I’ve been absent from this blog recently, which is something I intend to change. I’ve read a challenging and interesting book, the Long Emergency by James Howard Kunstler. I must give this book some credit for some of the posts that will now ensue, but in this post I want to try to state the world as it is before imagining as it could be.
It is a general maxim that the rich get richer and the poor get poorer. In a political environment geared towards reduced the national deficit and budget, we cannot seem to tax the rich. When the Republicans made a roaring comeback in the 2010 elections, they were supposed to save our country’s finances by fixing the budget. No sooner had they entered office then they refused to let tax cuts for the rich expire. These tax cuts have primarily benefited the highest of income earners. One would think that in the midst of chronic unemployment tax cuts for the rich would be quite unpopular, especially the top 2% of income earners. But apparently this is not the case. It would appear that the struggling American worker simply doesn’t know how to vote in their economic best interests.
Watching TV the other day I noticed Wall Street analysts completely confused about the perception of the American public. Recent surveys indicate the majority of Americans think the economy is getting worse, but stock prices were at record levels. High stock prices indicate investors are confident the American economy is doing well. So where does this come from? The poor are more convinced the economy is not doing well while investors have not been so confident in some time?
Honestly I think the answers lie in globalization and unemployment. Individuals struggling to find work in America are not doing well. Meanwhile corporations are easily offsetting weak performance in America with income from other nations. Multinational corporations are infamous for dropping local staff and outsourcing operations overseas. It might be the case that corporate America, a major employer, just doesn’t need as many American workers as it used to. If you look at the numbers, big business is doing great.
But globalization is possible for one reason alone: cheap oil. The low cost of fuel is the only reason it’s cheaper to pay factory workers abroad next to nothing and then ship the resultant product 12,000 miles away. When transportation costs outweigh the savings in labor, manufacturers will start to return to the US (or at least to the Mexican border regions). The bad news about this is that it won’t happen until gas prices spike for quite some time.
Let’s face it, gas prices are going nowhere but up. Back in the late 90’s I remember seeing gas at $0.77 a gallon. Now, even when deep recession greatly lowers demand, prices reach lows at around $2.50 and seem to peak at $4+. What’s causing this spike in gas prices? Three words: it’s running out. What’s left is increasing difficult to get. The concept of peak oil is important to discuss. Essentially, because oil is increasingly more difficult to pump out as the well supply decreases, there comes a point where there is nothing you can do to increase production other than to find another oil field. Oil, however, is a limited resource and discovering new fields is also subject to peak. Experts agree the world discovery peak is decades behind us. The implication is obvious: when peak oil hits, there will be no way to change the supply/demand dynamic by increasing supply. Demand is going up, and so price is going to go predictably up with it.
At least, the general trend is upward. Prices often ease over time, but even minor threats to our oil supply can result in huge price hikes at the pump. Basically, when oil is perceived to be in any trouble, some entities who need oil no matter what buy that oil on futures markets, often at prices far above market value. This predictably ups the price of gasoline by increasing demand and reducing supply. The current unrest in the Middle East is probably not going to be in serious trouble, but Middle Eastern troubles have made serious dents before.
I made a prediction in the winter months that prices at the pump in the summer would return to their 2008, $4+ levels. This was based on the fact that the only thing that shot them down was the recession. Numbers lead experts to state the recession is over. The economy is growing and unemployment is going down slowly. So I figured since gas prices spike in summer and we’re in modest recovery, oil prices would go straight up. My prediction was based on the idea that oil was running out though it seems that turbelence in the Middle East (where 60% of the reserves remain) is the cause instead.
The increased price may decrease summer trips this year, and so the general summer effect on prices might not be as pronounced. Regardless, as stated before, it’s running out. I hadn’t come to appreciate how dire the consequences of running out of oil would be. This was until I read James Howard Kunstler’s The Long Emergency, and traveled for small town Missouri to San Antonio. A significant number of people have constructed a living environment that’s near impossible to manage without a car. Personal transport is the number one consumer of oil. There’s no replacement for oil in our cars. Some electric vehicles have come on line, but they had a limited range, less than many daily commutes. In daily commuting, current electric cars would probably provide just enough range for a single day’s transport before having to be recharged for hours, and of course the electricity is most likely being produced by the burning of fossil fuels. In this area, nothing can substitute for oil.
Many other fields remain the same. Plastics can only be produced through oil refining. Plastics are polymers whose structure is attained by creating long chains of hydrocarbons refined out of oil until it becomes mostly octane, or gasoline. Oil provides the raw material for these structures. Even a completely renewable energy system would probably still need oil for chemical engineering. But will we ever get to that renewable energy future? The Long Emergency challenges that renewable energy future. Kuntsler makes note that all the current renewable energy equipment is being produced in factories with energy inputs far greater than renewable energy can provide on its own, hence energy derived from renewable sources is still dependent on oil.
My vision for the future of energy had been a bit different. I thought higher gas prices would begin to make renewable energy more profitable and (herein lies the difference in our thinking) that the overall higher energy prices would lead to a decrease in demand (energy conservation). What really challenged my thinking was the simple fact that demand is not decreasing. The continued expansion of oil depedent suburbia, the excesses of consumer electronics and other goodies, and the new infrastructure needed for 4G continues, oblivious to the fact that they are all dependent on oil. Meanwhile, outside the country that’s the biggest consumer of oil (the US), developing nations are looking to expand their oil use in an effort to become fully industrialized themselves. China and India, both with populations of a billion, first come to mind, but where in the world is demand for oil going down? (If you are reading this don’t spare me the details, I offer a challenge to those in the know.)
The Long Emergency, written in 2005. Seems to anticipate many of the major events since it was written. Kuntsler declared suburban expansion unsustainable and that it would topple (housing bubble) though to be fair I don’t know if he expected the problem would come directly from the top (the big financials) who were so convinced of the incivibility of the housing market that they took systemic and dangerous risks with their money. Oil experts predicted peak oil would happen in the 2000’s and I’m inclined to agree. Kunstler made the prediction that just after peak gas prices would wobble. In 2008 gas prices suddenly skyrocketed, and only a contracted recession brought them down. Now, as soon as it seems the country is making a modest recovery, gas prices surge again via turmoil in the Middle East.
I really don’t want this to come true, but I’m quite worried high gas prices will send the economy back to recession again. And I’m really not excited about a Republican sweep in 2012 because of the economy. Their belief in the efficiency of the market is now at the level of dogma: anything but privatization is heresy. I wished people would notice the correlation between Republican coddling of business interests and the massive financial meltdowns that tend to happen after a two term Republican president: George W. Bush and the financial crisis; Reagen and the savings and loan crisis; and yes Calvin Coolidge and the 1929 stock market crash.
Not that I want to make a foray into the world of politics. I don’t think the squabbling involved is going to get the country in better territory so much as culture change: a shift in how we do things on a day to day basis. That’s what downgraders is all about.