Energy, Finance and Hegemonic Power

[GliderGuider]

Here are some excerpts from a very thought provoking introduction from my favourite economic blog, The Automatic Earth:

Energy, Finance and Hegemonic Power

The interface between finance and energy will prove to be the most important determinant of the way the Greater Depression we are rapidly moving toward will play out in practice. For those here who may be unaware of peak oil, the point is that global oil production appears to have reached a production peak that it will not be physically possible to exceed. Oil discoveries peaked decades ago and we have since been increasing production from large existing fields using ever more complicated and expensive technology, in order to supply increasing global demand from decreasing reserves.

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The effect of easy credit was to flood commodity exchanges with liquidity, as liquidity fleeing risky securitized assets searched for a safe haven. This pushed up the prices of all commodities beyond what could be justified, sending premature signals of scarcity that attracted even more speculative investment. In this way a bubble was formed, but bubbles always burst, and when they do, the speculative money disappears very quickly, taking price support with it. The price collapse we have seen since is partly a result of speculation in reverse, as speculators go short, and partly a result of falling demand, and that fall in demand has only just begun.

The consequence of that price plunge is a severe impact on the viability of continued fossil fuel exploration and development, and also a similarly significant impact on the viability of energy alternatives such as renewables and efficiency investments. Ilargi has long referred to this as the Law of Receding Horizons, meaning that each time alternatives appear to be reaching the threshold of viability, the combination of the price of conventional energy and the cost structure for the alternative is such that the threshold is never quite reached. Once again, energy prices are falling as costs for alternative have remained high, so that the hoped for developments will again be put on hold.

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Many governments around the world, including those of all the major powers, are well aware of peak oil. In a very real sense in a modern world, oil IS power, as there is no comparable source of concentrated, transportable and flexible fuel. Securing access to it is therefore of the utmost strategic importance. Some governments, like the Anglo-Saxon economies, have so far appeared to place their trust in the global markets and their own perceived ability to outbid the competition. Others, notably China, have been quietly arranging long term bilateral supply contracts directly with producers, thereby taking production off the market.

China's strategy is likely to prove far superior in difficult times when international trade is drying up, the fungibility of oil comes under threat and no one can be sure of being able to outbid the competition. By the time others realize that trusting the market to provide is essentially a modern day cargo cult, they may have been completely out maneuvered. In my opinion, this will be the foundation of the coming shift in hegemonic power towards the Far East, but it will not be a peaceful transition. Resource wars are a given under these circumstances.

[Bigmack]

1. Powerful Post

Thanks for this one...."answers" some questions I've been mulling over. And like all arguments - logical (which this one is) or not, only time will tell, but thanks. Ms Bigmack