Peak Oil, Zero Growth and Asset Prices: Playing with Numbers
Question: What happens to asset prices if / when Peak Oil permanently slows economic growth?
Peak Oil Theory suggests that global oil production reaches a plateau as reserves deplete and remaining oil becomes more difficult and expensive to extract. As this occurs, oil shortages are expected to increase oil prices. Many argue we witnessed this phenomenon in 2008 as oil prices hit $147/bbl sending the economy into a tailspin.
But you thought subprime mortgages were responsible for the financial crisis? Subprime and over-leverage in general was the financial transmission mechanism that derailed the global economy. However, rising gas prices helped push indebted consumers and businesses beyond their threshold for debt capacity and consumption. For example, as gas prices rose, personal economic tradeoffs between travel, discretionary spending and housing became necessary. Those who drove to work were forced to spend more on gas, so they crimped in other areas.
Research suggests that residential areas where residents had the longest commutes were the first areas to witness declines in property values. This is probably one of the best demonstrations of the link between higher energy costs and asset prices. Proponents of Peak Oil Theory expect oil prices to continue to drag on the economy into the indefinite future – the magnitude of drag depends on the sensitivity of the economy to exogenous shocks and the size of the exogenous shock. Consequently, opinions on the economic impact and timing of peak oil vary. Some predict a gradual economic deceleration, while others predict a hard crash and GDP declines of over 20%.
Given various peak oil scenarios, what is the potential impact to asset prices?
To conduct a sensitivity analysis, I looked at the terminal value of a $100 cash flow in a valuation model.
[The terminal value of an asset is essentially its value when cash flow growth hits a steady state. For example, a company may experience high growth in its early stages, but as the company matures cash flow growth tends to align with the rate of general economic growth. On average, and over the long run, it is reasonable to expect all financial assets combined to grow at the same rate as nominal GDP.]
The point of this exercise is not to value an asset but to highlight the range of terminal values given multiple scenarios. To do this, I calculated the terminal value using continuous terminal growth rates ranging from 3.8% to -10%. Also, the discount rate is adjusted based on the severity of the terminal growth rate. Under declining growth scenarios, investors will incorporate greater risk expectations into financial asset valuations.
Note: The average historical long-term nominal earnings growth rate is 3.8% (as observed by Robert Shiller between 1874 and 2004). I consider this growth rate and an 11.5% discount rate a prudent base case.
The chart below shows the range of terminal values based on different growth and discount rate expectations. Simply going from the long run average growth rate (3.8%) to a zero-growth scenario implies a 49% haircut to asset values. If the Peak Oil Theories are correct, a 0% growth rate is quite optimistic – it essentially assumes we are able to maintain the status quo indefinitely.
Realistically, unless a substitute energy is discovered, growth is likely to turn negative. Under a negative growth scenario, the terminal value is cut by up to 81%.

The point of this exercise is not to point to a specific final value for any particular asset if economic growth permanently stagnates or declines. The mission of this article is to inform readers that asset prices are highly dependent on the assumption of continuous growth. If Peak Oil Theory – or any other theory that threatens mankind’s ability to grow continuously – becomes widely accepted as reality, expect asset prices to plummet.
Link -
http://www.planbeconomics.com/2010/08/01/4630/================
And that purely relates to Peak Oil, now throw in an Aging Population, which is set to start declining in 20-30 years time, a current Debt problem where many countries are quite possibly already insolvent and then factor in a looming Climate Catastrophe in 50-100 years time.
Yep, all is fine, when's Christmas, I NEED TO CONSUME SOME MORE GOODS?