Peak Oil Economics & Money – What Underwrites our Dollar?

A topic that is surprisingly never linked and analysed these days is that of the monetary & economic impact of peak oil. Most gold bugs would be well aware of the classic arguments of inflationists and deflationists as they relate to the fate of our fiat monetary systems, but none I have read have really mused on the impact of oil shortage on our monetary system’s fundamentals and operation. This is due mainly to group denial of coming oil scarcity, or as James Kunsler puts it “consensus trance” of the belief in the longevity of our current living arrangements.
Most discussions of monetary backing have focused on the history of gold and silver in this role, and the dilution of this backing through monetary inflation, which I tend to think is a part diversion from the point at this stage of the dollar’s evolution.

I say this in light of the fact that gold and silver were supplanted by oil some time ago as the primary, most valuable commodity, and underwriter of the value of the dollar and the assets given their high value in dollars (such as but not limited to Western Real Estate). I make this point remembering that it is the dollar that currently purchases us incredibly large volumes of cheap energy that makes the living arrangement and utility of the real estate and other assets we own a proposition and hence assigns them high value.

So what happens when due to depletion and supply constraints the dollar no longer purchases us huge volumes of cheap energy? Part of the answer is obvious and spells high initial commodity inflation – but would this stabilise and translate to higher asset prices (such as real estate) as we experienced in the aftermath of the inflationary period of the 70s? If we consider that in the long term demand for energy will never now decline, but in fact accelerate due to population factors, and this combined with energy supply always falling for geological reasons, then the only way for supply and demand to balance in this market is for UNENDING rises in energy prices. This is a very different kettle of fish to the 70s when there were swing producers to counter the OPEC scourge.

Matt Simmons in a recent presentation to the Harvard business School said that “There is no clear ceiling for when oil is too expensive.” This implies an ever increasing inflation of oil and its energy derivatives going forward, including all consumer products that are derived from it directly or indirectly, or have their distribution facilitated by it.

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