Gail the Actuary is a good writer and her skill shows in the second installment of “Economic Impact of Peak Oil.” This article pulls together the oil price issue and the debt issue that are the two most worrisome concerns in the contemporary economy and she starts exploring the relationship between the two.
For years I have thought that the economic vulnerability of relying on fossil fuels as such a large part of the foundation of a modern economy to be a serious risk. With more than 3/4s of the crude output in the control of leaders of non market economic systems and with consumers loading to such a percentage of total use in fossil products, all the eggs are in one basket and some not real reliable folks are holding the basket handle.
Gail explains this problem in concert with the other most vulnerable segment of the modern economy, the credit system. Credit is by its nature a system of managing risk for a return, and has played a significant role in the growth of the economy. The access to money for investment and spending puts lots more choices into the pool of possible transactions that powers economic growth and increasing standards of living. See:
Over the course of 12 questions Gail explores and clarifies what is has happened and what’s going on. The first third of the article is background and builds the facts for the assessment of the current situation and the prospect of a reduction in economic growth. The background peaks with “Surprisingly, a decline in US real growth rate may come even before peak oil.” I am bolt upright in the chair now. A decline in real growth would be a disaster.
Now keep in mind that this piece is written by an actuary, not an economist. Actuaries are really more mathematicians than economists and perform work more based in analysis of known facts and use those facts in projecting risks in the future. The economist would use a far broader range of more “soft” inputs like “behavior.” I freely admit I took a lot of economics courses when in school, and found the “dismal science” to be all that math for actuarial courses. Today I have three good friends that are actuaries. I strongly attend to their opinions.
The second third of the piece looks into the broad consequences of a decline in real growth, and the absence of planning to absorb or adapt to such conditions. This segment then looks into the spending of the economy and how the export of money for products isn’t being met others exporting the money back to us for products. Some money coming in is for products, capital plant and such things, but the bulk of the money coming back is buying debt instruments. By the end of question 9 its pretty clear just what might be in store for the credit market.
In the three final questions Gail looks at credit market specific problems, some of the other issues that will impact costs, and in part, sums up the article. The next explanatory step is of course in part 3.
I wish to close the review with encouragement to everyone to share Gail’s work. She writes particularly well this time in a way that everyone can understand. Perhaps some will take her to task about her background facts, but there doesn’t seem by be much in the way of cherry picking the facts to make her case.
I am eager to see what part 3 will cover. My esteem for the actuarial science leads me to take Gail very seriously. After all it takes terrorists flying airliners into office towers to throw these folks of their math when projecting what rates should be for insurance companies. They are lots more right than wrong.