, because traders will know that summer is coming.



I assume that you are referring to the financial crash? I actually don't see this coming for another couple of years. That is, unless the Fed is determined to bring it on (which they just might be). In which case, if they continue with 0.25% rate hikes at each meeting, we might see the collapse begin in spring of 2006, just in time to avert another oil price spike.

When the crash does come, I think that we will see an initial period of deflation, in which prices drop, because the supply of money dries up due to mass joblessness and bankruptcy (including bank failures). During this time, I expect that at least Japan's central bank, and probably other Asian banks, will continue a desperate dollar support action in an effort to revive the US economy, without which their own economies are toast.

Once bankruptcy and deflation have allowed the rich to take possession of a large chunk of the real estate and productive assets in the US, I think that we will see hyperinflation, as Asian money creation spins out of control. The Fed and US government will take advantage of the opportunity to wipe out their debt and other obligations, such as the Social Security system. Hyperinflation will also be useful for wiping out the remaining savings of the middle class in order to force them to take any available work for low wages. But I think that hyperinflation probably won't begin until at least 2009, after the Republicans have engineered another presidential term.

Marko, Why will joblessness cause prices to drop? This is traditional economic theory, but will it be valid this time around?

Marko,

You can add to the equation the Beijing olympic games in summer 2008. Chinese will probably try to maintain the economy before the olympics. At this point, US will already be in electoral campaign. 2009 is a very good possibility for hyperinflation.

I agree with the scenario about deflation / inflation.

I think the initial phases of the crash are coming soon. In fact, it may have already begun at small degrees as reflected in the stock markets. They have all turned down - and so has oil, gold, and commodities. Since 1996, the movement of most major markets in the US has tracked M3 money supply. There is another factor to money though - the speed at which it can move through the economy. M1 is a good measure of 'mobile' money.

I think the fed is still pumping money, but without the desired effect. M3 continues to grow, but much of that money sits in corporate coffers and big lending institutions. Meanwhile, M1 is declining...

I don't see why not. People without jobs have much less money to spend. When you have much less money chasing the same number of goods, you get deflation, or a drop in prices. That will apply to oil as well.

Even if the Fed is pumping money into the economy, by creating money to buy US debt to support government spending, unless we have a radical change in government policy, that money will go to pay for military adventures and handouts to the rich. The rich don't spend most of their money on consumables. They save it or use it to buy big assets. Such a policy might help to keep real estate prices from going through the floor (and to ensure that only the rich can afford foreclosed real estate). And it might provide support for the prices of armored Mercedes and Humvees. But it won't keep the prices of consumables like food and oil from dropping.

Once the Asian central banks' creation of money to buy dollars leads to hyperinflation in Asian countries, forcing the Asian countries to abandon their support of the dollar, however, the dollar will plummet, and the prices for most consumables will soar in dollar terms, because they are imported. Even domestically grown food will rise in price in this scenario, because its price reflects large inputs of imported oil and natural gas. As prices rise here, the Fed will be forced to create more money to pay for the expanding US deficit. Meanwhile, rising interest rates will sharply increase the US government's debt service costs. This will quickly lead to hyperinflation. At that point, the dollar price of oil will be going through the roof. Wages will rise, too, for those lucky enough to have jobs, but not as fast as the prices of consumables.

The dollar will ultimately become worthless, and the government will try to issue a new currency, perhaps a "new dollar" worth a million old dollars. Whatever it is, it will no longer be accepted as payment for oil. It might have to be backed by gold.




This is an interesting perspective. I hope you are wrong!

The downturns in oil and gold are recent, small, and have followed big rises in both. I don't think it's clear yet that the trend has turned. Stocks have been more or less flat since last winter. (up a little, down a little, up a little, down a little)

If the oil price steadies, this is actually a promising sign for the economy in the short term. It means that we may escape a collapse triggered by oil prices this year (but probably not next year if the economy is still strong then).

As for money supply, there are two big questions: 1) Will the Fed back down and lower the short-term interest rate if the economy shows clear signs of weakness? If so, this will help to prolong the current bubble. I don't understand the Fed's motivations, but I do understand that they are pretty much all Republicans who want to win the 2006 Congressional elections or at least steal those elections without being too obvious about it. So I think that they will try to keep the bubble from bursting. 2) Will Asian countries continue to suppress long-term interest rates by buying T-bills? Here I cannot see any reason why they will not. In fact, I think that they will step up their buying in order to lower long-term rates still further if they see the bubble starting to lose air. I expect to see long-term rates fall below short-term rates before the end of the year, giving new life to the mortgage/housing bubble.

For all of these reasons, I think that a collapse is unlikely before 2007 and perhaps before 2009. However, 2009 looks bad. VERY bad.

I don't really look at this from a political perspective. I'm pretty sure Greenspan has been around so long because he has been determined to use monetary policy to push the economy forward under any administration. I don't believe a change in administration will make any difference to the fed in that regard - they won't sucker punch the economy simply because their consensus is to dislike the current admin.

Basically, I think they have put themselves in a cul-de-sac. They cannot continue to grow the economy via montary looseness with money flowing into something as destructive as oil, while at the same time the spectre of the K-wave sits waiting in the wings, with the forces that power K-waves far stronger than they have ever been (debt, maldistribution of wealth). At the same time, the housing boom is hitting a plateu and the markets are in a weak technical position. Interesting times ahead..

Marko, Put yourself in the position of a retailer. If 40% of the population is underemployed or unemployed, homeless--no longer a strong consumer, why would prices drop down to accomodate them?

Pricing margins are razor thin for retailers marketing to the lower and lower middle classes anyway--in a supposedly 'strong' economy. Regardless what the price of oil is, why wouldn't a retailer, like Target, for example, just delete this type of customer right out of his marketing plans?

The 20% who are able to purchase aren't just middle class, they have large incomes and assets to draw from. Why not hike prices sky high (even relative to inflation) for the few who are functioning members of a consumer society?

When Argentina devalued it's peso, after depegging from the American dollar, many lost their jobs, in the ensuing depression. As the peso plunged and Argentian's situation grew more dire, retailers responded by hiking prices. The rising prices did more than compensate for inflation of the peso, they illustrated that standard marketing theory was tossed out the window.

Deflationary theory is based on North American model of the depression of the thirties. It ain't going to happen here--not even temporarily

An interesting side note. While everything else went up in price in Argentina, , real estate fell in price. I consider Argentina the working model of what the US and likely Canada to a much more limited extent, can expect in the very near future.

Argentina has partially pulled out of it, after tremendous suffering. Hopefully the US will reach some kind of homeostasis, after a currency collapse, but it seems that a true 'recovery' is unlikely.

But won't we start with deflation? If the companies see it coming then maybe, but I don't think they respond fast enough and suddenly they start to notice that customers ain't buying anymore (well a lot less). Then what we have is a lot of overcapacity, like big SUVs. They are already produced, so better sell them for less than not selling them at all. (However demand for expensive sportscars in the ME is growing, they are taking an interest in Ferrari and Spyker for example.)

I think we will first see another spike in oil prices when Peak Oil hits mainstream and a lot more people will speculate in the oil market. Right after that I think it will crash.

I think the stock markets are now in decline (reached a high last week, at least over here).

If supply is really limited for oil, it will not crash until
a cheaper alternative for oil is found.
That may be many years away.

Yes, very temporary deflation in the SUV type market. This makes perfect sense. If it's already sitting in your lot, deteriorating in value, why not sell at firesale prices? Hell, they may even give them away!

I guess when it comes to getting rid of inventory of any kind, the economy could throw a big garage sale.

It's just extrapolating from there to draw conclusions about an on-going deflation, isn't likely to play out.

I even question hyperinflation, as wages aren't going to go up commensurate to the amount of money that the fed prints or wants to print.If you look at past hyperinflations, wages rose to accomodate rising prices.

Banks won't lend to indigents, and demand and desire are two very different things. The entire economy rests on a mountain of debt, but that rests on the expectation that the debt will be paid back. You don't need a gold backed system for this,--you can have a paper system that will function using these paramters. You could use cowrie shells, bird feathers, little glass marbles, beads, or sticks and accomplish the same.

The problem arises when banks start to assume that they won't be paid back, by many they previously lent to. Then the system locks up, for those in the middle and lower end of the spectrum with prices high, but not spiralling out of control.

What makes you think oil markets will crash? Smoke and mirrors?

I don't know about pushing the economy "forward," but Greenspan has been good at creating conditions that inflate profits, protect financial speculators, and maximize the portion of economic output that ends up in the hands of the rich.

As an example of Greenspan's partisanship, I cite his strident calls for fiscal restraint and spending cuts to end the deficit under Clinton. Earlier, he called for raising the social security payroll tax under Bush I. However, once Bush II was in office, Greenspan was all in favor of his tax cuts for the rich, even though they were fairly certain to lead to the kind of deficits that he opposed under Clinton. Funny, isn't it, that those income tax cuts for the rich are partly financed by the money that he wanted taken away from middle class people as payroll taxes. Now that we have the largest federal budget deficits in history, Greenspan has little to say about them. The difference this time is that a Republican is in office.



Because you have just received delivery of 300 tacky polyester tank tops from China, and you need to lower the price (and your margin) to sell them or risk taking a total loss.



First, I'm not sure that margins are so thin. Walmart and Target seem to be quite profitable now. If they cut staff and other costs in response to the lower volume and close less profitable stores, they can trim their margins, as they will have to do to survive.

There is no way that Walmart and Target are going to be able to compete with Neiman Marcus or Gucci in marketing to the rich.

By the way, one way in which retailers will defend their margins is by demanding lower prices from their suppliers. Facing huge overcapacity in a recession, suppliers in places like China will have to cut their own costs and prices in order to make any sales to American retailers at all.



As I said, there is a limited pool of high-end consumers, and they will not be going to Walmart. Probably retailers like Neiman Marcus will face less downward pressure on their prices.

But the bottom line is that with a drastic drop in the incomes of 80% of the population, there will be less money chasing a similar amount of goods. There is only so much stuff that rich people can buy. Prices will drop.



This is what happens when the currency collapses. I do not foresee an immediate collapse of the dollar. Too many Asian countries are prepared to defend the dollar. No one wanted to defend the Argentine peso.

I have argued that, during the initial year or two of the recession, Asian central banks are going to be desperately buying dollars and US Treasury bills in an effort to support the dollar and the US economy, on which they are heavily dependent. Only after Asian money creation spins out of control and leads to hyperinflation there will they be forced to give up this policy. Then the dollar will drop like a stone, leading to hyperinflation in the US.



I think that it is actually going to look a lot like the depression of the 30s at first, before it shifts into something like the situation in Argentina.

Marko--WalMart and Target have razor thin margins per unit and rely on volume and economies of scale. They won't survive unless they alter their marketing dramatically. They can't trim enough to counter the wave of poverty they'll be encountering. A strong dollar- relative to other currencies, cheap foreign labour, and oligopolic pressure brought to bear on their suppliers have enabled Americans to survive deflation style wages. They HAVE been living deflation. You're predicting the past here.

The American dollar is going to be realigned internationally, and that is what is going to hurt. The idea that other currencies will drop in a synchronized fashion, allowing the US to go on purchasing goods from China assumes many things, first of which is that China doesn't have a vested interest in seeing the US crater as it creates a stronger engine of consumption domestically.

If the US is successful and controls the flow of oil in the Middle East, that will have serious repercussions for the US, economically. China won't continue underwriting American economy if this happens.

If on the other hand the US doesn't control the flow of oil into China, this allows China to develop in a more unimpeded fashion, and they don't need the US. Either way, the US suffers economically, as China lets its currency climb ever higher relative to the American dollar.

The US has been important internationally as the biggest consumer. It is no longer in the international community's best interest to perpetuate this system. It WILL be cut adrift, and that is an inflationary scenario. Americans should take advantage and buy everything they can in the big ensuing yard sale, as that will unfold over a period of no more than six months, after the sh** starts hitting the fan.