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October 24th, 2008

Was It Deliberate?

Warning: I am not convinced that the following event actually happened, but it is an important possibility to explore.

The current financial crisis is clearly not simply the bursting of the housing bubble. The underlying cause was world oil production. The housing crisis is a symptom, not the disease.

• Timing: World oil production stopped growing (on schedule) in 2005. The first big news in the financial crisis was the collapse of Bear Stearns in March 2008.
• Size: A $100 per barrel increase on 30 billion barrels of oil per year is a $3 trillion annual drain on the world economy.

Peak oil was the cause; the financial disaster was an effect.

We all know the consequences for the US economy:

• Lost jobs
• House foreclosures, and threatened foreclosures
• Rising food prices
• Bank failures, unavailable credit
• Stock market gone south

The current disaster is enormously larger than the 2001 attack on the World Trade Center. It isn't just dollars. People are avoiding essential health care expenses; the US suicide rate is up. The destruction of the World Trade Center was deliberately planned, and the damage was huge compared to the cost of the attack.

Another possible example was the collapse of the USSR. On page 11 of Beyond Oil, I quote Stephen Kutin's hypothesis that the Soviet Union crashed after Saudi Aramco flooded the world with cheap oil. Here's the question: Did an economist in a windowless basement office in Langley, Virginia figure out that two million barrels per day of additional Saudi oil would destroy the profitability of the Soviet oil exports? Suppose that the economist passed the word upstairs and the idea was proposed to the Saudis as an old-fashioned price war. At that time, the Soviet Union and Saudi Arabia were the two largest producers of oil.

In a fascinating piece in the October 16, 2008 Denver Post, W. Jackson Davis points out that peak oil probably triggered the present crisis, but he says that economists were blindsided as if "a 'secret signal' sent out in 2007 slammed the economy with soaring energy and food costs, and the free-fall of housing prices." Could it have been an actual signal message?

• Was the signal actually sent?
• Who would have wanted to do it?
• How could it have been engineered?

The motivated parties would have to have been nations; this one is too big for Osama bin Laden. Here is a list of the usual suspects; I have no direct evidence that any of them were actually involved:

• Russia, the #2 oil producer in the world, reverting to its Cold War tendencies
• Nigeria, involved in violent controversy with the major international oil companies
• Venezuela, with the agenda of Hugo Chavez
• Any or all of the Arab oil exporters, because of the US automatic support of Israel

Let's entertain the hypothesis that representatives from several of these countries were having afternoon tea at an international meeting. One of them said that he had an economist in a windowless basement office who said that the US economy was a house of cards and that a five-percent additional drop in world oil supplies after 2005 would collapse the US economy. (All of them had read Hubbert's Peak and Beyond Oil.) The conversation turned to implementing the idea. A deliberate cut in production would be too obvious. However, the welfare of the US economy was based on imports, not on production. The trick would be to increase in-country oil consumption, leaving less to export. All of these countries had price controls on gasoline. Maintaining the price controls and letting some of that additional national income from high oil prices trickle down to the middle class would do the trick. ("Middle class" is defined as owning, or being able to acquire, a car. Import second-hand gas guzzlers from the USA.) Nothing would seem to change locally, but globally the sky would fall. Here are some regulated gasoline prices, converted to US dollars per US gallon:

Those prices are from CNNmoney.com in 2005; sources at other times put Venezuelan gasoline at five cents per gallon. If some of the oil profits worked their way down to the local consumers, a huge amount of oil would disappear from the world market. Exports would go down, taking the US economy down with it. As it happened, the house mortgage card got the naming rights for the overall collapse, but it was the energy and food costs that pulled the mortgage card out of the house of cards. At least for Russia, it backfired. Their banking system is in turmoil. However, Russia would not be the first arsonist to get burned after setting the fire.

OPEC is caught in a replay of the late 1970s, with the market for oil and the price of oil collapsing. The OPEC response on October 24, 2008 was to cut back production to support the price. If my fantasy hypothesis is true, a production cutback only amplifies the problem. In the wake of the October 24 OPEC announcement, the price of oil went sharply down.

I close by repeating my initial warning. I have no direct evidence that one or more countries deliberately initiated the financial collapse. However, as so often happens, I cannot disprove the hypothesis.