Contango = ‘Holy shit, we’ve run out of planet!’

posted 24 May 2008 by Paula | link to this

tags: contango, markets, peak oil

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It seems odd to me that in the past several years I’ve been studying sustainability and economics that I’ve never come across the words “contango” and “backwardation.” These words entered the public lexicon this week when crude entered the state of contango, meaning that the price of futures contracts are higher than the price of right-now contracts. Usually, when futures prices are higher, there is some date beyond which prices come down again. What’s remarkable about crude’s move into contango this week is that, currently, there is no future date beyond which prices come down again: the markets are expecting oil to become more and more expensive, into the foreseeable future. And the only reason markets would expect this is if they expect oil to become more and more scarce into the foreseeable future — in other words, they’ve suddenly realized there’s a finite amount of the stuff to go around.

If contango is the state markets achieve upon realizing that oil is finite, then it stands to reason that other commodities markets will also reach a state of contango as traders realize other things are finite, too: peak water, peak food, peak gold, peak copper — peak everything.

It seems that contango is, and should always have been, the normal state of markets on a finite planet. It is the realization that infinite economic growth simply cannot occur on an orb that has a measurable circumference (24,901.55 miles, in case you’re wondering); that there comes a point when economic activity reaches the limit of that circumference, and that there simply is no more of a given commodity. A great many of us have known all along that the time discount on value is a hallucination that could only occur among people utterly divorced from reality. It’s like watching someone come off drugs to see the markets waking up from the fog to realize, “holy shit, we’ve run out of planet!”

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