From THE AUTOMATIC EARTH
Firstly, I would say that the energy prices that currently seem stubbornly high should fall substantially as the speculative premium evaporates and demand falls on a resumption of the credit crunch. The sucker rally that has spawned all the talk of green shoots is essentially over in my opinion.
The result should be a reversal of a number of trends that depend on the ebb and flow of liquidity – we should see stock markets and commodity prices fall, a significant resurgence in the US dollar and a large contraction of credit. The scale of the reversal should be substantial, as should its effects on energy demand. Demand is not what one wants, but what one is ready, willing and able to pay for, and in a severe credit crunch the capacity to pay for supplies of most things will be severely reduced.
As demand falls, and with it prices, investment in the energy sector is likely to dry up. Many projects will be uneconomic at much lower prices, meaning that the projects which might have cushioned the downslope of Hubbert’s curve (and the much steeper net energy curve), are unlikely to be developed. In this way a demand collapse sets the stage for a supply collapse that could place a hard ceiling on any prospect of economic recovery. That is a recipe for extremely high energy prices in the future…
The scale of the problem has been temporarily concealed by a market rally and the shovelling of tens of trillions of dollars of taxpayer’s money into a giant black hole of credit destruction. This has done nothing to reignite lending, but the temporary (and entirely irrational) resurgence of confidence has restored a measure of liquidity. As that confidence evaporates with the end of the rally, that liquidity will also disappear.
Deflation is ultimately psychological. Without trust we will see hoarding of the cash which will be very scarce in the absence of the credit that currently comprises the vast majority of the effective money supply. The combination of scarce cash and a very low velocity of money will be toxic.
Money is the lubricant in the economic engine and without enough of it that engine will seize up as it did in the 1930s, when farmers dumped milk they couldn’t sell into ditches while others were starving for want of the money to buy food. There was plenty of everything except money, and without money, one cannot connect buyers and sellers…
In my opinion, we stand on the brink of truly tragic circumstances.
See original article here→