German study warns of consequences of peak oil

We've already told of the UK's concerns; now it seems that Germany's worried too:

A study by a German military think tank has analyzed how "peak oil" might change the global economy. The internal draft document -- leaked on the Internet -- shows for the first time how carefully the German government has considered a potential energy crisis.

The term "peak oil" is used by energy experts to refer to a point in time when global oil reserves pass their zenith and production gradually begins to decline. This would result in a permanent supply crisis -- and fear of it can trigger turbulence in commodity markets and on stock exchanges.

The issue is so politically explosive that it's remarkable when an institution like the Bundeswehr, the German military, uses the term "peak oil" at all. But a military study currently circulating on the German blogosphere goes further.

The study is a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military. The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises.

From Der Spiegel. The article goes into a fair bit of detail, postulating that countries that still have a lot of oil will wield a great deal of influence in the coming years, among other things. Even more interesting is one of the report's recommendations:

The scenarios outlined by the Bundeswehr Transformation Center are drastic. Even more explosive, politically, are recommendations to the government that the energy experts have put forward based on these scenarios. They argue that "states dependent on oil imports" will be forced to "show more pragmatism toward oil-producing states in their foreign policy." Political priorities will have to be somewhat subordinated, they claim, to the overriding concern of securing energy supplies.

For example: Germany would have to be more flexible in relation toward Russia's foreign policy objectives. It would also have to show more restraint in its foreign policy toward Israel, to avoid alienating Arab oil-producing nations. Unconditional support for Israel and its right to exist is currently a cornerstone of German foreign policy.

One hopes that Israel is taking these issues seriously as well; their current favourable treatment in the foreign policy of most Western countries (not just Germany) is bound to be weakened by this. How they handle this, of course, could make all the difference, not just for them but for much of the world. If they completely pull out of the West Bank, for instance, they'll likely be fine (or at least no worse off than a lot of countries), as much of the animosity the Islamic world has towards them will be dissipated. On the other hand, if they refuse to do so, they could become vulnerable as Western aid starts to decline. The consequences of this could be catastrophic, and not just for Israel (Samson is still lurking, you know).

The peg precipice

You know all those countries (especially oil producers) who have their currencies "pegged" to the US dollar? Well, this is starting to be a problem for them:

Pegged exchanged rates prevent those countries from raising interest rates to keep inflation under control. Instead, to maintain the exchange rate, they have to match U.S. monetary policy. Interest rates in the United States are highly stimulative, however, designed for an American economy struggling to avoid a recession - not a Gulf country whose coffers overflow with oil money.

So emerging market demand continues unabated, even encouraged, further exacerbating the inflation problem that governments around the world are scrambling to contain. Qatar's inflation is running at about 14 per cent. Egypt is at 19 per cent.

The average for the region just two years ago was a mere 2 per cent.

From here. Furthermore, Saudi Arabia is experiencing serious inflation; depending on who you believe it is anywhere from 3.4 to 10.5%. I'm more inclined to believe the latter, myself. The thing is, if this starts really hurting the citizens of these countries, they might unpeg their currencies, in which case things could get very exciting indeed:

"If several dollar-pegged currencies were revalued, we could expect to see some panic selling in the U.S. dollar, further destabilizing the global economy," she said.

Such speculation has prompted politicians in the United States and the Gulf to frequently deny this would occur.

So what happens then? Well, I suspect that America's ability to buy oil would be severely compromised. It's not hard to guess what that would mean. It would get pretty awkward for us as well, given our dependence on the US market. Just how it would play out is anyone's guess (plenty of speculation happening here if that's your thing.