Peak Oil is You

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Page added on January 6, 2011

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Jeff Rubin: Peak Oil Means Massive Sovereign Defaults


2010 left us all with a mountain of debt. Whether you’re a taxpayer in the UK, Ireland or the US, it must already be pretty clear that you’re on the hook for a lot of IOUs borrowed from your future. You may not have borrowed the money yourself, but your government has already done it on your behalf, running up massive, record-setting deficits. What’s not clear is exactly how your government is going to pay that debt back.

With students already rioting in London over huge tuition increases, and general strikes the order of the day in places like Athens and Madrid, chances are slim that incumbent governments will survive long enough to cut their way to fiscal solvency. That’s not to say the fiscal brakes aren’t on (they are—at least everywhere but in the US). But the deficits are so gargantuan (as an example, Ireland’s is equal to one third of the country’s GDP) that the twin tasks of slashing spending and hiking taxes could last decades, provoking all kinds of social and political push-back during that time.

Given austerity’s slim chance at success, you might ask why government borrowing rates in the bond market, though rising, aren’t much higher. History would suggest that the yield on a ten-year US Treasury bond should be close to double what it is, given the size of Washington’s borrowing program.

The reason it’s not is that creditors and debtors both share a common belief that a powerful economic recovery lies just around the corner—one so powerful, in fact, that tax revenues will suddenly fill government coffers and let bondholders be paid the huge sums they are owed while at the same time sparing taxpayers an otherwise draconian fate.

The only problem is that the economic growth everyone is counting on is powered by oil. And as you’ve probably noticed, that’s getting more and more expensive to burn.

The minute global industrial production recovered from the recession, oil prices were suddenly on the verge of triple digits. That’s not an accident, since the two go hand in hand. Global oil demand is up 2.5 million barrels per day from last year. Any further increases in oil demand and oil prices will be trading comfortably in triple-digit range.

That suddenly makes all that government debt very energy intensive. It will take huge amounts of energy, particularly oil, to achieve the growth rates that all the near-bankrupt governments around the world need to even service their debt, let alone repay it.

So consider just how sustainable economic growth would be in a world of oil prices of $100 to $225 per barrel. Because those are the price parameters we’d be facing in the unlikely event that we actually see the kind of economic growth that bond markets and public treasuries around the world are so desperately depending on.

Jeff Rubin

2 Comments on "Jeff Rubin: Peak Oil Means Massive Sovereign Defaults"

  1. Kenz300 on Thu, 6th Jan 2011 1:39 pm 

    We all need to think about the changes that need to be made to become a more sustainable society.

    Limited resources of food, water, oil, phosphorous, tuna, rare earth metals and on and on are meeting an ever growing world population. In the last 12 years the world added a billion people and in another 12 years there will be a billion more. This is not sustainable.

    We will all be doing more with less energy and less water. We will learn to conserve.

    Locally generated wind power, solar power, geothermal power and second generation biofuels will become an increasing part of the energy supply.

    Communities need to look at producing goods and services close to home with local labor.

    If oil prices rise to the $150-$200 barrel range the world economy will be in for a shock.

    We may need to create safe paths to bicycle to work, school or play. Those highways may become less crowded with high energy prices.

    The time to transition is now.

  2. Perfecto on Thu, 6th Jan 2011 11:17 pm 

    I read Mr Rubin’s book Why Your World Is About To Get A Whole Lot Smaller.It was good. Why do we never hear about oil prices causing recession, apart from him? It seems so logical.

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