"How fast does the economy decline as oil production declines? In his latest report, drawing on various sources, Robert Hirsch reasons that the correlation is 1:1...Other reports substantiate that ratio....our GDP will decline at approximately the rate oil declines....With the annual oil decline rate expected to range between 2% and 5% (see Hirsch, 2008) and the Oakland Peak Oil report using 2.6%, we will have a massive unemployment and homelessness problem on our hands. [Eventually the production decline rates will be further affected by depletion rates of 8 to 9%. Global Peak Oil was reached in 2006.--Ed.] It also seems reasonable to expect that a great deal of wealth will be destroyed during the decline, as is happening now in the current credit crunch but on a larger scale...
Note the relationship between oil price spikes [immediately preceeding] economic contractions. Also, we must consider that the nominal price of oil might fluctuate wildly as the underlying monetary supply expands (inflation) or contracts (deflation). Indeed, economic systems may become so unhinged by price fluctuations in oil that the system becomes wildly chaotic, with extreme cyclical swings prices as economies collapse to due high oil prices, recover, collapse again, and so on.
However, the bottom line is this: oil will become increasing expensive in real terms, even as it goes through wild swings of nominal decreases (due to general economic contraction and deflation) or nominal increases (due to monetary inflation). During an economic depression, the real price of oil will be too expensive for most people to sustain their current standard of living despite nominally low oil prices. That is, if you don't have much money, oil is pretty expensive even when it is nominally cheap...
As noted earlier, a shrinking economy is a 'negative sum game' (similar to the game of 'musical chairs'). Such situations typically lead to conflicts over resources."
Aloha, Brad
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