TTWK and the credit crunch

What's Transition got to do with the credit crunch? Now that oil prices are falling is peak oil just a load of old tosh? These are the kind of questions that people ask when we give talks of late such as our recent visit to Wirral Ramblers.

Well peak oil certainly doesn't negate the laws of supply and demand. Global oil production may have plateaued since 2005 and exports have been falling but if demand for oil is falling faster as it certainly is at the moment then prices will fall.

As for the current financial crisis there is a clear link between peak oil and the credit crunch. Firstly it is important to understand how money is created in our system. The overwhelming amount of money (97-99%) is created in the form of debt.

For example, if you take out a new mortgage, the funds loaned to you represent brand new money that the bank writes into existence. That loan must be repaid with interest so the amount of money (i.e. debt) in the future must increase in order to pay off today’s debt.

To service the ever increasing amount of debt there has to be an ever increasing amount of real economic activity because at the end of the day every debt represents a claim on something physical be it a business, house, car etc.

However, because physical resources are finite there is a limit to how much debt our economy can sustain. These physical limits have become increasingly apparent in recent years and chief amongst these is oil which is the lifeblood of our globalised economy.

Consequently it is no coincidence that peak oil and the credit crunch have coincided. Peak oil represents a huge constraint on future economic activity and, therefore, a huge constraint on future levels of debt.

For a deeper yet brief take on this you should read this excellent article posted on theoildrum.com