In the twin killing of an eye

By Carl

Overnight, oil prices jumped more than $5 a barrel.

They had been heading upwards, inexorably, all year, with one or two hitches in the road. This past week, however, has seen it rapidly soar past $130 a barrel.

Conventional wisdom on Monday pointed to such obvious things as the heated rhetoric in the American political campaign, the situation in Africa, a jump in demand from Asia, the summer driving season, all of which together could explain a spike like that.

Or...as some of us guessed, there was a bigger story in play:

Oil prices leaped above $135 in overnight trading on Thursday, a new record that underscored the growing pressures that runaway energy prices are placing on some of the biggest names in global industry.

By midday Thursday, oil had fallen back and was trading at $131.95, down $1.22 from Wednesday’s close. But in a week that has seen the oil price rise by $4, the economic consequences of high fuel costs continued to mount.

[...]Thursday’s gains came after a series of unsettling reports that suggested world oil supplies may not be able to keep up with future demand, a situation that could potentially lead to even higher prices.

On Wednesday, weaker-than-expected weekly inventory data in the United States stoked fresh worries over oil supplies in the world’s biggest economy ahead of the busy summer driving season, sending oil prices up $4.19 a barrel on the day.

Some investors reacted to a report on Thursday in The Wall Street Journal that the International Energy Agency, an Paris-based policy advisory group for industrialized countries, was concerned about a reduction in the long-term world supply of crude oil.

The IEA usually uses the reports of the individual nations of OPEC and other oil producers to estimate world oil supplies.

Needless to say, nearly every nation inflates their reserves. The report, therefore, is clearly unreliable.

Indeed, in this month's National Geographic magazine comes a report about a renegade industry analyst in Saudi Arabia who's estimates indicate that, not only has Saudi Arabia passed peak oil, but that its reserves are draining faster than anticipated.

Many skeptics point to several reserves of oil that are a litle harder to get to, but now that oil prices have climbed, are cost-effective.

However, when we've seen oil prices spike in the past, they have been accompanied by fervent & frenzied attempts to find more oil, discoveries of which have provided smaller and smaller finds. Indeed, the price drop of the 80s and 90s in crude prices was due in large part to the discovery of oil to tap into.

In this current spike, there has been zero, nada, nil, increased effort to find new oil sources. For example, Exxon Mobil, while increasing the exploration budget over 20% this year, still spends more on maintaining existing oil wells than it does on exploration, and their goal is to increase oil production by 2010 by a measly 725,000 barrels a year, and that 20% increase barely makes up for the past eight years of sitting on a budget line item like they were drowning it in the bathtub, as prices steadily inched, then rocketed, upwards.

I predicted earlier this year that once oil hit $130 a barrel, we could expect to see $5 a gallon gasoline.

I was wrong, but I had not anticipated that it would take weeks rather than months to reach that level, and expected that interim oil prices would be absorbed into the price structure. However, I can report that here in NYC, premium gas is bumping andexceeding $4.50 a gallon already.

OK, so that's the good news.

Here's the scary part:

[In 2005, the IEA] said that if investments didn’t keep pace with the growth in consumption, the world might face a shortfall of as much as 15 million barrels a day by 2030. Instead of growing to reach 116 million barrels a day, global supplies would struggle to increase to 100 million barrels a day by then, up from today’s average of 86 million barrels day.

Contrast that with this (from NatGeo):

Last fall, after the International Energy Agency released a forecast showing global oil demand rising more than a third by 2030, to 116 million barrels a day, several oil-company executives voiced doubts that production could ever keep pace. Speaking to an industry conference in London, Christophe de Margerie, head of the French oil giant Total, flatly declared that the "optimistic case" for maximum daily output was 100 million barrels—meaning global demand could outstrip supply before 2020. And in January, Royal Dutch Shell's CEO, Jeroen van der Veer, estimated that "after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand."

That is, within the next ten years, we will literally and effectively be running out of oil.

Get used to it, folks. This is going to hurt. A lot. And in ways you can't even begin to expect.

(Cross-posted to Simply Left Behind.)

This is what we're reduced to...

By Carl

How does a President deal with sky high oil prices?

A leader might bully a little the people who are holding back, if he felt they were doing it to pump up their profits. He might threaten or cajole them to pump out a bit more to help ease the strain.

A leader might recognize that this is a permanent, serious problem, and begin (even if a bit late) to try to correct our dependency on that oil.

A leader might make demands that both producers AND consumers work together to bring the price down until we can manage to absorb the increases.

A leader would never beg:

"I would hope, as OPEC considers different production levels, that they understand that if ... one of their biggest consumers' economy suffers, it will mean less purchases, less gas and oil sold," Bush said.

"Please sir, may I have some...more?"

That's our energy policy? Sheesh!


(Cross-posted to Simply Left Behind.)

This is going to hurt. A lot.

By Carl

If you're old enough to remember the Carter administration (1977-1981), then you'll remember the ugly phenomenon, unprecedented in a free-market economy, of stagflation.

Loosely defined, stagflation is when the economy is stagnant (i.e. a recession, in which economic activity slows) coupled with hyperinflation (when prices skyrocket through the roof).

The Carter stagflation hit when OPEC decided to play games with the price of oil. Since America was far and away the single largest consumer of OPEC oil, this was targeted directly at us, likely as a result of several foreign policy factors (Iran being number one among them).

Now that oil is flirting with its all-time record highs, as adjusted for inflation, as improbable as it may seem, we look likely headed down the stagflation path once again.

It's hard to describe what living in those times was like. The prime rate was up around 20%, while inflation ran at a then-unheard of (in America) rate of 15% (some studies indicate inflation may actually have reached higher levels in the past, like during the Civil War, but there's no clear measure of these incidents).

So the government was borrowing money at credit card rates, while families were seeing their incomes deteriorate at about one and a half percent a month, meaning if you made $30,000 a year, which was a really comfortable salary in 1979, by the end of that year, effectively you were making $25,000, but still paying taxes at the $30,000 rate, I should add. Further, banks stopped lending money at points in the incident, because if prime lending rates were 15%, say, but inflation was 16%, they were actually losing money in the deal.

Let's look at the current situation, tho: the housing market has cooled off and begun to drop nationwide. Housing prices have traditionally been the source of "wealth" in America, a fairly nebulous term that really means, "in a pinch, can I sell my home for more than I paid and pay down my credit cards?"

So long as the answer was "yes," people felt secure and kept on buying. Now the answer is "Eh. Not so much!"

This morning, we've seen clear signs that the economy is in serious trouble. While the Producer Price Index, the average cost to produce a good and bring it to market, shot up 3.2% on an annual basis in November, retail sales were up only 1.2%.

Which means that the entire increase in retail sales can be attributed ONLY to inflation (and the PPI doesn't include direct energy costs!), meaning the consumer economy dropped by about 2% in November. People bought 2% less in November. Period.

The consumer markets make up about 70% of the gross domestic product (the entire economic activity of a nation), so we'll call this a drop of about 1.75% in the economy.

In other words, a recession. A contraction. Not a good thing.

In current economic theory, you fight inflation by raising interest rates. This tightens available credit, forcing companies to put off infrastructure investment, and also means people like you and me pay more interest on our credit cards.

But the Fed has had to lower interest rates in response to the crippling sub-prime mortgage crisis, which has rippled now into prime mortgages. Anyone who believed this crisis was contained in the sub-prime markets is an idiot, including Ben Bernanke.

No rational borrower in his right mind is going to see Ditech.com offering 0% adjustable rate mortgages and not bite their banker's ass about paying 5%, even on a fixed rate loan! Hell, I bitched about paying 1.9%!

This clearly ripples through the credit markets, and is a far larger problem than we've been led to believe.

And don't think this is only an American problem. England's Northern Rock bank debacle shows that it's at least hitting the EU, and many central bank heads believe that we might see the first global stagflation in history.

You wanted to be a war president, Herr Bush? You will be, in 2008. A global stagflation will mean more poverty, more starvation, more angry young men and women in the streets of poor countries with weak tyrannical leaders.

The pieces are in place, ladies and gentlemen, for a true World War III. And we have only ourselves and our greedy overlords to thank.

(Cross-posted to Simply Left Behind.)