Archive for June 19th, 2008

Future uncertain

We just wrote a check for about $4000 to pay for heating oil next year. That works out to about almost $350 a month, the cost of a typical car payment. But while we can afford it, there are a lot of people next year who will be in dire straights due to the fact heating oil has more than doubled in price within a year, and is five times what it was a decade ago. While this is bad enough — the hospital, for instance, expects a huge spike in pneumonia and other cold related problems next winter — the ripple effects through the economy are only beginning, and things could get much worse.

When GM closed four of its major SUV manufacturing plants it sent a very stark message: they believe high oil prices are here to stay. This is not a repeat of the 70s, when oil spiked only to fall back down after a crisis has passed. This is demand driven, and evidence suggests that production is at a peak, or perhaps even slightly past its peak. With something as demand inelastic as oil, it takes large price increases to reach a new equilibrium if demand rises and production does not. The questions now are ‘how bad will it get?’ and ‘what can we do?’

I am convinced that most economists and pundits are underestimating the ripple effect that high energy costs will have in the economy. This is uncharted territory, past oil spikes have been relatively short lived. In 1979 a short spike caused stagflation and some of the most difficult economic conditions in recent history. Yet we recovered quickly, in part because oil price declines in the early 80s acted as an economic stimulus. Not only that, but this price increase comes at a time when credit is tight, the housing market is bad, and consumers do not have excess money to spend. Add to that the large current account deficit held by the US, contributing to the weakness of the dollar, and the economy looks especially fragile, subject to possible jolts either from further oil price increases, a new terrorist attack, or even choices by foreigners to divest from the US for either political or economic reasons. Saudi Arabia and China are two countries which could do considerable damage to the US with just a few economic choices.

In short, we could be entering a time of true economic crisis, perhaps approaching that of the 1930s. If energy costs continue to rise, if the US remains mired in costly foreign policy gambits, and if other countries decide the US is no longer a good economic bet, things could get much, much worse. An economic collapse, while unlikely, is conceivable. The US has shifted away from manufacturing, financed a continuing current accounts deficit with a capital account surplus from foreign states, and engaged in a massive increase in debt, both public and private, meaning we have little in the way of a safety net if things go bad. As vibrant, dynamic and large as the US economy is, we are also vulnerable.

So what to do? As I noted in Oil Denial, easy answers from both the left and the right can be dismissed. We can’t sue OPEC, as Senator Clinton suggested — they are already producing at capacity. We can’t blame the oil companies, they don’t set the price. We can’t just choose to drill in Alaska and off shore. Not only will it take awhile to get to that oil and build pipelines and infrastructure to exploit it, but there isn’t that much oil there. One has to ask if that kind of money is best spent on a resource we know has limited quantities, or on alternatives that may have a longer future? The answer is probably mixed — some drilling to try to provide short term relief in order to invest in a long term solution.

What is the long term solution? Senator McCain urges the building of more nuclear plants. That seems reasonable; France gets 70% of it’s electricity from nuclear energy. There are dangers, but given the economic consequences of a increasingly probable economic melt down, it may be worth risking a very improbable nuclear melt down in order to supply energy to the economy. Nuclear energy does not contribute to global warming, and is reasonably clean.

Yet nuclear enegy does produce waste, there are limited quantities of uranium (I’m not convinced we can feasibly simply mine it from the sea) and the risk of an accident or a terrorist attack are real enough to make one consider other options. Here is there is no magic bullet. Solar, geothermal, wind, tidal, and other alternatives all are useful in certain circumstances, and the investments needed to tap these sources suddenly don’t seem so expensive with oil over $130 a barrel and rising. The only alternative I dislike is biofuels — in a world where population and hunger are rising, we shouldn’t divert food production in order to satisfy our luxurious lifestyles. A shift to electric cars and new ways of providing heat and energy can be done. The question is only how fast and at what cost.

We could have a future of economic collapse, as rising oil prices simply drown the economy with stagflation and debt at a level making it impossible to come up with alternative energy sources fast enough to counter the crisis. The collapse won’t be permanent — after we recover, there could be a new boom based on new energy sources — but for those of us on the planet now, it could mean decades of difficulty. We could have a future where technological innovation fuels a mini-boom even while oil prices continue to rise, allowing a relatively smooth transition. The fact that GM closed so many plants, and all the auto manufacturers are focusing not just on small cars, but electric, hybrid and hydrogen vehicles is promising.

Nuclear power may well be necessary to provide needed electricity, but I don’t feel comfortable shifting to that as our main source of energy. Technological advancements in other, safer and cleaner alternatives are more promising and less risky in the long run. Still, I can’t help but be struck by the fact that for the first time in my life I look to the future and can really imagine a United States not only in decline, but in economic collapse. I truly wonder about my children’s future, and whether I’ll be able to enjoy the kind of lifestyle I now have for the rest of my life.

We live in interesting times.