Peak Oil Can Oil My Peak.

My opinion is that although the concept of Peak Oil rings true in the most literally way (the cost of extracting petroleum will increase over time as the cheapest and easiest to extract reserves are depleted), the often touted economic and social repercussions are fear mongering and a result of very shallow analysis.

There are massive reserves trapped in harder to extract contexts, such as oil sands, and there are massive unexplored areas where there are thought to be large amounts of oil. Add to this the fact that there are hundreds of years worth of coal and nuclear energy. If oil gets too expensive, we use more coal and nuclear in the mid term while alternative energies catch up.

Keep in mind that the Earth is exposed to enough radiant energy from the sun provides energy to 75 billion tons of biomass, and only about 1/3rd of 1% is humans. Living organisms are very good at turning energy from the sun into oils. There are plants that are more than 20% oil by weight. From a physics point of view there is no energy problem.

If oil was going to run out suddenly in 5 years and there were no such thing as coal, natural gas, or nuclear power then yes, there might be a pretty big social disaster. But there is coal, natural gas, and nuclear, and there is at least 50 years of oil too. As is almosts always the case, the alarmists are either idiots or opportunists.

There has been a lot of talk about this next recession.

Maybe too much talk. Predicting a recession is very difficult in any environment, let alone one with two huge and rising stars (India and China). Over time, people that base their investment strategy on the constant belief that a recession is imminent will not perform as those that bet on growth. Doomsday preaching is more a personality characteristic than a sincere prediction. We get upset when someone that says things are about to melt down turns out to be right, the market drops 14% and then is stagnant for a year...but the truth is that same guy missed out on 10 years of groth at 9% a year to be right that once.

Predicting inflation is easier. I believe that since the early 80s inflation in the west has been low because we have imported more and more core products from low cost overseas producers every year while raw materials prices were also stable. In the last couple of years, there has been a huge and rapid rise in raw materials costs, and we already import almost all manufactured goods (there is no more cost savings to be had from increasing imports). Also, labor and production costs are starting to rise in China and India. Energy, which is a cost input to almost every product, is going to get more costly.

I am fairly certain that the Chinese economy is bubbling in a few areas, notably including real estate and public equity markets (the PEs are ridiculous and expect unsustainable growth, and in real estate the rental to price ratios are about half of what they are in the U.S.). I don't think their recession will spill over much to the U.S. when they correct, but it could cause them to draw down foreign reserves, which will flood the bond markets a bit - driving down bond prices, and driving up interest rates.

So long and short, no significant global recession is always the smarter bet, but you can expect higher inflation over the next 5-10 years. I am not comfortable predicting how much higher.