Pufferfish

Was It Oil?

A paper by economist James Hamilton at the Brooking Institution argues that it was the oil shock that served as the catalyst for our recession:

The grand retelling goes something like this. Cheap gasoline from the 1990s into this decade encouraged families to set up their homes farther from the cities where they worked. But as the price of gas began to increase, it put a big strain of these families' commutes. With gas rising from $2 to $4, the price of these long drives doubled, straining those families' most expensive payments, namely: mortgages. When families realized they could not afford their exurban commutes, they sold their homes for a big loss. Voila: Their mortgage crisis became a bank crisis and the rest is our living history.

Notably, Hamilton himself has a tough time believing the theory. But his numbers don't lie. My reaction is similar: Huh? Are we really to believe that this whole thing was caused by oil shocks? What about real estate, subprime mortgages, credit default swaps and over leveraging? Well, I'm inclined to say that this report doesn't actually change much. The crisis was caused by a culmination of events resulting in a perfect storm. Not only were gas prices on the rise through last summer but commodities across the board were spiraling upward. Eventually the entire system seized up and the housing bubble popped, triggering a cascade of bad investments that broke the credit system.

So I don't think it was distinctly oil's fault. But it didn't help. And in turn this might be a better way of thinking about the recession because it concludes with an argument for energy independance. All roads lead there.

Kicking The Habit

While an oil pimp was running the White House for eight years, prices shot up at an astronomical rate last summer. Now, that's not exactly Bush's fault; he was at the mercy of the global laws of supply and demand. But what is Bush's fault - and all the rest of the GOP oil apologists - is that we aren't close to developing a coherent alternative policy to ween us from our addiction. There's a reason for that: oil lobbyists have been very good to the GOP. But the status quo is not going to be good much longer for the rest of us. Most oil watchers and economists figure the threat of increased oil prices comes from global demand outstripping supply, which means our current economic plight will eventually lead to costs skyrocketing once the global economy starts to grow. Last summer we got a taste of what the not too distant future could hold. As a result, there is no better time than right now to get serious about conservation, energy efficiency and renewable energy. Consider:

World real GDP increased by 9.4 percent between 2003 and 2005. That growth in world income was the primary cause behind an increase in world petroleum consumption of 5 million barrels per day between 2003 and 2005, a 6 percent increase over the two years. The next two years (2006 and 2007) saw even faster economic growth (10.1 percent cumulative two-year growth), with Chinese oil consumption alone increasing 870,000 barrels per day. Yet between 2005 and 2007, global oil production stagnated.

Consumption goes up, supply stagnates, costs soar. Well, China is going to try and do something about it:

The Chinese are growing wealthier and demanding automobiles by the tens of milions, but the demand for oil they create is likely to send petrol prices soaring again before long, making driving unaffordable for most Chinese families. It's no wonder, then, that the Chinese government is anxious to develop electric automobile technologies. Not only would this allow Chinese families to continue driving as petrol prices soared, it would also allow China to sell into foreign markets similarly afflicted by dear oil—including America. China recognises this and is heavily subsidising efficient automobile purchases and production.

I'm not sure there's a more crucial domestic issue than the price of oil. The US can't fall behind the curve and be held hostage to the market when our suburban housing, daily commutes and transportation costs greatly rely on cheap fuel. The time to get moving is now. Unfortunately, our politicians have an unhealthy habit of not acting until the threat becomes an emergency.

What Goes Down...

So oil has dropped big time from where it was last year. That's because of the global freak out; prices fall during times of uncertainty. But what happens when the law of supply and demand sets in?

Since scarcity tends to express itself in gross volatility, it's easy to imagine oil prices rising swiftly beyond the $147-per-barrel record level of last year. As that occurs, the most basic premises of everyday life in the USA will be called into question. If you think car sales have been bad lately, with oil in the $35-a-barrel range most of the winter, just wait. The newly-minted unemployed will be marooned in their subdivisions. They will not be buying GMC Yukons on 48-month installment contracts, let alone X-boxes on their Visa cards. They might be very very hungry, though. All bets are off as to how these social classes may organize themselves to alleviate their hunger (and express their anger about it).

The one thing Obama and Geithner haven't had to contend with is rising energy prices. It's not going to stay that way forever.

Ships Passing

And those ships are named Common Sense and the American People. Here it says:

Ford Motor Co.'s U.S. sales plummeted 32 percent in December and Toyota Motor Corp.'s fell 37 percent as car and truck buyers continued to steer clear of showrooms due to the dismal economy.

But that doesn't mean the weak economy and a momentary drop in gas prices isn't doing wonders for SUV sales:

It looks like the Highlander is in and the Prius is out — for now at least.

Trucks and sport utility vehicles will outsell cars for the first time since February, according to a December report by Edmunds.com, which tracks industry statistics.

At a certain point you just have to stop in wonder at the sheer indefatigable stupidity of many Americans. This issue is going to take care of itself once the market stabilizes and prices rocket back north of $4.00 a gallon. A gas tax isn't necessary, though that would have been nice thirty years ago. Anyway, the dimwits who went out buying an SUV they can't afford will be left screaming about the inequities of it all. It really is mind-numbing. But then meaningful changes to our energy policy can't be done without the status quo being severely threatened. Old habits die hard.

Reality Bites

Over the last couple years Russia has emerged as the leading oil and natural gas producer in the world, while the US has bunkered down in the hornets nest of civil war in Iraq, stretching ourselves economically and militarily thin. That poor focus - a focus McCain has argued in favor of repeatedly - has coincided with a listless, unimaginative pissing away of time and oil during George Bush's presidency; a presidency McCain now whole heartedly endorses. We have chosen the lowest common denominator in our president, which serves as a metaphor for the country as a whole. Kunstler picks up that theme:

We miscalculated in Western and Central Asia. Russia still "owns" that part of the world. Are we going to extend our current land wars there into the even more distant and landlocked Stan-nations? At some point, as we face financial and military exhaustion, we have to ask ourselves if we can even successfully evacuate our personnel from the far-flung bases in Uzbekistan and Kyrgyzstan.
      This must be an equally sobering moment for Europe, and an additional reason for the recent plunge in the relative value of the Euro, for Europe is now at the mercy of Russia in terms of staying warm in the winter, running their kitchen stoves, and keeping the lights on. Russia also exerts substantial financial leverage over the US in all the dollars and securitized US debt paper it holds. In effect, Russia can shake the US banking system at will now by threatening to dump its dollar holdings.

Much has been made of losing our moral authority during the Bush years. We can also say goodbye to our economic dominance. Meanwhile, and all the more depressing, is McCain's chutzpah to claim the mantel of righteousness every time a foreign policy crisis emerges. His lack of prescience is startling. Stammering and stuttering over the years about not trusting Putin and only seeing K-G-B in the Russian president didn't result in a single policy proposal or strategic suggestion. Sure, he offered bluster and pithy quotes. But nowhere in McCain's long, long record has he shown an ability to see the forest through the trees. He relies on the urgency of the moment. Never mind looking beyond it.

What's the Future of Suburbia?

That's the quesiton the NYT's Freakonomics blog put to a bunch of smart people:

There are many ways of describing the fiasco of suburbia, but these days I refer to it as the greatest misallocation of resources in the history of the world.

I say this because American suburbia requires an infinite supply of cheap energy in order to function and we have now entered a permanent global energy crisis that will change the whole equation of daily life. Having poured a half-century of our national wealth into a living arrangement with no future — and linked our very identity with it — we have provoked a powerful psychology of previous invesment that will make it difficult for us to let go, change our behavior, and make other arrangements...

The suburbs have three destinies, none of them exclusive: as materials salvage, as slums, and as ruins. In any case, the suburbs will lose value dramatically, both in terms of usefulness and financial investment. Most of the fabric of suburbia will not be “fixed” or retrofitted, in particular the residential subdivisions. They were built badly in the wrong places. We will have to return to traditional modes of inhabiting the landscape — villages, towns, and cities, composed of walkable neighborhoods and business districts — and the successful ones will have to exist in relation to a productive agricultural hinterland, because petro-agriculture (as represented by the infamous 3000-mile Caesar salad) is also now coming to an end. Fortunately, we have many under-activated small towns and small cities in favorable locations near waterways. This will be increasingly important as transport of goods by water regains importance.

Get your beet seeds while you can.

Stupidity as a Virtue

Krugman builds off of Obama's pridefully ignorant comment:

...know-nothingism -- the insistence that there are simple, brute-force, instant-gratification answers to every problem, and that there's something effeminate and weak about anyone who suggests otherwise -- has become the core of Republican policy and political strategy. The party's de facto slogan has become: "Real men don't think things through."

In the case of oil, this takes the form of pretending that more drilling would produce fast relief at the gas pump. In fact, earlier this week Republicans in Congress actually claimed credit for the recent fall in oil prices: "The market is responding to the fact that we are here talking," said Representative John Shadegg.

What about the experts at the Department of Energy who say that it would take years before offshore drilling would yield any oil at all, and that even then the effect on prices at the pump would be "insignificant"? Presumably they're just a bunch of wimps, probably Democrats. And the Democrats, as Representative Michele Bachmann assures us, "want Americans to move to the urban core, live in tenements, take light rail to their government jobs."

If it feels good, do it, has been the Republicans answer on our glaring dependency on oil going back to the tarring they gave Jimmy Carter, who had the audacity to point out the looming problem we now find ourselves in. We have two oil men running the country and a willing, complacent successor in McCain. And yet about two-thirds of the country favors his off-shore drilling pander because it's the easiest available solution. Insanity is doing the same thing over and over again and expecting a different result. Insanity in the name of stupidity is McMaverick's energy plan.

Moderate Approach

Joe Klein drops some knowledge on the energy debate:

For those of you who are new to politics: Obama's position on offshore drilling is what is called a compromise. It is how significant legislation gets passed--which is something that hasn't happened very often lately. It is what McCain did when he joined thirteen other Senators to come up with a plan to allow some, but not all, of the President's Republican judges to be confirmed while preserving the minority right to filibuster. (McCain criticized Obama--rightly, I believe--for not joining that compromise.)...

The price of governing is ideological impurity. It is a principle John McCain has favored in the past, and may still, except--apparently--when it is done by Obama. But it's hard to tell.

Obama's reluctant agreement to compromise is promising. Politically it neuters a potentially fatal McCain attack; people want to drive their cars around cheaply and many will vote for the person who promises the status quo. In terms of governing, Dems would secure a greater investment on developing alternative fuel - a vital win - while Repubs get to brag that they are doing everything they can to keep gas prices down, the environment be damned - an acceptable loss. It's not an ideal solution. But this is how you get shit done in Washington. Which points to Obama being game to getting a lot done. A radical liberal he's clearly not.

Things That Make You Go WTF?!?!

Toss another log on the roaring Iraq Mismanagement Fire:

Soaring oil prices will leave the Iraqi government with a cumulative budget surplus of as much as $79 billion by year’s end, according to an American federal oversight agency. But Iraq has spent only a minute fraction of that on reconstruction costs, which are now largely borne by the United States.

The unspent windfall, which covers surpluses from oil sales since 2005, appears likely to reinforce growing debate about the approximately $48 billion in American taxpayer money devoted to rebuilding Iraq since the American-led invasion.

In one comparison, the United States has spent $23.2 billion in the critical areas of security, oil, electricity and water since the 2003 invasion, the report said. But from 2005 through April 2008, Iraq has spent just $3.9 billion on similar services.

Sounding the Alarm

Following the stock market's biggest June drop since the Great Depression, Kunstler says 1929 wasn't shit compared to what we're now facing:

Our debt problems today are of a magnitude so extreme that astronomers would be hard pressed to calculate them. By any rational measure our society is comprehensively bankrupt. From the federal treasury down to the suburban cul-de-sacs so much loaned money is either not being paid back, or is at risk of never being paid back, that the suckage of presumed wealth has passed through an event horizon out of the known universe into some other realm of space-time, never to be seen again in this realm...

This condition is partly disguised by both the loss of credibility of US currency and real-world scarcities of oil and food, but the upshot will be something at least twice as bad as the Great Depression of the 1930s: people with no money in a land with no resources (with manpower that has no discipline), hardly any family farms left, cities that are basket-cases of bottomless need, comatose small towns stripped of their assets and social capital, an aviation industry on the verge of death, and a railroad system that is the laughingstock of the world. Not to mention the mind-boggling liabilities of suburbia and the motoring infrastructure that services it...

Complicating matters is a global oil predicament that is really not hard to understand, but which the organs of news and opinion have obdurately failed to explicate for an anxious public. Call it Peak Oil. There are only a few elements of it you need to know. 1.) that demand has now permanently outstripped supply; 2.) that new discoveries are too meager to offset consumption; 3.) That under under the circumstances, the systems we rely on for daily life are crumbling. I've called this situation The Long Emergency...

So where we are at now is the equivalent of standing in the slop by the ocean shore under a gathering hundred-foot-high wave that is about to come crashing down on our heads. Since I sure don't know everything, I can't say how this will all play out in the months ahead, especially with the presidential election coming at the exact moment that voters will be turning on their furnaces for the cold and dark winter beyond. I would venture to say that so far our society as a whole has done a piss-poor job of comprehending the situation. But there is still the possibility, with four months of politicking left, that the nature of our predicament can be articulated in a way that few can fail to understand, the way Mr, Lincoln articulated the terms of the Civil War on the eve of its fateful outbreak.