The Error of Peak Oil

There is a lot of worry that the world has reached its maximum petroleum production level and will now, or soon, begin to reduce the annual production. Given the assumed increase in world demand, led by China and India, this produces an alarming scenario.

First, of course, if production drops, prices will rise, and demand will fall. As prices rise, production sources that were previously uneconomical are brought online, although not immediately. To a considerable extent, this is a self-liquidating problem.

But more than that, there would be no tight supply situation except that Americans have been allowed to buy more than half their requirements on credit from foreigners. We have just about maxxed out that credit card. It's been a great run for people like the Chinese, as they have used America's feckless disregard for its own interests to excise most of our manufacturing capacity, but pretty soon, they're going to realize that they are taking worthless paper in exchange. The United States and Zimbabwe have more in common than we like to admit.

For years, we lived high by liquidating our capital. The capital is gone and we owe foreigners much more than they owe us. We are now living on their forbearance. With the federal deficit now above 10% of GDP, the myth that the federal government takes its debt obligations seriously isn't going to wash. When that bubble bursts, the greenback is heading sharply south and Americans will be paying record oil prices even if the rest of the world isn't. When Americans only consume the oil they can pay for, there won't be a peak oil problem.