The price of oil determines how rich we are.

Just finished reading Jeff Rubin's Why Your World is About to Get a Whole Lot Smaller. Rubin believes in peak oil - meaning the (still controversial) idea that the world's oil production has peaked and we will soon run out of oil.



Before this happens, however, we'll see a steady increase in the price of oil and this will fundamentally change our economy by making our world "smaller". Since gas will be so expensive, it will no longer be cost effective to ship goods and food from China. That means we'll be relying more on local farms and local companies to produce commodities. It also means higher prices.



Rubin does a great job of explaining how cheap oil subsidizes the low cost of almost everything we buy. Cheap oil means that it's better for us to buy goods from faraway, where the cost of making these goods is much lower than it would be if they were made locally.



He argues that the current economic recession started because the price of oil went up too quickly. It wasn't the sub prime mortgages. Expensive energy means slow growth and the stalling of economic development. Now that oil is cheap again, the economy will pick up. When it does, oil will skyrocket causing another recession and so on.



This to me was one of the most interesting things about the book - the connection between prosperity and cheap energy. As oil slowly becomes too expensive, people will search for a new (cheaper) energy source. If we find a cheaper energy source, expect prosperity and a high standard of living. If we don't, expect economic stagnation, high prices and a drop in our standard of living as we rely on pricey local alternatives.