The more expensive the oil, the more everything costs. Every step of production is influenced by oil’s price. As price rises, it acts as a tax on the consumer. Given a constant income level, spending more on energy means spending less on other goods and services which themselves also cost more.
The one part of Mike Ruppert’s movie “Collapse” that I always remember is the scene where he explains that never ending growth is impossible on limited energy. Of course many have explained this, but his explanation of how he foresaw the economic “collapse” unfolding involved oil prices shooting higher until a certain price was reached that strangled the economy. Oil price would then fall back down for awhile, and as the economy recovered oil would rise again to the point that it slowed the economy yet again, and thus we would have a rolling collapse as oil repeatedly reached an unsustainable price. Kunstler’s “The Long Emergency” also echoes this theme.
Collin Campbell predicted this “bumpy plateau” effect to be a sign of peak oil. Below is his chart illustrating this point…
Take the following chart with a grain of salt, however it does depict the "bumpy plateau" on the peak of the oil based economy.
I’ve been warning recently that the level of maximum sustainable oil price appears to be the $80 level. Below is a chart over the past three years with the horizontal blue line at the $80 mark. The candlesticks represent the price of oil, while the solid black line is the SPX:
Note that at this time of year in 2007 (very left side of the chart) oil crossed over the $80 mark on its way to $145.66. What was the trajectory of the stock market while this was occurring? DOWN.
Fast forward to the past year and you will see that there have been five minor excursions above the $80 mark… and what has happened each time? Both equity prices and oil prices fall back down. Coincidence, or cause and effect? The correlation seems a little too good for coincidence.
This is exactly why Bernanke and all those who do not understand the dynamics of their actions always run into problems when confronted with the real world. They see the “need” to stimulate but realize the bond vigilantes will get them so they rig the bond markets by printing money to buy our own debts. The dollar plummets, oil zooms, and then…
Question: When is Expensive Oil Bad for Your Engine?
Answer: When your economic engine is dependant upon inexpensive oil!