Who said it?

“We need to start addressing the cause of our problems – the hierarchal structure of out political-economic system that we generally take as a given – rather than continue to focus in isolation on the many symptoms of this structure.

In my opinion, commodities (including oil, metals, agricultural commodities etc.) are in another speculative bubble, which I would expect to resolve as the last one did in 2008 – with a very sharp speculative reversal crashing prices in a matter of months. Bubbles form as positive feedback loops where the anticipation of higher prices in the future drives momentum chasing, creating a self-fulfilling prophecy in the relatively short term. Speculators jump on the bandwagon and drive prices far in excess of what would be justified by the fundamentals, then they take their profits, dump the sector and short it, creating a price crash (i.e. a self-fulfilling prophecy in the other direction). This financial gaming can overwhelm, and wreak havoc with, sectors of the real economy. We may or may not have seen the high for the year, but I think the high is not far off, and when the reversal comes I expect that high to stand for perhaps a few years.

As supply and demand become tight, what one typically sees is not a one-way price escalation, but an exaggerated boom and bust cycle with very high price volatility. We have seen this play out for the last several years. It is also part of the general topping process of the credit bubble, with moves in many markets governed by the general ebb and flow of confidence (and therefore liquidity), so that many prevailing trends (i.e. stocks, commodities, bond yields, the dollar etc) turn at similar times. Such a turn is rapidly approaching in my view, and with it will come a resumption of the credit crunch, but more powerful this time. A notable casualty could well be the European monetary union.

I would expect the speculative reversal to be the initial stage of finance impacting on energy prices. As we move into depression, the price crash should be followed by a dramatic weakening of aggregate demand, and therefore price support. Purchasing power will be falling due to credit contraction and spiking unemployment, undermining demand, which is not what you want, but what you can pay for. Even as prices fall, affordability is likely to get worse for most, as purchasing power may fall further (and perhaps faster) than price. I think we could see oil reach $20/barrel, but this would not be cheap oil for most people under depression conditions.

In my opinion, oil will bottom early in this depression. As depression leads to escalating conflict, I think resource wars will intensify. Conflict, and the lack of investment that depression would ensure, set up the conditions for a supply collapse down the line. In a few years I think low prices could give way to a veritable moon-shot, continuing the exaggerated boom and bust cycle. Against a backdrop of deflationary depression (i.e. the collapse of the global credit bubble, which is deflation by definition), this would render oil products completely unaffordable for many.

While I think the next few years will be remembered as a time of financial crisis, an energy crisis is clearly coming. Financial crisis can delay it, but at the cost of making it worse a few years later

Nicole Foss is the co-editor of The Automatic Earth, where she writes under the name Stoneleigh.


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