Peak Oil

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.

---

Andrew Clancy says:

How can our economy recover from recession if the price of oil continues to climb? In 2007 we entered what appears to be a perfect storm of out-of-control commodity prices, cost-push inflation, and the simultaneous collapse of commercial and consumer credit. The recession declared by the NBER officially began in December 2007, but it was preceded by a year-long period of rising commodity prices.

I watched the price of oil rise from $60 a barrel in the beginning of 2007 to over $140 in July 2008. At the same time I saw the effects of the credit crisis. The Bear Stearns collapse in March. Lehman Brothers in September. Both companies failed because investors lost confidence in their ability to meet short and long-term debt obligations. This happened, in large part, because they invested in risky credit derivative products linked to the sub-prime credit market.

The price of oil continued to rise as the sub-prime mess unfolded. Demand from developing nations as well as speculation on higher prices contributed to the increase. I suspect the declining dollar didn't help either. Oil ultimately reached about $147 per barrel before crashing to as low as $35.

So what happens now? In the midst of our economic recovery from the "financial crisis", oil has steadily climbed from around $35 per barrel in January to over $70 today. I remember $4 per gallon gasoline in 2008. I remember how consumers cut back their spending and how the price of just about everything rose in response to the higher energy prices. At the time oil was approaching $80-$90 per barrel there was talk of stagflation. I see gasoline prices inching up again. I know that housing, credit and employment issues have left consumers hurting. I see increasing demand for raw materials, especially from China. I see the world population increasing and I know that will lead to an increase in demand for commodities. I'd love to think that we (government) could just spend our way out of the mess we're in, but that may not be enough.

What do we do with a failed energy market? We've ignored the issue for so long that, at the very least, the solution(s) will be both difficult and expensive. Maybe government incentives for private industry to develop alternative energy would be a good, albeit expensive, start. Maybe nuclear fuel will make a comeback. Perhaps we can make a dent by recycling more, "buy local" programs, higher fuel efficiency standards, regulating corporate negative externalities, a resurgence of public transportation, etc. I'm not an expert, but my sense is that these things are not enough. If peak oil is a reality (Dr. King Hubbert predicted peak oil now [pdf]), then the rise in the price of oil is inevitable. Alternatives will take dozens of years to develop and implement, and we will suffer the economic, social and political consequences in the mean time. Maybe government spending on a "green revolution" helps us get out from under this mess, or maybe that's not enough, and rising energy prices throw us right back in to recession.

Bottom Line: There are social costs associated with the use of fossil fuels and for not developing alternatives. Many of the costs are known, but many are not. However they are ultimately quantified, the costs are compounding with time. The longer you ignore a problem, the worse it gets.