Thursday, October 30, 2008


The Great Unwind

Others have already observed how the crash in oil price and oil demand has coincided with the financial crisis that now grips the globe. Suddenly, everything just seems to be falling apart, and of course there’s a reason for that.

Picture the world economy as a giant clock spring without a ratchet. It takes a lot of energy to wind up that giant spring, and keep it wound up. Fossil fuels, in particular oil, have provided the energy to wind up that spring tightly and keep it wound up. That colossal energy surplus is behind the expansion of world trade into the “globalization” phase and the generation of so much money that no one really knows how much is swirling around the world. But suddenly that energy became too expensive, and the spring is starting to unwind at a fearsome pace. Mountains of money disappear in a single day. Businesses are talking about “reverse globalization.” Millions of Chinese factory workers are getting pink slips, not to mention in other countries. Giant financial institutions and corporations are foundering. Whole national economies are in danger of going under.

Cheap and high-quality oil was the boost of energy that wound the spring. As it unwinds, it expands and inflicts damage on everything around it. And the carnage is just beginning.

There is no other source of energy that can wind that spring back up again like oil, so the spring is going to keep unwinding until it reaches a lower energy level that can be sustained for a while. What the level is, is anyone’s guess right now. Assuming it will not be a very high level is safer for the time being.

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