2006: The Year of Oil Collapse?

By James Howard Kunstler, Kunstler.com. Posted January 11, 2006.

Editor's note: This is one of three perspectives AlterNet has assembled on the prospect of peak oil and its implications for modern society and the global economy. The other two are from World Watch: Christopher Flavin writes that while we can't know exactly when oil production will start declining, we must focus on alternatives to petroleum now; and Robert K. Kaufman describes the role the market and government should play in helping to make the transition from a petroleum-dependent society.

The sheer weight and inertia of American life kept our systems on their feet through 2005, despite a worsening economic climate and some harsh body blows, like the hurricanes that pounded oil and gas production in the Gulf of Mexico. In a way, some perverse law of sociopolitical physics seemed to concentrate all the year's destructive potential in the devastation of New Orleans, Biloxi and other Gulf Coast towns -- while the mighty din of motoring and cheeseburger sales roared on elsewhere without pause from Cape Cod to Catalina.

First, a little background briefing on where we are at -- to use some of the bad grammar now normative in American life -- before I make predictions (i.e., guesses) about the year ahead.

You can only introduce so much perversity into an economic system before distortions cripple it. From 2001 through 2005, consumer spending and residential construction had together accounted for 90 percent of the total growth in GDP, while over two-fifths of all private sector jobs created since 2001 were in housing-related sectors, such as construction, real estate and mortgage brokering. Much of the money spent did not really exist except as credit -- incomes as yet unearned, hallucinated liquidity, wished-for wealth, all based on the expectation that house values would continue to rise at 10 percent to 20 percent a year, forever. It became a reckless racket, all predicated on sustaining an economy that had lost its other means for generating wealth -- foremost its infrastructure for making things besides suburban houses.

This housing bubble economy represented, holistically speaking, the wish to maintain a sense of normality in American life under conditions of disintegrating normality, and it is no symbolic accident that it centered on the images of hearth and home, because fundamental comforts were what many Americans actually stand to lose in a reality-based future. The decay of standards and norms in banking behavior applied to housing started, as in the case of the proverbial rotting dead fish, at the head, the Federal Reserve, and infected every lowly loan officer through the body until, in effect, lending standards ceased to exist.

The suburban housing bubble and its related activities were predicated on the idea that we could continue building out a living arrangement dependent on cheap oil and methane gas, and that all the subdivisions and strip malls would retain value for decades to come. Of course, this was the central delusion of the suburban sprawl economy, because it was obvious to anyone who gave the situation more than a cursory glance that cheap oil and gas were the things we were least likely to have in the decades to come.

This reality had begun to penetrate the American collective consciousness and will be represented in 2006 by millions of individual choices to not buy a new suburban house, either because the individuals fear the expense of long commutes, or they fear the cost of heating a 4,000-square-foot house occupied by only a few people (or both). As the inventory of unsold new houses mounts up, the prices of all houses, new and old, will start to go down. There will be enormous psychological resistance to this reality, expressed in a lag of correct pricing, as the owners of these value-shedding "investments" wait for the bubble behavior (anticipated 10 percent to 20 percent asset appreciation) to return. Eventually they will get the picture.

The velocity of change in the housing bubble (and the psychology involved) will be greatly affected by oil and gas prices. It seemed to many of us watching the energy markets that the world may indeed have passed through its all-time oil production peak in 2005. Production in 2005 was nearly flat over 2004. The world was producing and also using roughly 82 million barrels of oil a day. Oil coming into new production was not making up for signs of depletion showing among virtually all the world's major producers. Iran, Russia, Mexico, Venezuela, the North Sea and, of course, the United States, were all past peak.

The big mystery was Saudi Arabia, but its inability to boost production from the 50-year-old fields that comprised its main reserves suggested that it was topping out, too. Which left an energy-hungry world with the need to either (a) make other arrangements for powering industrial economies or (b) contest for control of the remaining oil reserves, which were substantially concentrated in the Middle East and Central Asia.

Here, I hasten to remind the reader that peak is peak, meaning right now we are all operating on the basis of a lot of oil flowing around the world. The comfort level is still high. The factories are still humming in China, and the six-lane commuting corridors are still full of big cars around Atlanta, Dallas, Denver and Minneapolis. The problem is that the oil supply will soon steadily diminish at a rate of at least 3 percent a year, and that necking down of supply is likely to be expressed in greater geopolitical friction and turmoil between the great nations who crave oil.

James Howard Kunstler is a regular contributor to Orion magazine, Mother Jones and the Atlantic Monthly, and is the author of "The Long Emergency" (Atlantic Monthly Press).

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