Friday, March 13, 2009

The End of Suburbia

Back in 2004, we had the opportunity to watch a documentary titled “The End of Suburbia”. ( ). I must admit that it scared the heck out of us. Working in the oil and gas industry, I had already thought about the finite nature of oil and gas reserves. Amos Nur (Geophysics professor from Stanford) had even introduced me to the concept of Hubbert’s curve back in 1988. Nevertheless, I had not thought about the effects that oil shortages would have on North American lifestyles. This movie, more than any other single factor, started our shift away from our complacent lifestyle in Crossfield. And while I hate to admit it, the primary motivation was fear.

For the next couple of years we started gathering key components of farming equipment, working toward some level of self-sufficiency. Then we slowly realized that we were not in a very good area - or in a suitable house - for an energy-deprived future. We finally started to panic, thinking about the impact that major shortages could have on a significant city like Calgary.

In 2007, and in the midst of this increasingly depressing line of thought, we found that the documentary team had released a sequel called “Escape from Suburbia” ( ). This movie followed a wide range of people who were taking a proactive approach to the - then far distant - potential fallout from peak oil. These people were filled with hope and they were not content to sit around while this unpleasant future unfolded. It was in this film that we first learned of O.U.R. ecovillage near Victoria BC. This was one of our primary reasons for moving to Vancouver Island.

Now, there is no way to prove that this current economic collapse was caused by peak oil. In fact, you may argue that the economy was supporting oil prices of over $100/barrel for several months and it was the unfolding of the sub-prime mortgage mess that caused this recession. Current oil prices of $40/barrel certainly don’t look like an oil shortage.

However, there may be a fundamental connection in this entire crisis and it could go something like this;

Oil prices were undergoing a steady and significant rise from 2001 onwards. Normally increases in oil prices would result in increases in the cost of everything from agriculture and manufacturing to transportation and home heating. In turn, these cost increases should spur demand for higher wages resulting in an inflationary cycle. Amazingly, wages in North America - and official inflation statistics - stayed relatively flat during this period.

Closer examination of the figures show that the inflation index excluded “volatile” items like food and energy. These prices certainly increased faster than the background inflation rate and everyone had to buy these things on a static salary. Where did the money come from?

The answer seems to be that the government policy of lowering interest rates stimulated steady increases in housing prices. For example, if a family could afford a $100,000 mortgage at an interest rate of 10%, then they could just as easily afford a $200,000 mortgage at 5%. The process extended to families who owned their home. In their case, they could refinance their home at a lower interest rate, keeping payments the same and freeing up equity as cash to meet their expenses. Each increase in house prices provided more equity (on paper) and another easy way to free up extra income.

The easy access to mortgage funds at low interest rates kept the housing sector booming, in spite of the looming crisis with oil prices. Unfortunately, when prices spiked to more than 100 dollars a barrel, entire sectors of the economy began to fail. The first being the North American auto sector - which was building SUVs that no one could afford to drive. Then came the release of information stating that banks were over-extended on poorly secured mortgages. Housing prices fell as people were laid-off and could no longer afford to pay their mortgages. Soon houses were worth less than the mortgage owing on them.

Finally the whole house of cards came tumbling down.

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