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.

  1. #1 by Clifford J. Wirth, Ph.D. on March 30, 2009 - 04:18

    There are not even any plans to develop alternatives that will replace oil.

    This is what we must plan for. With increasing costs for gasoline and diesel, along with declining taxes and declining gasoline tax revenues, states and local governments will eventually have to cut staff and curtail highway maintenance. Eventually, gasoline stations will close, and state and local highway workers won’t be able to get to work. We are facing the collapse of the highways that depend on diesel and gasoline powered trucks for bridge maintenance, culvert cleaning to avoid road washouts, snow plowing, and roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, large transformers, steel for pylons, and high tension cables from great distances. With the highways out, there will be no food coming from far away, and without the power grid virtually nothing modern works, including home heating, pumping of gasoline and diesel, airports, communications, water distribution systems, waster water treatment, and automated building systems.

    Time to focus on preparing for the impacts of Peak Oil.

  2. #2 by Mike Lovell on March 30, 2009 - 15:20

    If you’re weren’t thinking too much about energy usage and have some extra monies, you know, my family could use a 3000 sq foot home..this apartment is getting crowded and I need a dog! LOL

    I’m not sure what to think about the energy argument. We have subsidies going to make alternative forms cheap enough to afford, like ethanol here in Iowa, is about 12-15cents cheaper than regular unleaded with all the subsidies. But we also see food prices and fuel prices that one day are in conflict, another day they arent even related, depending on who you listen too. When it comes to the oil people vs the alternative energy people, it always seems to be an argument of one or the other, instead of a mixture, with gradual switches to alternative forms of energy as research finds ways of making it more affordable.

    Which brings me back to food again…why is the stuff thats supposed to be better for you, always out of the price range for anyone but the well to do, while the stuff thats supposedly so bad for us is abundantly cheap and ready to grab on the fly at a moments notice?

  3. #3 by Scott Erb on March 30, 2009 - 16:00

    The stuff that really tastes good is fat, carbs, and sugar. And that’s cheap!

    I agree about energy — the only possible answer is a lot of different alternatives developed as oil remains in use. I also think the ethanol-food link, while real, can be overstated. In Canada they’re making ethanol from agricultural waste (and Brazil it’s sugar cane — sugar is great in every context!) It’s just a matter of making sure we have alternatives fast enough. I’ve read a lot from people like Clifford Wirth above (including Dr. Tom Eastler, a geology professor here where I work) that questions whether alternatives can be on line fast enough. There are also real concerns about just how much oil the Saudis really have. I taught a first year seminar based on the film *Syriana* for a couple years, and if you read the peak oil material, there is real cause for concern. I guess all we can do is be prepared as possible.

    When I was your age (imagine me as an old geezer ‘when I was young…’) I was living in a basement single room apartment in a not so nice section of Minneapolis. And you know, it was just fine. I like our house (which we got more for location than size — our boys are growing up literally in the woods on the end of a dirt road), but I really liked my apartment back then too (though perhaps not with a family — I was single at the time).

  4. #4 by Mike Lovell on March 30, 2009 - 18:00

    Oh don’t get me wrong…our apartment is okay (maintenance on these places leaves someting to be desired…they’ll repaint for no real reason, but refuse to fix a roof that caused serious damage with a big hole of a leak that went to the bottom apartment before bursting int hrough the walls down there). But with a wife and 2 kids 700-750 sq feet isn’t quite enough. otherwise its great..park to the south of the complex, elementary school to the north….5-7 minute drive to work (depending on the traffic lights), everything you can want to buy within 10 minutes, interstate out of town, or freeway to downtown within 5 minutes…and if it was just me, I’d be cool with it (outside the dog and garden factor). But at the ripe old age of 30 (on the 27th of april anyways) i find myself telling these kids “when i was your age” and for the first time ever, i’m serious about it! so much has changed since then.

  5. #5 by Scott Erb on March 31, 2009 - 03:52

    On apartments: I definitely see advantages to apartment life, and in Europe it’s very common, especially in cities, for families to have apartments.

    On kids toys — my wife is originally from Russia, we met when she was in the US to perfect her English as she was an English teacher. Now she’s a CPA, and she’s gone from living near the Arctic circle on a Reindeer farm in a small house with no indoor plumbing to the extravagence of the US. (Her family has since moved to a city where they have a nice apartment — Skytyvkar, in the Komi republic.) She and I had minor squabbles about buying toys for the kids — she buys them much more than I would! It finally became clear that she really enjoys giving them what she didn’t have — she remembers Christmas gifts as candy and some tangerines her dad (who directed the collective farm) got from Moscow. She’s come around now to seeing that we don’t need to buy so much (and the current economic crisis scares her because she lived through Russia’s collapse in the early nineties).

    I definitely will write a post on children and toys some day soon. And Ryan is getting a Hot Wheels monster truck from the tooth fairy tonight…and no, having the tooth fairy bringing a toy along with a dollar was not my idea :). But Ryan, near six, has a beautiful mix of naivete and shrewdness. He believes the tooth fairy is magic and will come for his tooth, but has a theory that she grinds up the teeth and sells them to people building houses (because teeth are strong, and it’s a strong building material) to make the money to give kids.

  6. #6 by henitsirk on April 2, 2009 - 01:58

    Ha — our story about the tooth fairy is that she gives the teeth to the gnomes under the earth to grow more crystals! 🙂

    I have problems with ethanol because it promotes damaging monoculture agriculture. And it doesn’t promote becoming less reliant on fuel! The idea isn’t to develop some alternative to fossil fuels that allows us to keep on an unsustainable path. Maybe using agricultural waste is one idea, though I question how sustainable it would be to have that much waste available — sounds like monoculture again. Imagining a family farm with a variety of animals and crops, there just aren’t large amounts of waste. Think Farmer Boy — no mention of large piles of silage or waste products hanging around! A better picture would be Polyface Farm, where all of the animals and plant products support each other with minimal waste.

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