[donshan]

I have been reading the book "The United States and the World Economy", edited by C Fred Bergsten. This book is mainstream economics at the global level at the Institute for International Economics. The book is endorsed on the back by such Economists such as Lawrence Summers (President of Harvard and previous Secretary of Treasury) and Paul Volcker( Chairman of the Fed prior to Greenspan). There is one chapter by Phillip K Verleger Jr. titled Energy: A gathering Storm?. This was written in late 2004 and published January, 2005. The energy chapter reviews a growing crisis and is sort of an open letter to the new Bush Administration on what must be done in the Energy area. It does not even admit the existence of an oil supply constraint due to Peak Oil, but instead blames under investment in oil development and refineries for sour and heavy crude oils, and a number of geopolitical issues. He calls for strong energy conservation measures, alternative fuels, a gasoline tax of $1.00 a gallon, (with changes in tax structure in other areas to make it revenue neutral), a doubling of the SPR to use as a buffer on price spikes, the necessity of OPEC raising production, increases oil inventories and others including a number tax incentive issues.

One interesting analysis is an econometric analysis that showed that the ENTIRE world goes into recession at oil prices above $55/bbl. He calls for strong action.

Now none of his proposals have been implemented, and oil has gone well above $55. His conclusions in 2004 were:

$this->bbcode_second_pass_quote('', 'T')ime is short and Action is Required
Crude oil prices rose to record levels in 2004., In the next three years, they will climb even higher if action is not taken., Economic recession or worse will surely follow. It is not an exaggeration to say an economic storm of immense proportions lies just over the horizon.

In May 2001, President Bush called on Congress to pass a new energy policy. His request for action was correct; however the policies he put forward, even if adopted immediately, would do little to avoid the coming tumult. Today, the United States, the European Union, Japan, Russia, China, and OPEC members, particularly Saudi Arabia must act at once to address this problem. Each country can take many steps by itself. However, the crisis can be avoided only if they all work together.

[AmericanEmpire]

$this->bbcode_second_pass_quote('', 'I') voted all hell breaks lose....just think if the entire world at once knew about PO...their would be a run on the banks and cash out of the markets.....it would be worse then 1929 OCT 31st.....real estate would crash like someone said domino effect.

[Doly]

$this->bbcode_second_pass_quote('AmericanEmpire', 'W')hat matters is when large masses of people realize the ramifications of it and panic. I'm actually glad most people don't know. Lets things continue on for a little while longer.

[Revi]

Dale Allen Pfeiffer's editorial this month is about exactly this problem. It makes me nervous that the stock market is almost up to 11,000 now. That's the highest it's been since 2001. Are we building to another crash?
I think economic hard times could happen anytime soon. Real Estate could pop the bubble, taking down homebuilding and furnishings. Right now I'm just thankful that we should be safe and warm for this winter.

[emersonbiggins]

$this->bbcode_second_pass_quote('Revi', ' ')Real Estate could pop the bubble, taking down homebuilding and furnishings. Right now I'm just thankful that we should be safe and warm for this winter.

[Revi]

I'm planning on burning the several cords of dry wood we cut off our woodlot last winter.

[fecteau]

$this->bbcode_second_pass_quote('', ' ')What alternates do you see coming online to replace our petroleum-dependent agricultural system?

[The_Virginian]

The world is not so sane...

So I vote scramble boogy time for recources.

A new war in South America...something the USA can actualy handle, while we drawdown in IRAQ and back off IRAN (because they have nukes).

The USA Dollar will stay a REGIONAL oil currancy, Euro will take over Asia and Europe. It will involve taking over Venezuala, Bloivia, and keeping Colombia. (we will bypass Brazil, and she is too dollar linked to switch just yet anyhow).

The World will then truely look like the Prophet Orwell wrote about. Sheres of Influence dictated by continental geography, and never ending "wars".

(I did not actualy get to cast my vote in the poll, oh well)

[Revi]

[quote="The_Virginian"]The world is not so sane...

So I vote scramble boogy time for recources.

A new war in South America...something the USA can actualy handle, while we drawdown in IRAQ and back off IRAN (because they have nukes).

The USA Dollar will stay a REGIONAL oil currancy, Euro will take over Asia and Europe. It will involve taking over Venezuala, Bloivia, and keeping Colombia. (we will bypass Brazil, and she is too dollar linked to switch just yet anyhow).

The World will then truely look like the Prophet Orwell wrote about. Sheres of Influence dictated by continental geography, and never ending "wars".

I love the "scramble-boogy for resources" It's definitely started. I personally advocate doing the same. It's time to get some arable land. Just in case...

[pup55]

Carnegie Rochester



My theory on this, for what it is worth, is that interest rates are as important, if not more important, than the fuel/energy cost, and therefore, as long as interest rates are kept low, the system could go on for quite a while in its current dysfunctional form.

We did the calculation last fall during the Katrina period to the effect that as a percentage of the overall cost of a produce item (peaches), the interest/finance charge was actually more important, as a percent of the selling price, than the fuel cost to produce, transport and sell it.

As further evidence, note in the graph above the price of oil doubled between 1978 and 1979, but it was not until volcker raised interest rates in 1979-1980 that the economy finally slowed down, and people started to use less oil. As you can see from the above, it was not all that much less oil, either. Ultimately the economy went into a hell of a recession, and people started losing their jobs, per the earlier post.

The difference this time around is that even though the price of energy has doubled (actually tripled in the last 2 years) interest rates have stayed low. Part of this is because they were deliberately kept low by Bubblespan, and part of this is because "the market" , that is, the Chinese and Japanese who are loaning out the money, do not perceive much inflation risk, and therefore do not demand higher rates when they lend us money. Also, part of this is the fact that there is a lot of money in the system, as courteously provided by the current liberal government spending policies.

The article cited above talks a lot about the emotional element of this, which is to say that during the 70's there were periods of emotional expectations of inflation that made people demand higher rates.

The chart above shows what Volcker did. During a period of about 18 months, he basically put his foot on the throat of the economy until the disinflation hit and got everything back under control. The reason he did this was that he had a mandate from his bosses (the fatcats that control the economy) who insisted that inflation, and capital deterioration, be brought more under control.

So, how long will the current system go on?

Maybe a long time. It is possible that as long as the Chinese and Japanese accept low interest rates, and as long as copious money keeps flowing out of the US government treasury, things could keep up like this for quite awhile, even if "the peak" passes and oil becomes more expensive. Even if the price goes up, the poor nations will give up their oil first before the wealthy nations, so the system could go on awhile longer.

However, at some point, the lenders will take a look at the situation and start to seriously question whether the US borrowers (government and corporate) are capable of paying back a loan, or whether or not inflation risk is still around. At this point, they will demand higher interest in response to the risk. If you look at interest rates in places like Ecuador and Venezuela, you can see what happens when people lose faith in the government's ability to repay a loan (20-25% interest).

We can be pretty sure that the supply of government red ink will continue indefinitely. Also there is no indication that the fed guy Bernanke will do anything except print bountiful money.

So, there would have to be quite an emotional tipping point before any of this would happen. Also, you can be sure that the longer the delay between now and the tipping point, the more painful the remedy will be.

[Revi]

In the 1980's we did not use much less oil even though the price went through the roof. Oil and gas have become a "giffen good", so even if the price goes up we still have to buy it. Like the Irish during the potato famine. The price will keep going up and we will keep buying because we have no other choice. This will bankrupt large segments of the middle class until they become poor and destitute and no longer drive or heat their houses. They will be out of the system, and may even disappear into the growing ranks of the homeless. We will all be told that everything is hunky dory and the system will continue, but for less and less of the population.

[Scion]

My real world experience about prices I paid 2005 and 2006 I must pay.

2005 Jan-2006 Note
Gas 95E/L 1,00 1,3 2005 peak 1,5 €/litre ($6,84 per gallon)
Car price 15500 16600 The same car exactly
Mortgage 2,6% 3,4% $50/mo less spent on movies and such
Frozen pizza 0,89 1,12 300 gr from Euromarket
Electricity 6 10 +25% price hike paid to boss options !
Haircut 20 22 The place I have used 10 years.
USD 1,3 1,22 6,5% less purchase power in Thailand
Gold gram 11,8 15 www.tavex.fi

Above prices are from Finland and as euros. 1 Euro = 1,22 $.

All this shows inflation in practise and reduced surplus
in income meaning less purchases for business.

However official statistics claims only
1% inflation in Finland and 2.2% in Europe.

If I eat or drive a car, go to haircut or pay my electric bill
there is significant purchase power erosion in my salary
but if I buy alcohol or speak to mobile phone that is cheaper now.

All I know I paid as commuter 300 euros per month for gas
and now I pay 390 euros per month.

That is 90 eur less for shopping per month.
I have to cancel my annual 1 week in Sun winter vacation
from the equation to stay even without taking a loan.

Too many people take loans like there is no tomorrow.

Americans really should try to "want less, waste less"
because we Europeans will hard time soon to invest our export
earnings to buy your stupid loans and support that huge deficit.

Working according to Kioto agreement seems to rise prices.

It is easier to eat small bites than trying to swallow complete
big cake at one time - that is what USA will face soon I am afraid.

[Revi]

I agree with you, Scion. Too many people take out loans like there is no tomorrow. There are a lot of people living beyond their means. Unfortunately they won't get it until it all comes crashing down. That time may not be too far away if they keep driving big cars and buying gas toys.

Most people in my part of the US are struggling just to keep their houses heated and their old cars running. Who knows how they'll do with energy costs twice what they are paying now?

[linlithgowoil]

petrol prices are starting to rise again in my hometown. 91 pence per litre on average now which is about £4.10 per gallon, or $7.30 ish i think.

good thing for me though is that my work is now a 15 minute walk away rather than a 35 mile round trip by car which took about 1hour 45 minutes.

hopeing to drop to 3 days a week working in the not so distant future and will be getting rid of the car completely by summer time. we currently spend around £30-40 a month on petrol compared to about £110 a few months back. running a car is still too expensive though ,especially when its 10 years old like mine !

only thing is, i live 7 miles from my mum and dad and family now so i wont be seeing them at weekends quite so much without a car, though they can come and visit us i suppose.

electricity/gas bills continue to soar - up by 50% at least since last year for me anyway.

desperately trying to pay down credit cards and loans as fast as possibly can at present. £500+ a month on debt! aarg!

[shady28]

Well, looks like peak oil is going to make things end with a whimper rather than a bang.

It looks like gradually (rapidly) rising fuel prices is going to be the norm for the next decade or so. My thought is that at some point, the economic back of the consumer will be broken by a combination of high oil/gas prices and excessive debt.

Until that happens, more and more 3rd world countries will be priced out of competition for oil and petroleum products. Along with that goes the social unrest in those 3rd world countries that produce oil, where the citizens want to keep their oil in their own country.

Gas is mostly in the 2.50-2.70 / gal range here in the states, and the numbers about supply don't give a clue as to why the cost is going up so much. It brings into question the validity of the supply numbers.

My guess is that 2007 will see $2.90 - 3.00/gal gas in the states become the norm. That's roughly $75 / bbl for oil. I think the real question now is not when the peak is, but when the post-peak decline will start.

Economic changes are already there if you look. For the last couple of years there has been a revival in the 'scooter' market.

"The scooter market is apparently thriving, probably helped along by the increasing price of fuel. Although the overall number of scooters sold is still a fraction of street bike sales (about 8.8% in 2005), scooter sales nevertheless rose 17.45% to 56,899 in 2005 from 48,445 in 2004."

http://www.webbikeworld.com/Motorcycle- ... -sales.htm

Meanwhile the SUV market has resumed its collapse, after a short respite in December and January :

http://www.treehugger.com/files/2006/03 ... fullsi.php

"Another pleasant piece of news is that sales of full-size SUVs keep declining in the US: In one month, February, they dropped by 14% (from 120,376 to 103,566 units)."

And hybrid sales grow much faster than the (shrinking) sales numbers of the auto market :

http://www.greencarcongress.com/2006/02 ... 06_us.html

"Hybrid sales in the US in January 2006 almost doubled from January 2005 with a total of 15,868 units sold, compared to 8,455 the year before. By contrast, sales of total light duty vehicles in the US increased by 3% in January 2006 from the year before."

And the solar panel market is so hot, it can take weeks to get a product :

http://www.azcentral.com/arizonarepubli ... lar06.html

"...the American market has increased at a rate of about 35 percent each year, and that growth is likely to continue due to federal and state policies that encourage use of solar."

So all the economic trends are starting to line up. Big question is, how long till that drop, and how fast will the economy be able to adjust.

[Revi]

I think this next winter will be an ouch to the average middle class American. 2007/8 will be deadly for the poor. The winter of 2008/9 will be impossible for middle class people. We needed to pay over $1000 to get the half of our heat that came from oil this last year. Next year it'll be around $1500 and the year after that it'll be over $2250. It's hard to squeeze that out of the budget. We'll just burn more wood, but everyone doesn't have that option! We shrunk both of our cars and installed solar hot water. Most others haven't begun to prepare for what's coming. They are waiting for Bushco to take over some other country and get gas and oil prices back down. It ain't gonna happen! 2007/08 will be the winter of our discontent.

[WhipperSnapper]

$this->bbcode_second_pass_quote('No-Oil', '')$this->bbcode_second_pass_quote('RdSnt', 'G')enetically modified people.

[WhipperSnapper]

$this->bbcode_second_pass_quote('shady28', '
')My guess is that 2007 will see $2.90 - 3.00/gal gas in the states become the norm. That's roughly $75 / bbl for oil.

[Revi]

I don't think people can switch their cars. They will take a bath on the trade in, and not recoup it until they have driven cheaper cars for a couple of years. We did it, and are only now breaking even from trading our two cars to smaller ones. The only ones who can really benefit are new car buyers. I feel that the whole fossil fuelled transportation sector is a big money pit. Insulating your house or installing solar gives a lot more bang for your buck than getting a hybrid.

[rwwff]

$this->bbcode_second_pass_quote('WhipperSnapper', 'S')o far, the vehicle stock in my area (mostly upper middle class and middle class) doesn't look much different than it did before--about 50% SUVs and pickup trucks.