Archive for March 30th, 2009

Twin Crises of Oil and Finance

Oil is now $52 a barrel.  Not too long ago that would have been a cause for concern.  In comparison to the prices in the summer of 2008 which hit $150 a barrel, it now seems like a bargain.  Yet given the severe economic recession, the price isn’t so cheap.   In the 90s, even as economies grew, oil struggled to stay even around $15 a barrel.  And, while efforts to restrict production have played a role in keeping the price high, similar efforts failed in the past.  What’s up with oil?

I’m increasingly convinced that the current recession is more than just a credit crunch, or even the result of a quarter century of debt combined with an unsustainable current accounts deficit.  To be sure, that “something for nothing” culture that created the tsunami which hit the world economy in September is a problem on its own merits.  But the situation is made much worse by how it is intertwined with the energy crisis and oil markets.

In 2008 we started to feel the first effects of so called “peak oil,” the spot in the history of oil production where we are at maximum production, with roughly half the world’s oil reserves used up.   By most  accounts, within a couple decades after peak oil there will be a sharp decline in oil production, as more expensive methods or locations are unable to compensate for the amount of oil production going off line due to aging oil fields.   It’s not surprising that this first encounter with peak oil led to drastically rising prices followed by a step recession.

In other words, two crises are hitting simultaneously, and while we were focused on oil in 2008, and now finance and credit in 2009, there is really no way out of this if we solve only one crisis.  Both must be dealt with.

The sudden collapse of the housing industry was hastened by high oil prices.  Consumer spending shifted to pay energy costs, creating a drop in demand for other goods.   This also meant that people could no longer afford increasingly higher priced homes, especially large ones requiring considerable energy for heating and cooling.   Consider: in the last three recessions, 1974, 1980, and 1991, a sharp spike in oil prices came just before the economic slow down.  Oil price increases directly sap money from the economy, exacerbating other economic imbalances and creating the spark for a recession.   This should have also happened in 2001, after the stock bubble collapse, but massive government spending and cheap credit in response to 9-11 kept the economy moving — and overheated.

If government action gets the economy moving again, oil prices will rise, risking a slip back into recession.  Since debt is increasing dramatically through stimulus and bailout measures, high oil prices could mean that any recovery will be stillborn.   They could also be the catalyst for inflation.

Stagflation — a recession plus rising prices, would again push down prices of oil, and perhaps that would lead to another attempted recovery.   But increase in oil costs might thwart any effort for long term recovery.   Perhaps we can at some point get a couple years of growth but any move to the kind of economic production of 2008 will significantly increase oil prices.  Since it’s unlikely debt and deficit spending will disappear any time soon, those high oil prices will cripple the economy and perhaps send us into a downward spiral from which there is no clear escape.  In a worst case scenario it could be something akin to the collapse of western civilization, at least in a way analogous to the collapse of communism in the early 90s.

There are two ways out of this: a) find another source of cheap energy (and to avoid a global warming crisis later in the century, it should be clean, cheap energy); or b) alter our lifestyle to create a sustainable economic system not based on constant growth and consumption.   “A” would take less of a psychological change in perspective, but “B” would ultimately be easier to pull off in material terms.

Part of the current Obama administration plans is to fast track solar and wind power production.  There are also discussions about returning to an expansive nuclear energy program.   All of this could make a difference, but as my blog repeatedly notes, many of our problems come from a culture defined by consumerism and abstraction.   We’ve disconnected ourselves from nature and from each other.

I know it’s true for me.  I’ve lived a life of plenty, have not put too much thought into energy use, and in 2007 we bought a house with over 3000 square feet of living space.   Yet due to work and family demands, I haven’t found time to connect well with neighbors, and its been all too rare that I get to spend time with friends.  E-mails and long talks after meetings replace families coming together to dine and interact.     I am part of this culture of abstraction and waste, I grew up in it, I’m used to it, and I have enjoyed its material delights, allowing distractions to make up for the lack of real contact with my community.

How to change the culture?   Well, there’s really only one way.   A whole bunch of individuals will have to choose to reach out to one another, shift away from a consumerist mentality, and think about the consequences of the lives we’re leading.   Neighbors talked last year of a community garden; we plan to participate.   I’m finding myself saying “no” to buying things I usually would not think twice about, and reflect on how well my actions and lifestyle reflects my true values.   In so many ways my actions fall short of the principles I believe in.  I can’t change the world, but I can make changes in myself.

Most important, we have to internalize the realization that we will not simply get through this recession and return to the boom times of the pre-2008 world.   We’re at the end of an era, and transitions can be difficult.  Better to embrace with open eyes the need for change, rather than hope or wish for some kind of short term fix.   The boom years were fun, but unsustainable.