The shunning of the dollar and the braking for peak oil

Two of the biggest under-the-radar stories of all time, especially if you live in the reality-free zone that is the US: the dollar collapse and peak oil.

For years, the US has been printing dollars, buying oil, and selling treasury bonds for those dollars, in effect buying oil with promissory notes. We also ran up huge fiscal and trade deficits.

For nearly 30 years, due to overproduction of oil, there was little conservation, little investment in alternative energy, and the construction of an urban landscape that cannot function without cheap oil. The problem is not that oil has become too expensive; the problem is that for far too long, oil was too cheap. All that did was cause the oil industry to go bust and hollow out, greatly reduce the number of drilling rigs and people who knew how to operate them, discourage generations of engineering students from entering the field, and teach everyone to treat energy and food with utter contempt.

These two basic problems are about to grab each other by the tail in a vicious circle.

In the short term, the price of oil will go up, and it will go down. The dollar will go up, and it will go down. Do not avert your gaze from the brick wall we are approaching.

The price of oil and the supply of oil follow supply and demand... sort of. The problem is the supply and demand of oil are always in disequilibrium, because it can take significant amounts of time for price to catch up with supply and for supply to catch up with price. Texas used to be the "swing producer" (the one that could ramp up supply or ramp down supply quickly in response to price swings). For the last 30 years, Saudi Arabia has been the swing producer. Now, there is no swing producer. So what is different this time is that no one has excess oil production capacity, and since all the easy-to-pump oil is gone, new drilling projects now take 10 years or more to implement. Over the last three years, although the price of oil has substantially increased in all major currencies, the amount of oil pumped has remained at about 85 million barrels per day. So supply is clearly not responding to demand.

On the other hand, because the rest of the world is developing so rapidly, demand is not, and will not, respond to the limited supply until there is a global recession... and that would be only a temporary respite.

We are about to get a front seat view of what happens when supply and demand cannot respond rapidly.

The Cantarell oil field off the coast of Mexico is the second largest oil field ever discovered. It provides the US with about 7% of the oil the US uses. Even if Mexico started drilling in deep water today, because of the complexity of the drilling, the new oil would not flow for 10 years. In order to continue to export oil to the US the way Mexico has been, the Cantarell field therefore has to produce oil at the rate it has been for the next 10 years in order to continue to export oil to the US the way it has been. There is only 1 year of oil left in the Cantarell field. So, Mexico has two choices: continue pumping at the present rate and then have nothing to export for 9 years, or drop pumping immediately by 90% and export at the rate of 10% for 10 years. Either way, Mexico is about to rapidly decrease the amount of oil it exports to the US. I suppose in the next few months to a year, Mexico will have an enormous fiscal crisis because their oil exports provide the Mexican government with half of its revenue. (This is an extreme oversimplification for brevity.)

It is not like there were no warnings.

Prince Abdullah, now King of Saudi Arabia, said to the Gulf Cooperation Council in 1998:
"The oil boom is over and will not return. All of us must get used to a different lifestyle."

The King said in April 2008 that he had "ordered some new oil discoveries left untapped to preserve oil wealth ... for future generations".

In April 2008, the vice president of one of Russia's biggest oil companies said that Russian oil output is in longterm decline.

So whether they can't pump or they won't pump makes no difference. They aren't.


The dollar has dropped by nearly half against the euro, and could drop further against the euro and other major currencies. This is part of the reason that the price of oil has risen to about 5 times in price in dollars; it has risen to about 4 times in yen, and about 3 times in euros.

There is wholesale buying of oil futures using all the dollars lying around because who knows how much a dollar will be worth in 5 years, but a barrel of oil will still be a barrel of oil in 2013.

Iran no longer accepts dollars for oil and only accepts euros and yen. Even some Japanese are starting to sell US treasury bonds because they lost 7% in value in two months, and they think the dollar will fall even further against the yen.


Ultimately, the oil exporters are doing us a favor. It is better to hit the brakes before we hit the brick wall rather than run into it at full speed.

Everything President Carter said is coming true.