Archive for September 9th, 2008

Oil still a crisis

Right now Americans are enjoying what just a couple years ago would have been shockingly high gasoline prices. The $3.549 I paid at the pump yesterday felt painless compared to the $4.199 I was paying just a month and a half ago. It’s amazing how quickly we get used to changed conditions. Still, while people now reckon with stable gasoline and fuel oil prices, the economy has not rebounded and we’re not out of the woods by any stretch of the imagination. Moreover, things could get worse really quickly.

First there’s Ike. Ike is now over Cuba, doing considerable damage as it stays on land and affects perhaps half the island. Consider it Eisenhower’s revenge for the 1959 revolution. It will leave Cuba as a tropical storm, and then continue into the Gulf of Mexico. Chances are it will, like Gustav, be more bark than bite, but right now it’s projected path goes straight toward Houston, Texas, and the place where much of the oil business in the US takes place. If — and these are still very speculative ifs — the storm strengthens back to a major hurricaine, and if it hits Houston and the ports on the coast directly, we could sese a rapid increase in oil prices as they work to repair the damage. It says something about our economy that we are so vulnerable to a storm; clearly our economic health is not in our own hands. A storm, a foreign policy debacle, or another country’s unrest can put Americans out of work, make homes and cars unaffordable to many, and directly effect our economic life. That is real vulnerability — and, of course, over time those sorts of events will occur, with unknown severity.

Then look to the Mideast. Iraq’s current situation is leading thankfully to an American withdrawal of troops. Moreover, we aren’t going to be sucked in to the kind of long term presence that the neo-conservatives wanted, and their policy goals of creating a model democratic Iraq to expand democracy in the region have failed. Instead, Iran has emerged the king maker, and in fact is probably the reason for Iraq’s current state. Still, this apparent stability masks a plethora of dangers.

Israel faces challenges it has not had to face in the past, and there is internal debate on how to do it. Their main challenge is Iran and its proxy in Lebanon, Hezbollah. Hamas is also a real foe in Gaza, while Syria still wants return of the Golan Heights. Back in the Cold War Israel thought it was in danger as the Arab states aligned against it. But there the danger was clear: states with armies. And the response was rather straightforward: defeat those armies. Now things are murky. Unlike the weak and divided Arab states on Israel’s border, the main state it is concerned about is Iran. Iran is a regional power, quite a ways away, whose threat isn’t its army, but it’s support for terror organizations. Those organizations, especially Hezbollah, do not behave like armies do, and in 2006 Hezbollah proved especially resistant to and resilient against a heavy Israeli assault.

Israel’s choice is: a) let Iran develop nuclear weapons and continue to fund groups like Hezbollah, and hope the peace process and diplomacy deter any sort of aggression; or b) try to deal with Iran and Hezbollah, and risk a war that could threaten Israel’s very existence, and could expand into a greater war. Right now, Israelis are undecided. They appear to think that at the very least they should take out Iranian nuclear facilities to avoid having to confront a nuclear Iran, but it’s not clear they can do that effectively, or what the consequences would be.

In essence, the calm now in the Mideast could be illusionary. It may well be the calm before a brewing storm. Regardless of what this storm might ultimately mean — regional war, destruction of Israel, destruction of the Iranian regime, or some kind of crisis management muddling through — it almost certainly will mean oil price spikes and threats to the oil supply.

Add to all that the continuing increase in demand in China and India, and you get the picture. Moreover, the current price decline is less some kind of bubble bursting, but more a reaction to decreased demand in the US (which consumes a quarter of the world’s oil) as a response to higher prices. Not only have we had the first decreases in driving mileage in a long, long time, but people are shifting from fuel wasting SUVs (which you can find embarrasingly cheap these days) to hybrids and smaller cars. Here in Maine people are giving up fuel oil in favor of wood pellet stoves, with geothermal, solar and even wind (I’ve seen a house with a tall windmill in its backyard, installed this year). That reduction in demand has an impact, but we are one major storm away from disaster.

I hope that this summer’s price spike has started to change habits that will lead towards fundamental chanage. SUV plants are closing, people are shifting to different fuels, and it seems like there has been a change in culture away from the kind of dismissal of energy concerns given in the past. It also helps deal with global warming, as most of the new energy sources are more ecologically friendly. The trends I noted in Oil Denial remain; we are heading towards lower production while growth in especially Asia means growing world demand. I do not believe conditions are fundamentally different than they were when I wrote The Economic Storm back in July when oil hit its peak price.

This is the largest issue we face. It is bigger than terrorism — terrorism alone can create spectacular effects like on 9-11, but the real physical damage is minimal. If done at the right time with the right target, however, a terror strike could create a devastating economic backlash, based largely on our need for oil. Wars in the Mideast, concern about Georgia and Russia, and our current economic downturn are all built around oil and our economic addiction to it. The candidates talk a good talk, but it’s empty rhetoric. Sure, we can drill more here off shore, but there isn’t enough oil there to make a real difference. Sure we can invest in alternates, but that’s been promised for decades. There needs to be a sense of urgency that goes beyond government and is internalized by each person. Unfortunately, it seems that once it looks like things are a bit more stable, people put it out of their mind. That is a mistake.