War is a Disaster - An Oil Shortage is Not
By Nathan Allonby
03/06/07 "ICH" -- - Stock prices crashed last week in a panic sparked by a combination of factors including the weakness of the US economy and fears about a possible war with Iran (1).
Although war was far from the only factor in the crash, the markets are regarding the prospect of war very negatively and with extreme nervousness. It is clear the markets do not want war - they anticipate a very negative effect upon the economy. They don’t want anyone to rock the boat when it is already half-full of water.
By contrast, record oil prices last year did not prevent stock prices surging to record highs also. The markets saw rising oil prices as much as an opportunity as a problem. Sure, rising oil prices could cause an adjustment, but not a crash.
There has been a lot of speculation about the effects of “peak oil” - the idea that oil production is about to peak, or has already done so, and that from now on oil production will fall continuously, leading to rising energy prices. Many commentators have worried whether this would make our current lifestyles unsustainable, with dramatic social and economic readjustments. This belief is based upon the myth that energy consumption directly supports economic activity and that a fall in energy consumption must lead to a fall in economic activity. In fact, that is not strictly true because there are several intervening factors between energy consumption and output, not least of which being efficiency. Yes, there is a simple relationship between the level of economic activity and the level of oil consumption (for a fixed price, with more money, you can buy more oil) but not the other way around.
There are precedents to show us what may really happen as a result of “peak oil”. Britain hit “peak coal” in 1913. As a result, between 1907 and 1937, Britain’s energy consumption was held almost static. Despite this, Britain’s economic output doubled. Quoting E.F....