October 28th, 2010
05:19 AM GMT
(CNN) – Earlier this week, HSBC economist Frederic Neumann sent out a research report noting the similarities between what is happening in the world economy now, and what was happening in late 2007:
“The Fed is about to engage in another round of easing, the dollar is weakening, soft commodity prices are rising, growth in emerging Asia is rising and equity markets are on a roll.
What’s missing, so far, is a more convincing push-up in oil prices. Still, the parallels are striking. Will it all end in another bust?
“What’s the upshot here? Watch oil. Plain and simple. If it heads to $100 per barrel, or higher still, you’ll know that it’s back to 2008 and another bust.”
The price of petroleum pervades nearly all aspects of the economy – not just energy, but clothing, fertilizers, pharmaceuticals and the cost of food, says Jeremy Rifkin, president of the Foundation on Economic Trends. At a speech he gave in Ottawa, Canada, last May, he made the case that it was high oil prices that triggered the credit crisis: As oil approached $150 a barrel, it revealed the real state of the economy and disrobed the false economy built on U.S. credit spending and debt.
“When oil went over $100 a barrel, prices went up. When it hit $147 there were food riots in 40 countries … the purchasing power of the entire civilization stopped,” Rifkin said. “The industrial machine, after two centuries, turned off in July of 2008: That was the earthquake. The collapse of the financial markets 60 days later was the aftershock.”
Rifkin believes that every time the price of oil per barrel approaches $150, a similar short-circuit of the global economy will occur.
That’s a pretty bleak assessment. But as the Economist explains, the cost of extracting energy from the ground is rising. Drilling in the 1970s “delivered around 30 units of energy for every unit invested.” Now it stands somewhere between 16-to1 and 20-to-1. The return on tar sands and ethanol are even worse, according to the Economist.
The cost of crude oil dropped below $82 a barrel on Wednesday – so far, so good. But is a climb inevitable? And, if so, how will the world economy handle it?
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