End of Cheap Oil

Things to keep in mind on economics and finance: the rise of gold along with the rise of oil in the 1970s. Protectionism gone wild. Agriculture. Fertilizer. Real estate.

Politics: Entitlements and other rising costs on government in an economy that might be getting smaller every year, but which is already heading for insolvency. A shift in "green" rhetoric.

The big area of disagreement I have is where he thinks this will create jobs (since he assumes that there won't be technological innovation for about a decade at least). This will create jobs in the same way that getting rid of heavy equipment at a construction site means instead of one guy operating the equipment, there are 20 guys with shovels.

However, let's say that job losses are overestimated by free market economists and that the gain in jobs in the U.S. comes at the expense of jobs overseas. Now, the last audience question comes into full relief. Why are China and India going to agree to cut carbon in order to export to a market that he has just pointed out will not demand imported goods and which, I would argue, is too poor anyway.

The response of much of the developing will be to demand, and receive, massive technological transfers from the West, or they will burn coal. The former is possible because the West will figure, due to the high cost of oil, they are insulated from foreign competition. The other is that they continue to use cheap energy and this low cost allows them to build the capital necessary to transition to a more efficient economy. In either case, these countries will still be the fastest growing. Another possibility is that their economies stagnate and they become trapped, as will we, at current or lower standards of living. In that case, there will be serious political repercussions all around.

Finally, think about the U.S. and Western government's response to suddenly expensive oil. If oil is $200 a barrel and every oil shock has created a recession, how will the economy and government respond? The initial effect will be highly deflationary. Costs will be soaring, but this will not be inflation, as people will spend more on food and energy and less on leisure and debt repayment. Less debt repayment leads to deflation...and a repeat of the crisis of 2008. However, in a world where oil goes to $200 a barrel *WITHOUT* inflation, think of where the price will end up if the governments of the world print money to "bail out" the economy.

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