How pessimistic should we be?

I was recently asked that question, more or less. Below I duplicate the dialogue:

Nick, our disagreement about Peak Oil boils down to a question of capital replacement. While I do not foresee the collapse of civilization I do think that the costs and lead times on capital replacement and lead times in organizing new industries around new ways of doing things will cause a long deep recession as Peak Oil's decline hits full force.

I've become more pessimistic about Peak Oil due to the financial crisis. Imagine how bad the next financial crisis will get when the amount of oil available is declining 3%-10% per year.

I answered:

"Our disagreement about Peak Oil"

I don't think we differ that much - I think we have a real challenge ahead, that certainly could hurt us economically. That said, I'm somewhat more optimistic. Below I'll comment on each of your points in detail.

"a question of capital replacement"

Peak Oil (PO) is mainly a liquid fuel problem, and cars turn over fairly quickly, even now (9M per year is still not bad). We have substantial idle production currently, and putting it to use making extended range EV's (EREVs) is a social problem which I am reasonably hopeful we'll solve. EREVs are currently ready for production - I recently saw a fully finished production-ready prototype of the Chevy Volt. It's just a matter of ramping them up.

Hybrids are a transition to plug-in's (PHEVs) and EREVs, and Honda Insight and Prius production could be ramped up fairly quickly (Toyota has a second plant waiting in Texas for expansion of Prius production).

"While I do not foresee the collapse of civilization "

For a significant % of those in the world of PO, that makes you a "cornucopian". Have you looked at dieoff.com?

"costs and lead times on capital replacement"

The Volt R&D is pretty much done. Production will start in 18 months - that's not bad.

"organizing new industries around new ways of doing things will cause a long deep recession as Peak Oil's decline hits full force"

Well, GDP measures activity, and PO could keep us mighty busy. GDP gets a bump up after natural disasters.

High oil prices hurts the US's GDP mainly because of the income transfer to oil exporting countries. If OEC's can be persuaded to take T-bills, then GDP will be ok (at the cost of a large long-term wealth transfer). After their current reminder that oil prices can also go down, leaving them to live off investments, I think OEC's will be more receptive to that.

The current crisis is largely a failure of petrodollar (and Asian exporter dollar) recycling: low income households were borrowing directly from oil-exporting (and Asian) countries through CDO's, but it turned out they didn't have good collateral, and we're returning to financing our trade deficit with national debt, rather than personal debt. That's much more workable for the long-term.

I'm a bit more pessimistic about Climate Change, and a bit more optimistic about PO, because of their differing dynamics. Take Y2K: it was a problem with a purely man-made system, and so it's cure was relatively straightforward. PO has a geological element, but ultimately it's mostly a problem with human systems - heck, with the right national consensus we could reduce oil consumption by 10% overnight, 25% in 3 months, and 50% in 5 years. CC, on the other hand, has enormous natural lag times, and dynamics which we understand only poorly.