Oil Dependency is bad if you cannot change your exorbitant habits
It’s the Holiday Season, which usually means a lot of parties and a full social and fundraising agenda. As a volunteer to the MDA Lock Up Program this year, I wrote a story last week about too many fundraisers on a small island in an economically challenged time and Christmas Gift Giving to compete with. Well, that story keeps coming back to me daily at these parties in the form of questions to explain what really is going on with the economy. There is evidently a lot of confusion on Main Street about where the economy is heading and what to expect. So in order to be able to enjoy the Season’s Parties a bit more from the Peace on Earth approach, I’m going to attempt to explain the economy.
The very short version of where it is heading goes like this:
The Government is spending our children’s inheritance. It’s that simple. In essence it’s the same as what we, as consumers, have done for the past three decades: Spend Now, Pay Later.
We created a historically unique economy as it was fueled for 70% by consumer spending. Cheap money catapulted us far beyond where we historically should have been in prosperity growth. And of course we liked it a lot. Who wouldn’t?
We grew from one TV in the house to every room has a TV, from one or maybe 2 cars per family to 5 cars and a weekend vehicle for rough terrain riding. I don’t have to continue this list as we all know it to be true. We supersized our economy in a matter of a few years because we were SEDUCED by the availability of cheap money in endless quantities. The size of our economy (GDP) as a consequence doubled since 1995 from roughly 7 trillion to 14 trillion, primarily because we kept buying more of the same; more stereos, more cars, more toys, more food….and started paying more for “essential” services such as insurance, financial advice, medical treatments, professional assistance etc. This was not a need/want situation, it was just the result of cheap money diminishing the respect for real needs and wants.
And since the power of printing money is in the hands of the federal reserve, Ben Bernanke has ordered just that: print money by the truckloads and with that money we can buy our own debt and hide the fact that nobody else wants to buy it anymore. No wonder it “works” like Madoff on steroids, witnessing the fact that Bernanke was just named ‘Man of the Year’ by Time Magazine. Everybody loves a ‘winner’. The dark side of this picture is that even Bernanke does not have a clue, when the price for excessive over consumption will ring our doorbell.
Our economy is powered by energy and therefore entirely dependent on its pricing. For the past almost 200 years that energy has been provided by wood, coal and oil.
Before we started bubbling, our economic standard of living had been an absolute derivative factor of the cost of oil and for the biggest growth period between the end of World War II and 1972, the price of oil was a very consistent $3 per barrel of 42 gallon of unrefined oil.
So what do we actually know about oil in Main Street?
For example, did you know that
‚Ä¢ 80 to 90 million barrels of oil are consumed worldwide every day. Until recently U.S. consumption was calculated at 20 to 25% of world oil production, and about half of all U.S. oil consumption is gasoline. OF COURSE WAY TOO HIGH. Oil in the U.S. has to be increasingly imported since the USA relies almost 60% (!) on imports. Does that have some impact on the “economic freedom” of Americans? You bet it does.
• The price of a barrel of oil is based on a barrel of 42 gallons, equivalent to 158.9873 liters (litres) or 34.9723 Imperial (UK) gallons, but those volumes are for calculation purposes only. Years ago, oil was transported in 42 gallon barrels, but not any more.
Today Oil is transported in steel drums of 55 U.S.gallons. In the early days of the oil business, Standard Oil used the 42 gallon barrel, which became the standard, only to be replaced as far as transport is concerned by the 55-gallon steel drum, a consequence of U.S. military shipping requirements during World War II. But the 42 gallon barrel was retained as a calculation basis.
• US oil production peaked in 1970. U.S. oil production at that time was 25% or 1/4th of the world market, whereas the U.S. currently produces only ca. 10.5% of the world market.
• Oil prices rise for several reasons but mostly whenever demand exceeds supply, a situation which the oil-producing cartels control physically by cutting or stagnating production arbitrarily as they wish, shortages are also create because of politics (war), diplomacy and natural disasters, which all lead to oil price increases.
Although the use of oil as an instrument of political control in the world began organizationally with the formation of OPEC in 1960, the defining point was hit in 1970’s when United States oil production started to drop as a percentage of world oil production.
The USA had put itself in the unenviable position of being reliant upon the oil cartels. As written at WTRG Economics by James L. Williams, this became politically clear in 1972:
“By then the price of crude oil was about $3.00 per barrel but by the end of 1974 the price of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western world showed support for Israel. As a result of this support several Arab exporting nations imposed an embargo on the countries supporting Israel.”
Oil has remained a political football since that period. As more and more oil had to be imported by the United States and as U.S. policies ran counter to the oil cartel countries, the price of oil has sky-rocketed, and this has been followed by comparable price increases in consumer goods that are produced using petroleum products or oil-based energy (just about everything). The current economic recession is partly the logical end result of a price push policy by the oil cartels, which has led to prices for consumer goods such as homes that are far removed from the normal economic realities.
However not solely the oil cartels are to blame, but also the American society itself is greatly to blame for the current economic situation. It seems that nothing has been able in the last 40 years to move Americans to change their immense over-the-top consumption of energy.
American automobile manufacturers continued to produce technically outdated gas-guzzling cars, while car manufacturers and drivers in Europe and Asia, have continued to produce smaller vehicles with lower gasoline (petrol) consumption. Furthermore, U.S. federal and state governments failed to increase taxes on gasoline to European levels, thus providing people in the United States with no incentive to adopt sensible energy consumption habits.
America’s energy woes are thus in large part its own doing. This pattern continued until 2008, when the price of oil rose to an extraterrestrial high, 50 TIMES the price of oil in 1972, topping out at $147 a barrel on July 11, 2008. The price of gasoline (petrol) topped $4.50 per gallon, and finally, it appears, large groups of Americans have gotten the message. There is an ENERGY PROBLEM. And the energy problem moved into every day life as the main facilitator of our economy.
People started to change their thinking, AND their behavior. They started to take vacations closer to home (stacations, nearcations). They drove their cars less and more practically planned. Many thought no longer about buying gigantic gas-guzzling SUVs but started looking at more economical vehicles, or considered not buying a new car at all. Rather than opting for gradual and intelligent change, America had opted for the “now or never” sudden flash, and they got it and are now in the middle of a forced restructuring of an economy that should have been renovated slowly already during the last 40 years, but was not. And the unfortunate problem is that the government wants us to continue living beyond our means. A cash for clunkers program is not an environmentally friendly program. It’s a financial incentive to buy yet another car, even though it takes an old one off the roads. Obama and Bernanke have chosen short term solutions for longterm problems and that’s the price our children are going to have to pay.
The inevitable change in consumer behavior, even more than the subprime catastrophe and following bank failures itself, is at the heart of the current economic recession in the United States. Recently consumers have not only stopped spending like there was no tomorrow. They have stopped spending altogether, except for practical needed merchandise.
Trust in governments and financial institutions is at an all time low. Just look at last week’s mayoral elections in Houston Texas, not unknown in oil circles I would say. Fear, anger, inertia and not caring anymore have become the pervading emotions.
Of course the oil cartels are suffering as well. Oil Rich Nations like Venezuela and Nigeria are edging on bankruptcy. Currently there is a very balanced pricing process in the works. Due to the outrageously high price of oil in 2008, demand for oil fell in 2008 for the first time in 25 years and is falling even further in 2009.
The bottom line of what has happened in recent times has the foundations of the world economy badly shaken and every country that can afford it or that does not want to exist at the whim of the oil cartels is looking for alternative solutions. Combined with technological advancements, this is moving the economy into a new stage, uncharted territory actually. It will still need energy, but energy will be based on efficient usage and need, rather than artificially cheap availability. This means that a vehicle will become much more a tool of needed transportation, than a tool of entertainment. Homes and offices will cut excess energy waste through technology etc.
In the meantime, in Germany, the Netherlands, Denmark, the Scandinavian countries, the construction of windmills as alternative sources of energy and the production of bio fuels to replace oil, gas and gasoline (petrol) is proceeding at a highly accelerated pace. Danish/Dutch Company Vestas is the largest wind turbine company in the world (bigger than GE) with more than 20,000 people employed in a new economic energy. That’s the new way and direction. The writing is on the wall and the Power of Change to eradicate dependency on one energy source is in full swing, while here in the US the stubborn dependency on oil is just putting our economy on a multi-year trip through the Doldrums.
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