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September 30, 2008 | Bigpicture
Is an imperial presidency destroying what America stands for?
Bill Moyers sits down with history and international relations expert and former US Army Colonel Andrew J. Bacevich who identifies three major problems facing our democracy: the crises of economy, government and militarism, and calls for a redefinition of the American way of life.
Part I click for video
Part II click for video
September 26, 2008
BILL MOYERS: Welcome to the JOURNAL.
Here in New York a new season is opening on and off Broadway. But nothing, not even a comic opera, can compete with the spectacle, drama and farce of what's happening in Washington and on Wall Street.
If it is possible for a political system, like individuals, to become deranged, so unhinged from reality there is no longer any regard for the consequences, we saw the process this week. It's nothing but bizarre, and for a supposedly mature democracy, deeply troubling.
For technical reasons we had to tape this broadcast before John McCain finally made up his mind about whether to show up for the debate tonight. So we decided not to try and second guess events.
Instead, we are going to hear some truth-telling from a man who says our country's in deep trouble and needs a renewed commitment to critical thinking, honest words, and hard choices.
In this slim volume on THE LIMITS OF POWER, Andrew J. Bacevich goes to the root causes of our discontent and to our broken and foundering politics. That many people agree with this unsentimental diagnosis was apparent when we first aired this interview a few weeks ago, your emails poured in to pbs.org. In a matter of hours his book had become a best-seller.
Now, with chaos in Washington and the markets, it seems a good time to give this soldier, scholar, and patriot another hearing. He has found an audience across the political spectrum, whether writing for THE NATION or THE AMERICAN CONSERVATIVE magazines, lecturing to college classes or testifying before Congress.
ANDREW BACEVICH: ...fixing our problems before fixing the world's problems.
BILL MOYERS: Bacevich speaks truth to power, no matter who's in power, which may be why those on both the left and right listen to him. Perhaps it's also because when he challenges American myths and illusions, he does so from a patriotism forged in the fire of experience as a soldier in Vietnam.
After 23 years in the army, this West Point graduate has been teaching international relations and history at Boston University.
Andrew J. Bacevich is with me now, welcome to the JOURNAL.
ANDREW BACEVICH: Thank you very much for having me.
BILL MOYERS: It's been a long time since I've read a book in which I highlighted practically every third sentence. So, it took me a while to read, what is in fact, a rather short book. You began with a quote from the Bible, the Book of Second Kings, chapter 20, verse one. "Set thine house in order." How come that admonition?
ANDREW BACEVICH: Well, I've been troubled by the course of U.S. foreign policy for a long, long time. And I wrote the book in order to sort out my own thinking about where our basic problems lay. And I really reached the conclusion that our biggest problems are within.
I think there's a tendency on the part of policy makers and probably a tendency on the part of many Americans to think that the problems we face are problems that are out there somewhere, beyond our borders. And that if we can fix those problems, then we'll be able to continue the American way of life as it has long existed. I think it's fundamentally wrong. Our major problems are at home.
BILL MOYERS: So, this is a version of "Physician, heal thyself?"
ANDREW BACEVICH: Well, yes, "Physician, heal thyself," and you begin healing yourself by looking at yourself in the mirror and seeing yourself as you really are.
BILL MOYERS: Here is one of those neon sentences. Quote,
"The pursuit of freedom, as defined in an age of consumerism, has induced a condition of dependence on imported goods, on imported oil, and on credit. The chief desire of the American people," you write, "is that nothing should disrupt their access to these goods, that oil, and that credit. The chief aim of the U.S. government is to satisfy that desire, which it does in part of through the distribution of largesse here at home, and in part through the pursuit of imperial ambitions abroad."
In other words, you're saying that our foreign policy is the result of a dependence on consumer goods and credit.
ANDREW BACEVICH: Our foreign policy is not something simply concocted by people in Washington D.C. and imposed on us. Our foreign policy is something that is concocted in Washington D.C., but it reflects the perceptions of our political elite about what we want, we the people want. And what we want, by and large - I mean, one could point to many individual exceptions - but, what we want, by and large is, we want this continuing flow of very cheap consumer goods.
We want to be able to pump gas into our cars regardless of how big they may happen to be, in order to be able to drive wherever we want to be able to drive. And we want to be able to do these things without having to think about whether or not the book's balanced at the end of the month, or the end of the fiscal year. And therefore, we want this unending line of credit.
BILL MOYERS: You intrigued me when you wrote that "The fundamental problem facing the country will remain stubbornly in place no matter who is elected in November." What's the fundamental problem you say is not going away no matter whether it's McCain or Obama?
ANDREW BACEVICH: What neither of these candidates will be able to, I think, accomplish is to persuade us to look ourselves in the mirror, to see the direction in which we are headed. And from my point of view, it's a direction towards ever greater debt and dependency.
BILL MOYERS: And you write that "What will not go away, is a yawning disparity between what Americans expect, and what they're willing or able to pay." Explore that a little bit.
ANDREW BACEVICH: Well, I think one of the ways we avoid confronting our refusal to balance the books is to rely increasingly on the projection of American military power around the world to try to maintain this dysfunctional system, or set of arrangements that have evolved over the last 30 or 40 years.
But, it's not the American people who are deploying around the world. It is a very specific subset of our people, this professional army. We like to call it an all-volunteer force-
BILL MOYERS: Right.
ANDREW BACEVICH: -but the truth is, it's a professional army, and when we think about where we send that army, it's really an imperial army. I mean, if as Americans, we could simply step back a little bit, and contemplate the significance of the fact that Americans today are fighting in Iraq and Afghanistan, and ask ourselves, how did it come to be that organizing places like Iraq and Afghanistan should have come to seem to be critical to the well-being of the United States of America.
There was a time, seventy, eighty, a hundred years ago, that we Americans sat here in the western hemisphere, and puzzled over why British imperialists went to places like Iraq and Afghanistan. We viewed that sort of imperial adventurism with disdain. But, it's really become part of what we do. Unless a President could ask fundamental questions about our posture in the world, it becomes impossible then, for any American President to engage the American people in some sort of a conversation about how and whether or not to change the way we live.
BILL MOYERS: How is Iraq a clear manifestation, as you say, of this, "yawning disparity between what Americans expect, and what they're willing to pay?"
ANDREW BACEVICH: Let's think about World War Two. A war that President Roosevelt told us was essential to U.S. national security, and was. And President Roosevelt said at the time, because this is an important enterprise, you, the American people, will be called upon to make sacrifices. And indeed, the people of the United States went off to fight that war in large numbers. It was a national effort. None of that's been true with regard to Iraq. I mean, one of the most striking things about the way the Bush Administration has managed the Global War on Terror, which President Bush has compared to World War Two.
BILL MOYERS: Right.
ANDREW BACEVICH: One of the most striking things about it is that there was no effort made to mobilize the country, there was actually no effort even made to expand the size of the armed forces, as a matter of fact. The President said just two weeks or so after 9/11, "Go to Disney World. Go shopping." Well, there's something out of whack here, if indeed the Global War on Terror, and Iraq as a subset of the Global War on Terror is said to be so critically important, on the one hand. And on the other hand, when the country basically goes about its business, as if, really, there were no War on Terror, and no war in Iraq ongoing at all.
BILL MOYERS: "So it is," you write, "seven years into its confrontation with radical Islam, the United States finds itself with too much war for too few warriors and with no prospect of producing the additional soldiers needed to close the gap." When I hear all this talk about increasing the troops in Afghanistan from two to three battalions, maybe even more, I keep asking myself, where are we going to get those troops?
ANDREW BACEVICH: Well, and of course the answer is, they have to come from Iraq. I mean, as we speak, the security conditions in Iraq have improved a little bit, and in a sense, it's just in time, because what the Pentagon wants to do is to draw down its presence in Iraq to some degree, not in order to give those troops a breather, but in order to redeploy them after a period of retraining to Afghanistan, because Afghanistan is going so poorly. So, we're having a very difficult time managing two wars which, in the 20th century context, they're actually relatively small.
BILL MOYERS: You say, "U.S. troops in battle dress and body armor, whom Americans profess to admire and support, pay the price for the nation's refusal to confront our domestic dysfunction." What are we not confronting?
ANDREW BACEVICH: The most obvious, the blindingly obviously question, is energy. It's oil. I think historians a hundred years from now will puzzle over how it could be that the United States of America, the most powerful nation in the world, as far back as the early 1970s, came to recognize that dependence on foreign oil was a problem, posed a threat, comprised our freedom of action.
How every President from Richard Nixon down to the present one, President Bush, declared, "We're gonna fix this problem." None of them did. And the reason we are in Iraq today is because the Persian Gulf is at the center of the world's oil reserves. I don't mean that we invaded Iraq on behalf of big oil, but the Persian Gulf region would have zero strategic significance, were it not for the fact that that's where the oil is.
Back in 1980, I think, President Carter, in many respects when he declared the Carter Doctrine, and said that henceforth, the Persian Gulf had enormous strategic significance to the United States and the United States is not going to permit any other country to control that region of the world.
And that set in motion a set of actions that has produced the militarization of U.S. policy, ever deeper U.S. military involvement in the region, and in essence, has postponed that day of reckoning when we need to understand the imperative of having an energy policy, and trying to restore some semblance of energy independence.
BILL MOYERS: And this is connected, as you say in the book, in your first chapters, of what you call "the crisis of profligacy."
ANDREW BACEVICH: Well, we don't live within our means. I mean, the nation doesn't, and increasingly, individual Americans don't. Our saving - the individual savings rate in this country is below zero. The personal debt, national debt, however you want to measure it, as individuals and as a government, and as a nation we assume an endless line of credit.
As individuals, the line of credit is not endless, that's one of the reasons why we're having this current problem with the housing crisis, and so on. And my view would be that the nation's assumption, that its line of credit is endless, is also going to be shown to be false. And when that day occurs it's going to be a black day, indeed.
BILL MOYERS: You call us an "empire of consumption."
ANDREW BACEVICH: I didn't create that phrase. It's a phrase drawn from a book by a wonderful historian at Harvard University, Charles Maier, and the point he makes in his very important book is that, if we think of the United States at the apex of American power, which I would say would be the immediate post World War Two period, through the Eisenhower years, into the Kennedy years. We made what the world wanted. They wanted our cars. We exported our television sets, our refrigerators - we were the world's manufacturing base. He called it an "empire of production."
BILL MOYERS: Right.
ANDREW BACEVICH: Sometime around the 1960s there was a tipping point, when the "empire of production" began to become the "empire of consumption." When the cars started to be produced elsewhere, and the television sets, and the socks, and everything else. And what we ended up with was the American people becoming consumers rather than producers.
BILL MOYERS: And you say this has produced a condition of profound dependency, to the extent, and I'm quoting you, "Americans are no longer masters of their own fate."
ANDREW BACEVICH: Well, they're not. I mean, the current debt to the Chinese government grows day by day. Why? Well, because of the negative trade balance. Our negative trade balance with the world is something in the order of $800 billion per year. That's $800 billion of stuff that we buy, so that we can consume, that is $800 billion greater than the amount of stuff that we sell to them. That's a big number. I mean, it's a big number even relative to the size of our economy.
BILL MOYERS: And you use this metaphor that is intriguing. American policy makers, quote, "have been engaged in a de facto Ponzi scheme, intended to extend indefinitely, the American line of credit." What's going on that resembles a Ponzi scheme?
ANDREW BACEVICH: This continuing tendency to borrow and to assume that the bills are never going to come due. I testified before a House committee six weeks ago now, on the future of U.S grand strategy. I was struck by the questions coming from members that showed an awareness, a sensitivity, and a deep concern, about some of the issues that I tried to raise in the book.
"How are we gonna pay the bills? How are we gonna pay for the commitment of entitlements that is going to increase year by year for the next couple of decades, especially as baby boomers retire?" Nobody has answers to those questions. So, I was pleased that these members of Congress understood the problem. I was absolutely taken aback when they said, "Professor, what can we do about this?" And their candid admission that they didn't have any answers, that they were perplexed, that this problem of learning to live within our means seemed to have no politically plausible solution.
BILL MOYERS: You say in here that the tipping point between wanting more than we were willing to pay for began in the Johnson Administration. "We can fix the tipping point with precision," you write. "It occurred between 1965, when President Lyndon Baines Johnson ordered U.S. combat troops to South Vietnam, and 1973, when President Richard Nixon finally ended direct U.S. involvement in that war." Why do you see that period so crucial?
ANDREW BACEVICH: When President Johnson became President, our trade balance was in the black. By the time we get to the Nixon era, it's in the red. And it stays in the red down to the present. Matter of fact, the trade imbalance becomes essentially larger year by year.
So, I think that it is the '60s, generally, the Vietnam period, slightly more specifically, was the moment when we began to lose control of our economic fate. And most disturbingly, we're still really in denial. We still haven't recognized that.
BILL MOYERS: Now you go on to say that there was another fateful period between July 1979 and March of 1983. You describe it, in fact, as a pivot of contemporary American history. That includes Jimmy Carter and Ronald Reagan, right?
ANDREW BACEVICH: Well, I would be one of the first to confess that - I think that we have misunderstood and underestimated President Carter. He was the one President of our time who recognized, I think, the challenges awaiting us if we refused to get our house in order.
BILL MOYERS: You're the only author I have read, since I read Jimmy Carter, who gives so much time to the President's speech on July 15th, 1979. Why does that speech speak to you so strongly?
ANDREW BACEVICH: Well, this is the so-called Malaise Speech, even though he never used the word "malaise" in the text to the address. It's a very powerful speech, I think, because President Carter says in that speech, oil, our dependence on oil, poses a looming threat to the country. If we act now, we may be able to fix this problem. If we don't act now, we're headed down a path in which not only will we become increasingly dependent upon foreign oil, but we will have opted for a false model of freedom. A freedom of materialism, a freedom of self-indulgence, a freedom of collective recklessness. And what the President was saying at the time was, we need to think about what we mean by freedom. We need to choose a definition of freedom which is anchored in truth, and the way to manifest that choice, is by addressing our energy problem.
He had a profound understanding of the dilemma facing the country in the post Vietnam period. And of course, he was completely hooted, derided, disregarded.
BILL MOYERS: And he lost the election. You in fact say-
ANDREW BACEVICH: Exactly.
BILL MOYERS: -this speech killed any chance he had of winning reelection. Why? Because the American people didn't want to settle for less?
ANDREW BACEVICH: They absolutely did not. And indeed, the election of 1980 was the great expression of that, because in 1980, we have a candidate, perhaps the most skillful politician of our time, Ronald Reagan, who says that, "Doom-sayers, gloom-sayers, don't listen to them. The country's best days are ahead of us."
BILL MOYERS: Morning in America.
ANDREW BACEVICH: It's Morning in America. And you don't have to sacrifice, you can have more, all we need to do is get government out of the way, and drill more holes for oil, because the President led us to believe the supply of oil was infinite.
BILL MOYERS: You describe Ronald Reagan as the "modern prophet of profligacy. The politician who gave moral sanction to the empire of consumption."
ANDREW BACEVICH: Well, to understand the truth about President Reagan, is to understand why so much of what we imagined to be our politics is misleading and false. He was the guy who came in and said we need to shrink the size of government. Government didn't shrink during the Reagan era, it grew.
He came in and he said we need to reduce the level of federal spending. He didn't reduce it, it went through the roof, and the budget deficits for his time were the greatest they had been since World War Two.
BILL MOYERS: And do you remember that it was his successor, his Vice President, the first President Bush who said in 1992, the American way of life is not negotiable.
ANDREW BACEVICH: And all presidents, again, this is not a Republican thing, or a Democratic thing, all presidents, all administrations are committed to that proposition. Now, I would say, that probably, 90 percent of the American people today would concur. The American way of life is not up for negotiation.
What I would invite them to consider is that, if you want to preserve that which you value most in the American way of life, and of course you need to ask yourself, what is it you value most. That if you want to preserve that which you value most in the American way of life, then we need to change the American way of life. We need to modify that which may be peripheral, in order to preserve that which is at the center of what we value.
BILL MOYERS: What do you value most?
ANDREW BACEVICH: Well, I think the clearest statement of what I value is found in the preamble to the Constitution. There is nothing in the preamble to the Constitution which defines the purpose of the United States of America as remaking the world in our image, which I view as a fool's errand. There is nothing in the preamble of the Constitution that ever imagined that we would embark upon an effort, as President Bush has defined it, to transform the Greater Middle East. This region of the world that incorporates something in order of 1.4 billion people.
I believe that the framers of the Constitution were primarily concerned with focusing on the way we live here, the way we order our affairs. To try to ensure that as individuals, we can have an opportunity to pursue our, perhaps, differing definitions of freedom, but also so that, as a community, we could live together in some kind of harmony. And that future generations would also be able to share in those same opportunities.
The big problem, it seems to me, with the current crisis in American foreign policy, is that unless we do change our ways, the likelihood that our children, our grandchildren, the next generation is going to enjoy the opportunities that we've had, is very slight, because we're squandering our power. We are squandering our wealth. In many respects, to the extent that we persist in our imperial delusions, we're also going to squander our freedom because imperial policies, which end up enhancing the authority of the imperial president, also end up providing imperial presidents with an opportunity to compromise freedom even here at home. And we've seen that since 9/11.
BILL MOYERS: The disturbing thing that you say again and again in here, is that every President since Reagan has relied on military power to conceal or manage these problems that stem from the nation's habits of profligacy, right?
ANDREW BACEVICH: That's exactly right. And again, this is, I think, this is another issue where one needs to be unsparing in fixing responsibility as much on liberal Democratic presidents as conservative Republican ones. I think that the Bush Administration's response to 9/11 in constructing this paradigm of a global war on terror, in promulgating the so called, Bush Doctrine of Preventive War, in plunging into Iraq - utterly unnecessary war - will go down in our history as a record of recklessness that will be probably unmatched by any other administration.
But, doesn't really mean that Bill Clinton before him, or George Herbert Walker Bush before him, or Ronald Reagan before him, were all that much better. Because they all have seen military power as our strong suit. They all have worked under the assumption that through the projection of power, or the threat to employ power, that we can fix the world. Fix the world in order to sustain this dysfunctional way of life that we have back here.
BILL MOYERS: So, this brings us to what you call the political crisis of America. And you say, "The actual system of government conceived by the framers no longer pertains." What pertains?
ANDREW BACEVICH: I am expressing in the book, in a sense, what many of us sense, even if many of us don't really want to confront the implications. The Congress, especially with regard to matters related to national security policy, has thrust power and authority to the executive branch. We have created an imperial presidency. The congress no longer is able to articulate a vision of what is the common good. The Congress exists primarily to ensure the reelection of members of Congress.
As the imperial presidency has accrued power, surrounding the imperial presidency has come to be this group of institutions called the National Security State. The CIA, the Joint Chiefs of Staff, the Office of the Secretary of Defense, the other intelligence agencies. Now, these have grown since the end of World War Two into this mammoth enterprise.
But the National Security State doesn't work. The National Security State was not able to identify the 9/11 conspiracy. Was not able to deflect the attackers on 9/11. The National Security State was not able to plan intelligently for the Iraq War. Even if you think that the Iraq War was necessary. They were not able to put together an intelligent workable plan for that war.
The National Security State has not been able to provide the resources necessary to fight this so called global war on terror. So, as the Congress has moved to the margins, as the President has moved to the center of our politics, the presidency itself has come to be, I think, less effective. The system is broken.
BILL MOYERS: Yeah, you say no one knows what they're doing, including the President. No one in Washington, as you say, that's the political crisis, as you define it, no one in Washington knows what they're doing.
ANDREW BACEVICH: What I mean specifically is this. The end of the Cold War coincided almost precisely with the first Persian Gulf War of 1990, 1991, Operation Desert Storm. Operation Desert Storm was perceived to be this great, historic, never before seen victory. It really wasn't.
BILL MOYERS: The mother of all battles-
ANDREW BACEVICH: Right, I mean-
BILL MOYERS: Schwarzkopf cam-
ANDREW BACEVICH: Politically, and strategically, the outcome of that war was far more ambiguous than people appreciated at the time. But nonetheless, the war itself was advertised as this great success, demonstrating that a new American way of war had been developed, and that this new American way of war held the promise of enabling the United States to exercise military dominion on a global basis in ways that the world had never seen.
The people in the Pentagon had developed a phrase to describe this. They called it, "full spectrum dominance." Meaning, that the United States was going to exercise dominance, not just capability, dominance across the full spectrum of warfare. And this became the center of the way that the military advertised its capabilities in the 1990s. That was fraud. That was fraudulent.
To claim that the United States military could demonstrate that kind of dominance flew in the face of all of history and in many respects, set us up for how the Bush Administration was going to respond to 9/11. Because if you believed that United States military was utterly unstoppable, then it became kind of plausible to imagine that the appropriate response to 9/11 was to embark upon this global war to transform the greater Middle East. Had the generals been more cognoscente of the history of war, and of the nature of war, then they might have been in a better position to argue to Mr. Rumsfeld, then the Secretary of Defense, or to the President himself, "Be careful." "Don't plunge ahead." Recognize that force has utility, but that utility is actually quite limited. Recognize that when we go to war, almost inevitably, there are going to be unanticipated consequences. And they're not going to be happy ones.
Above all, recognize that, when you go to war, it's unlikely there's a neat tidy solution. It's far more likely that the bill that the nation is going to pay in lives and in dollars is going to be a monumental one. My problem with the generals is that, with certain exceptions, one could name as General Shinseki, with certain exceptions-
BILL MOYERS: Who said, "We are going to need half a million men if we go into Iraq." And-
ANDREW BACEVICH: Right.
BILL MOYERS: -he was shown the door for telling the truth.
ANDREW BACEVICH: By and large, the generals did not speak truth to power.
BILL MOYERS: One of the things that comes through in your book is that great truths are contained in small absurdities. And you use the lowly IED, the improvised explosive device, or roadside bomb, that's taken such a toll of American forces in Iraq, to get at a very powerful truth. Tell me about that.
ANDREW BACEVICH: Well war - wars are competitions. The adversary develops capabilities. Your enemy develops capabilities. And you try to develop your own capabilities to check what he can do to you to be able to, overcome his capabilities.
One of the striking things about the Iraq War, and in which we had been fighting against, technologically at least, a relatively backward or primitive adversary, one of the interesting things is they have innovated far more adeptly and quickly than we have.
BILL MOYERS: The insurgents.
ANDREW BACEVICH: The insurgents have. And an example of that is the IED, which began as a very low tech kind of primitive mine. And, over time, became ever more sophisticated, ever more lethal, ever more difficult to detect, ever more difficult to check. And those enhancements in insurgent IED capability continually kept ahead of our ability to innovate and catch up.
BILL MOYERS: And I think you say, in your book, that it costs the price of a pizza to make a roadside bomb?
ANDREW BACEVICH: That's right. Yeah.
BILL MOYERS: This is what our men and women are up against in Afghanistan-
ANDREW BACEVICH: The point is to say that the reality of war is always a heck of a lot more complicated than you might imagine the day before the war begins. And, rather than looking to technology to define the future of warfare, we ought to look - really look at military history.
BILL MOYERS: And what do we learn when we look to the past?
ANDREW BACEVICH: What we should learn from history is that preventive war doesn't work. The Iraq War didn't work. And, therefore, we should abandon notions, such as the Bush Doctrine of preventive war. We should return to the just war tradition. Which sees force as something that is only used as a last resort. Which sees war as something that is justifiable for defensive purposes.
BILL MOYERS: How, then, do we fight what you acknowledge, in the book, is the perfectly real threat posed by violent Islamic extremism?
ANDREW BACEVICH: I think we need to see the threat for what it is. It is a real threat. It's not an existential threat. The 19 hijackers that killed 3,000 Americans on 9/11 didn't succeed because they had advanced technology, because they were particularly smart, because they were ten feet tall.
They succeeded because we let our guard down and we were stupid. We need to recognize that the threat posed by violent Islamic radicalism, by terrorist organizations, al Qaeda, really is akin to a criminal conspiracy, a violent conspiracy, a dangerous conspiracy. But it's a criminal enterprise. And the primary response to a criminal enterprise is policing.
Policing as in organizations like the FBI, intelligence organizations, some special operations forces. That would undertake a concerted campaign to identify and root out and destroy this criminal conspiracy. But that doesn't require invading and occupying countries. Again, one of the big mistakes the Bush Administration made, and it's a mistake we're still paying for, is that the President persuaded us that the best way to prevent another 9/11 is to embark upon a global war. Wrong. The best way to prevent another 9/11 is to organize an intensive international effort to root out and destroy that criminal conspiracy.
BILL MOYERS: You, in fact, say that, instead of a bigger army, we need a smaller more modest foreign policy. One that assigns soldiers missions that are consistent with their capability. "Modesty," I'm quoting you, "requires giving up on the illusions of grandeur to which the end of the Cold War and then 9/11 gave rise. It also means reining in the imperial presidents who expect the army to make good on those illusions." Do you expect either John McCain or Barack Obama to rein in the "imperial presidency?"
ANDREW BACEVICH: No. I mean, people run for the presidency in order to become imperial presidents. The people who are advising these candidates, the people who aspire to be the next national security advisor, the next secretary of defense, these are people who yearn to exercise those kind of great powers.
They're not running to see if they can make the Pentagon smaller. They're not. So when I - as a distant observer of politics - one of the things that both puzzles me and I think troubles me is the 24/7 coverage of the campaign.
Parsing every word, every phrase, that either Senator Obama or Senator McCain utters, as if what they say is going to reveal some profound and important change that was going to come about if they happened to be elected. It's not going to happen.
BILL MOYERS: It's not going to happen because?
ANDREW BACEVICH: Not going to happen - it's not going to happen because the elements of continuity outweigh the elements of change. And it's not going to happen because, ultimately, we the American people, refuse to look in that mirror. And to see the extent to which the problems that we face really lie within.
We refuse to live within our means. We continue to think that the problems that beset the country are out there beyond our borders. And that if we deploy sufficient amount of American power we can fix those problems, and therefore things back here will continue as they have for decades.
BILL MOYERS: I was in the White House, back in the early 60s, and I've been a White House watcher ever since. And I have never come across a more distilled essence of the evolution of the presidency than in just one paragraph in your book.
You say, "Beginning with the election of John F. Kennedy in 1960, "the occupant of the White House has become a combination of demigod, father figure and, inevitably, the betrayer of inflated hopes. Pope. Pop star. Scold. Scapegoat. Crisis manager. Commander in Chief. Agenda settler. Moral philosopher. Interpreter of the nation's charisma. Object of veneration. And the butt of jokes. All rolled into one." I would say you nailed the modern presidency.
ANDREW BACEVICH: Well, and the - I think the troubling part is, because of this preoccupation with, fascination with, the presidency, the President has become what we have instead of genuine politics. Instead of genuine democracy.
We look to the President, to the next President. You know, we know that the current President's a failure and a disappoint - we look to the next President to fix things. And, of course, as long as we have this expectation that the next President is going to fix things then, of course, that lifts all responsibility from me to fix things.
One of the real problems with the imperial presidency, I think, is that it has hollowed out our politics. And, in many respects, has made our democracy a false one. We're going through the motions of a democratic political system. But the fabric of democracy, I think, really has worn very thin.
BILL MOYERS: The other consequence of the imperial presidency, as you point out, is that, for members of the political class, that would include the media that covers the political class, serving, gaining access to, reporting on, second guessing, or gossiping about the imperial president are about those aspiring to succeed him, as in this campaign, has become an abiding preoccupation.
ANDREW BACEVICH: I'm not - my job is not to be a media critic. But, I mean, one - you cannot help but be impressed by the amount of ink spilled on Obama and McCain compared to how little attention is given, for example, to the races in the Senate and the House. Now, one could say perhaps that makes sense, because the Congress has become such a dysfunctional body. But it really does describe a disproportion, I think of attention that is a problem.
BILL MOYERS: Would the imperial presidency exist were it not for the Congress?
ANDREW BACEVICH: No. I think that the imperial presidency would not exist but for the Congress. Because the Congress, since World War II, has thrust power and authority onto the presidency.
BILL MOYERS: Here is what I take to be the core of your analysis of our political crisis. You write, "The United States has become a de facto one party state. With the legislative branch permanently controlled by an incumbent's party. And every President exploiting his role as Commander in Chief to expand on the imperial prerogatives of his office."
ANDREW BACEVICH: One of the great lies about American politics is that Democrats genuinely subscribe to a set of core convictions that make Democrats different from Republicans. And the same thing, of course, applies to the other party. It's not true. I happen to define myself as a conservative.
Well, what do conservatives say they stand for? Well, conservatives say they stand for balanced budgets. Small government. The so called traditional values.
Well, when you look back over the past 30 or so years, since the rise of Ronald Reagan, which we, in many respects, has been a conservative era in American politics, well, did we get small government?
Do we get balanced budgets? Do we get serious as opposed to simply rhetorical attention to traditional social values? The answer's no. Because all of that really has simply been part of a package of tactics that Republicans have employed to get elected and to - and then to stay in office.
BILL MOYERS: And, yet, you say that the prime example of political dysfunction today is the Democratic Party in relation to Iraq.
ANDREW BACEVICH: Well, I may be a conservative, but I can assure you that, in November of 2006, I voted for every Democrat I could possibly come close to. And I did because the Democratic Party, speaking with one voice, at that time, said that, "Elect us. Give us power in the Congress, and we will end the Iraq War."
And the American people, at that point, adamantly tired of this war, gave power to the Democrats in Congress. And they absolutely, totally, completely failed to follow through on their commitment. Now, there was a lot of posturing. But, really, the record of the Democratic Congress over the past two years has been - one in which, substantively, all they have done is to appropriate the additional money that enables President Bush to continue that war.
BILL MOYERS: And you say the promises of Harry Reid and Nancy Pelosi prove to be empty. Reid and Pelosi's commitment to forcing a change in policy took a backseat to their concern to protect the Democratic majority.
ANDREW BACEVICH: Could anybody disagree with that?
BILL MOYERS: You say, and this is another one of my highlighted sentences, that "Anyone with a conscience sending soldiers back to Iraq or Afghanistan for multiple combat tours, while the rest of the country chills out, can hardly be seen as an acceptable arrangement. It is unfair. Unjust. And morally corrosive." And, yet, that's what we're doing.
ANDREW BACEVICH: Absolutely. And I think - I don't want to talk about my son here.
BILL MOYERS: Your son?
ANDREW BACEVICH: Yeah.
BILL MOYERS: You dedicate the book to your son.
ANDREW BACEVICH: Yeah. Well, my son was killed in Iraq. And I don't want to talk about that, because it's very personal. But it has long stuck in my craw, this posturing of supporting the troops. I don't want to insult people.
There are many people who say they support the troops, and they really mean it. But when it comes, really, down to understanding what does it mean to support the troops? It needs to mean more than putting a sticker on the back of your car.
I don't think we actually support the troops. We the people. What we the people do is we contract out the business of national security to approximately 0.5 percent of the population. About a million and a half people that are on active duty.
And then we really turn away. We don't want to look when they go back for two or three or four or five combat tours. That's not supporting the troops. That's an abdication of civic responsibility. And I do think it - there's something fundamentally immoral about that.
Again, as I tried to say, I think the global war on terror, as a framework of thinking about policy, is deeply defective. But if one believes in the global war on terror, then why isn't the country actually supporting it? In a meaningful substantive sense?
Where is the country?
BILL MOYERS: Are you calling for a reinstatement of the draft?
ANDREW BACEVICH: I'm not calling for a reinstatement of the draft because I understand that, politically, that's an impossibility. And, to tell you the truth, we don't need to have an army of six or eight or ten million people. But we do need to have the country engaged in what its soldiers are doing. In some way that has meaning. And that simply doesn't exist today.
BILL MOYERS: Well, despite your loss, your and your wife's loss, you say in this powerful book what, to me, is a paradox. You say that, "Ironically, Iraq may yet prove to be the source of our salvation." And help me to understand that.
ANDREW BACEVICH: We're going to have a long argument about the Iraq War. We, Americans. Not unlike the way we had a very long argument about the Vietnam War. In fact, maybe the argument about the Vietnam War continues to the present day. And that argument is going to be - is going to cause us, I hope, to ask serious questions about where this war came from.
How did we come to be a nation in which we really thought that we could transform the greater Middle East with our army?
What have been the costs that have been imposed on this country? Hundreds of billions of dollars. Some projections, two to three trillion dollars. Where is that money coming from? How else could it have been spent? For what? Who bears the burden?
Who died? Who suffered loss? Who's in hospitals? Who's suffering from PTSD? And was it worth it? Now, there will be plenty of people who are going to say, "Absolutely, it was worth it. We overthrew this dictator." But I hope and pray that there will be many others who will make the argument that it wasn't worth it.
It was a fundamental mistake. It never should have been undertaking. And we're never going to do this kind of thing again. And that might be the moment when we look ourselves in the mirror. And we see what we have become. And perhaps undertake an effort to make those changes in the American way of life that will enable us to preserve for future generations that which we value most about the American way of life.
BILL MOYERS: The book is "The Limits of Power: The End of American Exceptionalism." Andrew J. Bacevich, thank you for being with me.
ANDREW BACEVICH: Thank you very much.
BILL MOYERS: I have to believe that if Barack Obama and John McCain took time to read THE LIMITS OF POWER, this would be a different campaign. The reality just might sober them up.
A personal word if you will at the end of this frenzied and dangerous week. All week I've thought of my father - and his friend in the White House. My father dropped out of the fourth grade and never returned to high school because his family needed him to pick cotton to help ends meet. The Great Depression knocked him down and almost out. He never made more than $100 a week in his working life, and he made that only when he joined the union in the last job he held. He voted for Franklin Delano Roosevelt in four straight elections and would have gone on voting for him until kingdom come if he'd had the chance. When I asked him why, he said, "Because he was my friend."
Now, my father of course never met FDR; no politician ever paid him much note. But when Roosevelt died, my father wept. I puzzled at how it was a struggling young husband and father, lucky enough to get a job as a day laborer on the highway to Oklahoma City, could believe that the patrician in the White House knew what life was like for people like him.
Then, one day, years later, listening to a compilation of Franklin Roosevelt's speeches, I understood. Listen, and I think you will understand too. Remember, it's 1933-- chaos has descended across the country. Millions are out of work, their savings gone, their pantries empty, and a quarter of the banks are closed. Everything that's tied down is coming loose. And there on the banks of the Red River a young couple with one son and about to have another, sat listening to the radio, listening to the new president being sworn into office, listening to this:
FRANKLIN D. ROOSEVELT: In such a spirit on my part and on yours we face our common difficulties…a host of unemployed citizens face the grim problem of existence and an equally great number toil with little return…Yes, the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths.
This is preeminently the time to speak the truth, the whole truth, frankly and boldly…let me assert my firm belief that the only thing we have to fear is fear itself…
BILL MOYERS: And so my father took heart. No false promises. No passing the buck. No pandering. Just a simple truth: when the new president said we can do this, my father knew he was included. He never forgot it, never stopped believing his friend in the White House believed in him.
That's it for the JOURNAL.
Before we go, I want to call your attention to a special broadcast scheduled to air on many of these PBS stations next week, as part of the series, "POV." "Critical Condition" is the powerful story of four patients struggling to survive, to survive not only illness but America's failing health care system, where treatment is all too often delayed or denied.
WOMAN: A lot of people are dying, and they're dying because they don't have health care.
I'm Bill Moyers. We'll see you next week.
Yesterday in his town hall meeting with Gov. Sarah Palin (R-AK), Sen. John McCain (R-AZ) advocated offshore oil drilling by pushing three myths: 1) Hurricanes won't damage oil rigs, 2) Fish love oil rigs, and 3) Cuba is allowing China to drill near the U.S. coast:
McCAIN: An oil rig off of the Louisiana coast. It survived hurricanes. It is safe, it is sound, and to somehow -
And by the way, on that oil rig - and I'm sure you've probably heard this story - you look down, and there's fish everywhere! There's fish everywhere! Yeah, the fish love to be around those rigs. So not only can it be helpful for energy, it can be helpful for some pretty good meals as well. […]
As far as China and Cuba are concerned, we continue to hear that there is negotiations or conversations or - I'm not exactly sure what the state of play is, but it's not a healthy thing, obviously.
MYTH #1: Hurricanes won't damage oil rigs. The U.S. Minerals Management Service estimates that Hurricanes Katrina and Rita destroyed 113 offshore oil platforms and caused 124 offshore spills for a total of 743,700 gallons. In fact, damage to offshore producers accounted for 77 percent of the oil industry's storm costs. In the wake of Hurricane Ike, there are at least three offshore oil rigs missing and "presumed to be total losses."
MYTH #2: Fish love oil rigs. McCain is pushing an oil industry talking point. While marine biologists have seen fish congregating around oil rigs, it doesn't mean they are good for wildlife. "That's like taking a picture of birds on a telephone wire and saying it's essential habitat," said the Environmental Defense Center's Linda Krop. Without the platforms, fish would likely return to natural reefs.
MYTH #3: Cuba is allowing China to drill near the U.S. coast. The Congressional Research Service has unequivocally concluded that Cuba has not permitted China to drill near the U.S. coastline in the Gulf of Mexico. Even Vice President Cheney has admitted this talking point is false.
McCain's second claim is especially silly. Not too long ago, conservatives were also trying to argue that the United States should start drilling in Alaska's Arctic National Wildlife Reserve because oil pipelines would "become a meeting ground and 'coffee klatch' for caribou." (HT: AMERICAblog)
With the nationalization of Fannie Mae and Freddie Mac, it's impossible to argue the Federal government isn't playing a crucial and growing role in the financial markets.
"Call it socialism, manipulation, intervention, [or] desperation. Call it what you will but don't underestimate the mandate," says Todd Harrison, CEO of Minyanville.com.
"The agenda [of policymakers] is very clear," he continues. "They need to stabilize the system [to] avoid the unthinkable -- a crash that's going to suck global capital markets in the abyss."
Certainly there's an economic benefit to avoiding a global financial market collapse. But Harrison has long argued policymakers had two major goals ahead of the election they are still pursuing: lower oil prices to $100 or below, and get equity prices higher.
Given all that's transpired in the past year, from the bailout of Bear Stearns to the Fed's special financial vehicles for Wall Street to this weekend's intervention, one thing is clear: The "invisible hand" in the markets these days belongs to Uncle Sam.
Ok. Oil. Exxon Mobil reported a second-quarter profit of nearly $12 billion -- a number that works out (as many did) to about $39 for every man, woman and child in America; $90,000 a minute etc.
Mark Thoma has a think about the future price of gasoline for us. The punch line:
If past global expansions are a guide, global demand will recede only gradually. This is a direct implication of the model underlying this analysis. This suggests that US gasoline prices will remain high for the time being. Barring a major economic collapse in emerging Asia, prices will stabilise only as the world economy learns to economise on the use of oil and gasoline and as the supply of crude oil expands. Both corrective forces will take time to gain momentum.
As an investor however I believe that there is a definite skew in the probability distribution. Who ever heard of an extra 5 million barrels per day unexpectedly hitting the market? Yet, there is a distinct possibility of that much being unexpectedly withdrawn. Better to own the upper tail than the lower.
Brad Setser revisits the Gulf-inflation story -- single digit interest rates, double digit inflation.
I'd like to see more game theory applied to the oil price analysis. If they did peg their currencies to price, the Gulf could be the world's ultimate monetary authority. They can open the spigots whenever world growth flags below a targeted rate, and pull back when things are running a little hot... I'd rather own a currency based on oil than one based on gold.
Alternatively, they could pull back whenever there is talk of carbon caps, open up when it looks like alternative energy is getting too much interest and investment...
If I were advising them, here's my spin: Gulf states announce that they are voluntarily limiting the production and export of petroleum in order to contain global warming; and coincidentally conserving global oil resources for future generations... Home run.
Americans today spend almost as much on bandwidth - the capacity to move information - as we do on energy. A family of four likely spends several hundred dollars a month on cellphones, cable television and Internet connections, which is about what we spend on gas and heating oil.
Just as the industrial revolution depended on oil and other energy sources, the information revolution is fueled by bandwidth. If we aren't careful, we're going to repeat the history of the oil industry by creating a bandwidth cartel.
As I noted yesterday, the difference between a moderate and severe recession might be what happens with oil prices:One of the keys to the base case is that oil prices decline in the 2nd half of 2008 (something I've been predicting for some time). This prediction is based on demand destruction, lower subsidies in certain Asian countries, weaker demand growth in China, and a few other reasons. The fundamentals of supply and demand for oil suggests a small decrease in demand could led to a fairly large decrease in price. If this happens, then that will hopefully lead to Kasriel's "sharp deceleration in inflation".
More and more, the evidence suggests that this is not just a temporary crisis. It is the beginning of the end of the Petroleum Age.
How do we know that the Petroleum Age is drawing to a close? Two key indicators tell us that this is so. First, many of the giant fields that have satisfied our massive thirst over so many years are experiencing diminished output. Second, although the major oil producers are spending more money each year to discover new reserves, they are finding less and less oil. Either of these factors by itself is cause for significant worry; the combination is deadly.
...new discoveries may add one or two million barrels of oil per day to existing output in 2015 and beyond, but by that point output from existing fields is likely to be considerably lower than it is today. Nobody can predict exactly where combined worldwide production will stand at that time. But more and more analysts are coming to the conclusion that the output of conventional (i.e., liquid) petroleum will peak at about 95 million barrels per day in the 2010-2012 time-frame and then begin an irreversible decline. The addition of a few million added barrels from Kashagan or Tupi will not alter this trend.
...none of this can stop the inevitable closing of the Petroleum Age.
Some say that any palliative is worth the expense as we head toward certain disaster. But this is not a logical response. Knowing that the age of petroleum is drawing to a close, it is far better to devote our talents and investment dollars on hastening the arrival of its successor, rather than prolonging the agony of oil's decline.
At this point, we cannot be absolute certain of the dominant energy source of the post-petroleum era. Will it be the Solar Age or the Biofuels Age or the Hydrogen Age? But we do know that it will revolve around some constellation of renewable, climate-friendly, domestically-produced supplies. From now on, America's top priority in the energy field must be to explore all potential components of this new energy future and move swiftly to develop those with the greatest promise.
The great oil shock of 2008 is bad enough for us. It poses a mortal threat to the whole economic strategy of emerging Asia.
The manufacturing revolution of China and her satellites has been built on cheap transport over the past decade. At a stroke, the trade model looks obsolete.
No surprise that Shanghai's bourse is down 56pc since October, one of the world's most spectacular bear markets in half a century.
Asia's intra-trade model is a Ricardian network where goods are shipped in a criss-cross pattern to exploit comparative advantage. Profit margins are wafer-thin.
Products are sent to China for final assembly, then shipped again to Western markets. The snag is obvious. The cost of a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded.
"The monumental energy price increases will be a 'game-changer' for Asia," said Stephen Jen, currency chief at Morgan Stanley. The region's trade model is about to be "stress-tested".
Energy subsidies have disguised the damage. China has held down electricity prices, though global coal costs have tripled since early 2007. Loss-making industries are being propped up. This merely delays trouble.
"The true impact of the shock will only be revealed over time, as subsidies are gradually rolled back," he said. Last week, China raised internal rail freight rates by 17pc.
BP 's Statistical Review says China's use of energy per unit of gross domestic product is three times that of the US, five times Japan's, and eight times Britain's.
China's factories "were not built with current energy levels in mind", said Mr Jen. The outcome will be "non-linear". My translation: China is at risk of blowing up.
Any low-tech product shipped in bulk - furniture, say, or shoes - is facing the ever-rising tariff of high freight costs. The Asian outsourcing game is over, says CIBC World Markets. "It's not just about labour costs any more: distance costs money," says chief economist Jeff Rubin.
NYTimes.comEven as politicians heatedly debate opening new regions to drilling, corralling energy speculators, or starting an Apollo-like effort to find renewable energy supplies, analysts say the real source of the problem is closer to home. In fact, it's parked in our driveways.
Nearly 70 percent of the 21 million barrels of oil the United States consumes every day goes for transportation, with the bulk of that burned by individual drivers, according to the National Commission on Energy Policy, a bipartisan research group that advises Congress.
SO despite the fierce debate over what's behind the recent spike in prices, no one differs on what's really responsible for all that underlying demand here for black gold: the automobile, fueled not only by gasoline but also by Americans' famous propensity for voracious consumption.
To be sure, the American appetite for crude oil is only one reason for the recent price surge. But the country's dependence on imported oil has only kept growing in recent years, undermining the trade balance and putting an added strain on global supplies.
Although the road to $4 gasoline and increased oil dependence has been paved in places like Detroit, Houston and Riyadh, it runs through Washington as well, where policy makers have let the problem make lengthy pit stops.
"Much of what we're seeing today could have been prevented or ameliorated had we chosen to act differently," says Pete V. Domenici, the ranking Republican member of the Senate Energy and Natural Resources Committee and a 36-year veteran of the Senate. "It was a bipartisan failure to act."
Mike Jackson, the chief executive of AutoNation, the country's biggest automobile retailer, is even more blunt. "It was totally preventable," he says, anger creeping into his affable car-salesman's pitch.
The speed at which gas prices are climbing is forcing a seismic change in long-held American habits, from car-buying to commuting. Last week, Ford Motor reported that S.U.V. sales were down 55 percent from a year ago, while demand for its full-size F-series pickup, a gas guzzler that was the country's best-selling vehicle for 26 consecutive years, is off 40 percent. The only Ford model to show a sales increase was the midsized Fusion. A Ford spokeswoman says the market shift is "totally unprecedented and faster than anything we've ever seen."
If the latest rise in oil prices isn't just another spike - like those of the 1970s and 1980s - but is instead a fundamental repricing of the commodity responsible for much of modern American life, the impact of that change will affect everyone from home builders and homeowners in exurbs to corporate leaders, landlords and commuters in cities.
... ... ...
A much more effective approach would be to simply raise taxes on gasoline, Mr. Dingell says, because higher prices are the easiest way to change buying habits. Some Europeans agree with this, noting that policy changes engineered through taxation can alter consumer choices without impeding economic growth.
Consumers overseas might not like higher taxes on gasoline, but they've adapted, says Jeroen van der Veer, chief executive of Royal Dutch Shell, the European energy giant. "A society can work, can function and can grow even at higher fuel prices," he says. "It's a way of life - you get used to it."
Jun 30, 2008 | ml-implode.com
As far as I am concerned, the "inflation vs. deflation" debate is over: we are already at hyperinflation -- even though certain markets and measures of credit exhibit deflation. If you want to quibble about the definition (how "hyper" the inflation actually is), go somewhere else: my point is that we have embarked on the path from which there is likely to be no return, given the way the system works. And the real kicker is: in response to the crisis, the system hasn't changed.
The big glaring data point backing this argument is oil prices. Oil prices in 2008 have shocked everyone, literally everyone, including me -- and that's saying a lot since I'm a "peak oiler," and already believed high and increasing rates of inflation were in the cards for purely monetary reasons.
Exhibit A: New York Times reporter Timothy Egan in May 2001 on the California energy crisis:
Timothy Egan, May 11: Many Utilities Call Conserving Good Business: Hundreds of miles to the south [of Seattle], the city-run utilities in Los Angeles and Sacramento, have generally managed to avoid the rolling blackouts of recent months by opting out of the state's deregulation experiment and promoting conservation with near-religious fervor.... When Vice President Dick Cheney said last week that conservation could not be a centerpiece of energy policy, he left some utilities -- those that have spent 20 years trying to prove just the opposite -- feeling as though their efforts had been undermined. In his speech, he said, "Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy."...
These guys in the Bush administration are doing this manly stuff, putting their horns on to make it sound like conservation is for sissies," Mr. Royer said. "But we know from experience that conservation equals generation. They are the same." Other utilities, even some that embrace conservation, agree with the Bush administration that the nation cannot conserve its way to energy independence....
S. David Freeman, the man named by Gov. Gray Davis to oversee the state's response to its power crisis, said that conservation remained a way not only to get through the difficult summer ahead but also to meet long-term energy needs.... Tom Eckman, the conservation manager of the Northwest Power Planning Council, which was created by Congress to guide major power decisions in this region. "It's common sense. If you can get something for 10 cents, why pay a dollar for it?"...
Mr. Cheney said that the Bush administration would oppose any measure based on a premise that people should do more with less. His remark was echoed this week by Ari Fleischer, the White House spokesman. Asked on Monday if Mr. Bush believed that Americans should change their lifestyles in the face of a power crisis, Mr. Fleischer dismissed the idea of people using less energy as one solution. "That's a big no," said Mr. Fleischer. "The president believes that it's an American way of life, and it should [be] the goal of policy makers to protect the American way of life. The American way of life is a blessed one. And we have a bounty of resources in this country"...
The Guardian has a leaked copy of a World Bank study that finds biofuels to be the biggest culprit in global food price increases. This finding will not only feed calls to scrap biofuels (save perhaps those derived from sugar) but may lead to a recognition that resource challenges cannot be pursued in isolation. In particular, food, water, and energy scarcity are interconnected problems and need to be addressed on an integrated basis. It also disputes the claim that increased consumption of meat in developing economies played a significant role in food price inflation.From the Guardian:Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report obtained by the Guardian.
The damning unpublished assessment is based on the most detailed analysis of the crisis so far, carried out by an internationally-respected economist at global financial body.
The figure emphatically contradicts the US government's claims that plant-derived fuels contribute less than 3% to food-price rises. It will add to pressure on governments in Washington and across Europe, which have turned to plant-derived fuels to reduce emissions of greenhouse gases and reduce their dependence on imported oil....
...In a nutshell, that's why we're 58% dependent upon foreign oil. Every time we have an energy crisis, in 1973, 1979, 1990, and 2008, we rush short-term expedients and cosmetics into law without doing much to solve the long-term problem.
If we were serious about the long-term problem we would never have allowed gas guzzling SUV's onto the road; we wouldn't have starved mass transportation; we would have developed much more renewable energy; we would have done a lot more conservation; and MOST OF ALL we wouldn't have allowed prices to decline after the crisis, killing energy saving investments and leading us right back to profligate energy consumption.
Our energy policy is like our diets. We diet frequently, but we never stick to our diets long enough or change our lifestyles enough to lose weight. Then, when diabetes and heart disease sets in, we rush to our doctors for the miracle cure that isn't there ...
Until we learn to live with somewhat higher energy prices, we'll continue to be at the mercy of OPEC and of periodic energy crises. As long as we demand quick fixes from our political leaders, that's all we will get -- quick fixes that don't work.
BloombergDemand for industrial commodities including oil will fall, pressuring prices, because the financial sector is in ``disarray'' and the U.S. economy will continue to slump, investor Marc Faber said.
``The industrial-commodity complex is vulnerable because demand will slow down,'' said Faber, publisher of investment newsletter the Gloom, Boom and Doom Report. ``The economy is weakening, corporate profits will disappoint, valuations are not particularly attractive, and the financial sector that serves to channel savings into investment is in disarray.''
Demand for commodities will fall after raw materials including oil, corn, copper and gold touched record highs in the first half, Faber said in an interview on Bloomberg Television. The global economic slowdown will last a ``very long time,'' he said.
``The financial crisis has been the appetizer,'' Faber said, referring to the $400 billion in writedowns at the world's largest banks and securities firms in the past year. ``We still need the main dish.''...
The U.S. economy went into recession last October and current statistics are hiding the ``severity'' of the recession, Faber said. Economists have also understated the rate of inflation as higher food and energy costs impact consumers, he said.
Commodities will face a ``correction'' after a seven-year rally and prices will decline in the next six months to one year, Faber said on June 26. Faber told investors to abandon U.S. stocks a week before 1987's so-called Black Monday crash.
Just to put things in perspective. This is through the first quarter so it does not reflect the last pop in energy prices.
It is now 6.6% as compared to a low of 4.2% at the double bottom and the 1970s low of 6.2%.
The peak was 9.3%.
Although white-collar workers may be able to telecommute, they could also take a serious financial hit because soaring energy prices tend to wreak havoc on the stock market. The explosion of 401(k) plans and similar retirement accounts in the last few decades -- and the decline of traditional pensions with guaranteed payouts -- have tied workers' financial futures more closely to stocks than they were during the 1970s oil shocks. A prolonged Wall Street downturn could mean a no-frills retirement, or none at all.
Angry Bear It is my understanding that the major byproduct of ethanol is distillers grains that are used as feed for cattle, hogs and chicken with essentially the same nutritional value as feed grains that have not had ethanol distilled out of them. All distilling ethanol does is remove the starch from the food grains and leaves the protein, etc, that animals need to grow.
.... I ran across a very good article by Richard Perrin at the University of Nebraska on Ethanol and Food Prices
Food prices in the
rose dramatically in 2007 and early 2008. Given the integration of the world markets for foodstuffs, prices increased around the world as well, leading to riots in a number of countries in early 2008. The popular press has tended to attribute these food price increases to demand for corn by the ethanol industry. Grain prices are one determinant of food prices, but they constitute less than 5% of food costs in the U.S. (a higher percentage elsewhere.) This paper focuses on the likely relationship between ethanol and food prices, ignoring the potential role of other important contributors. It finds that ethanol is responsible for no more than 30-40% of the grain price increases of the last 18 months. Food prices in the US increased about 16% over the last five years,7% over the past 18 months, but rising grain prices have contributed only about a 3% cost increase over these periods. It is reasonable to conclude that ethanol is responsible for increases in US food prices about 1% in the last two years – a relatively small proportion of actual of U.S. food price increases. In food-insecure areas of the world, however, the impact of ethanol on food prices has been higher, perhaps as much as a 15% increase, simply because the typical food basket in those areas contains more direct grain consumption. U.S.
so I sent him an email with my question and he was nice enough to respond with this:
You are right. One-third of the corn processed for ethanol is expelled as distillers grains and solubles (DGS.) (One third is ethanol, one-third CO2.) DGS has slightly higher feed value than corn when it's fed to ruminants (I have a publication with an animal scientist on this issue, if you become deeply interested, and could direct you to some others.) Since DGS can be directly substituted for corn, putting a ton of corn into an ethanol plant really only extracts 2/3 ton from the animal feed supply, so it would have been reasonable for me to assert that ethanol has accounted for only 30% of new net withdrawals of the world's coarse grains since 2000 (rather than 40%.) China, Sub Saharan Africa, and South America are each responsible for about 15%.
So the standard treatment of ethanol in the press and blog is significantly misleading.
Reading the brochures on the subject from various land grant universities in corn country suggest that distillers grain can be used for 10-20% of the feed volume for beef, pork or poultry. So the analysis is more complicated. For example, if corn was 50% of the feed volume before, ethanol-related demand has resulted in a doubling of corn prices, and distillers grain is free but can only replace less than half the corn in the diet, then the total cost of feeding the livestock has still increased.
As others have pointed out, corn starches are the starting point for large quantities of other ingredients that are heavily used -- eg, corn syrups for sweeteners -- and distillers grains are worthless for those applications.
Michael Cain | 06.28.08
Food is one of the most energy intensive sectors of the economy. I trying to remember this from the 1970s, but it ranks about fourth or fifth after energy, chemicals and transportation.
spencer | 06.28.08
wish I could give you numbers. We raise steers on our small pasture. They are supposed to be grass eaters, as someone noted above. The guy we buy our boys from has a racket he loves. His herd is grass fed but he hauls off the mash left from a small microbrewery that moved to town. It is free to him and a deal for the brewery because it is waste. He does agree his cows grow bigger eating this mash. ps he's a veterinarian.
A question I think is appropriate to your inquiry is how much mash is recycled like this. I think the point of view you're arguing with states the grain is taken OUT of the feed chain.
Sorry, I'm contributing what I know, but now you have 2 unknown numbers-how much beef you can grow with mash and how much mash is recycled as feed. What does Anheuser Busch do with their mash?
Laurie | 06.28.08
According to the University of Minnesota some 8 million metric tonnes of distillers grain were used in 2006 and it could reach 10 to 14 million metric tonnes within a few years. It has become a very big deal in the relevant markets..
spencer | 06.28.08
***Rather the Department of Agriculture and/or Bush Administration argument that ethanol production plays an insignificant role in the current run up in food prices is correct.*** Spencer
First of all, it's the Bush administration, so the odds on bet is that they are dead wrong.
Second, The Law Of Conservation of Energy and Kirchoff's Laws analogs (basically, what goes in must come out) have not been repealed. Every calorie/kilocalorie/BTU/Joule that ends up in ethanol does not end up fueling livestock or people.
A little quick Googling tells me that a bushel of corn contains 314000 BTU and will generate 2.16 gallons of ethanol with 84000 BTU each. That says that assuming no waste heat or anything (unlikely), the most energy that can be contained in the unconverted waste from ethanol production is 314000 - 2.16*84000 = 132560 BTU. Further, the stuff that gets converted into Ethanol is presumably the stuff that is easy to handle -- fructose and starch. I can't imagine that cows don't process those as efficiently as omnivores like ... well ... us. So the 132560 BTU probably contains a relatively high percentage of stuff so indigestable that not even a cow can break it down.
Conclusion: The idea that the waste from ethanol production is anywhere near as nutritious as the corn that goes in sounds pretty unlikely.
BTW, the economics of corn look to be quite complex. More complex than I want to tackle. But my bet would be that the idea that ethanol is not a significant contributor to the run up in food prices strikes me as likely being a crock.
vtcodger | 06.28.08
The LA Times has a story on the impact of $200 oil: Envisioning a world of $200-a-barrel oil. The story discusses some possible impacts of higher oil prices on consumer behavior, transportation, trade and the workplace (more telecommuting, fewer work days, etc.)
On housing:As for the ... beleaguered housing market, prices are falling faster in areas requiring long commutes -- such as Lancaster and Palmdale -- than in neighborhoods closer to job centers.For trade:
Sky-high gas prices "would basically reorient society to where proximity would be more valuable," said Tom Gilligan, finance professor at USC."To put things in perspective, today's extra shipping cost from East Asia is the equivalent of imposing a 9% tariff on East Asian goods entering North America," said Rubin of CIBC World Markets. "At $200 per barrel, the tariff equivalent rate will rise to 15%."All the same arguments have been made for $140 oil...
6/10/08 | Politico.com
Few issues focus the public's attention on politics like the price of gasoline. It keeps going up, the public wants relief, and politicians are held accountable for not fixing the situation. Yet to solve the problem, you first need to know the cause of the illness.
Why do gasoline prices keep going up? Is it because Congress and President Bush have not fashioned energy policies to reduce our dependence on foreign oil? Clearly that's part of the answer. Our government can do more to reduce demand and increase supply through conservation, auto fuel efficiency standards, tax breaks and subsidies for development of alternative energy sources, and incentives to drill more in the U.S.
But that's not the entire story.
The immediate cause of rising oil prices is the weak dollar. Oil-producing countries are requiring more dollars to purchase the same barrel of oil because the dollar is worth less today than it was a few years ago. Anyone who travels abroad knows about the weak dollar. In 2000, it took $1 to purchase one euro.
Today, it takes close to $1.60 to purchase a euro. A Canadian dollar is now worth the same as a U.S. dollar, whereas eight years ago it was worth considerably less than an American dollar.
And why do we have a weak dollar?
You can start with the economic policies followed by the Bush administration. During Bush's 7½ years in office, we have maintained large trade deficits with the rest of the world and run up large domestic budget deficits to pay for our misadventure in Iraq and large tax cuts for the wealthy. Also, according to a monograph recently issued by the Center for American Progress, the Federal Reserve's low-interest policy has caused a 14 percent decline in the value of the dollar since last September.
The center estimates that "nearly 40 percent of the increased price American consumers are paying for oil is attributable to the weak dollar," even after factoring in the effects of increased global demand from countries such as China.
So what are we to do?
First, the public should demand that Congress pass comprehensive energy policy that adequately addresses both the demand side and the supply side of the issue. Republicans controlled both Congress and the executive branch for most of the first six years of the Bush presidency, and yet nothing was done. So you can't just blame the Democrats for lack of action on the legislative front - even though pre-1995 Democratic Congresses didn't take significant action, either.
Secondicies that shore up the value of the dollar rather than run up big trade and budget deficits. Foreign producers will continue to raise the price of oil as long as the value of the dollar continues to drop. It was Democratic President Bill Clinton who last balanced the federal budget, and it may take another Democratic president to do this again.
Some may want to beat up on Congress for not acting more boldly now on energy policy. But don't forget it's "the man behind the curtain" and his Republican allies in Congress who pursued economic policies that have devastated the value of the U.S. dollar. When the history of this disastrous administration is written, the weak dollar should join the war in Iraq and Hurricane Katrina on the list of the effects of abysmal policy failures.
Martin Frost represented the Dallas-Fort Worth area in Congress from 1979 to 2005. He rose to caucus chairman and head of the Democratic Congressional Campaign Committee. He is now an attorney with Polsinelli Shalton Flanigan Suelthaus in Washington and serves as president of America Votes, a grass-roots voter mobilization and education effort.
Storage Cost is Zero says...
"But allocating into less liquid, unfamiliar categories of assets is slow work if you want to do it well. Perhaps current oil revenues outstrip oil producers' capacity to find good investment opportunities, and they view oil-in-the-ground as a better second-best asset than dollars in the bank."
Storage costs for leaving oil in the ground is essentially zero. From the point of view of a national oil company, why trade a depleting asset for paper that will just be inflated away? Pump just enough to meet current needs, and what can be efficiently invested in inflation hedges.
Now, the fuel price increase doesn't have that large an effect - at least not yet. But a very back-of-the envelope calculation using CIBC estimates of the fuel cost effect gives me a 17% contraction in trade if oil prices stay at current levels for a long time.
Business travel will also be affected. Via Felix Salmon, airlines are starting to cut long-distance nonstops.
CommentsPerhaps this is a salutary brake on some aspects of excessive globalization. Chasing low labor costs at the expense of national self-sufficiency is not good. I have been wondering when the Army is going to start importing their tanks and heavy weapons from China and Russia. We have lost a lot of manufacturing, and part of that which remains has shown itself very slow to adapt to realities: eg. GM making SUVs and gas guzzlers while killing their first electric car.
Closing SUV plants by US automakers is a great result and might eventually affect the people who decided that fuel efficiency does not matter to them since they can afford it at any price.
Will Congress increase the CAFE levels soon?
Will nuclear energy come back for the US so we can generate 80% of our power with it, like France?
Will people learn or will prejudice and false and fearful information still rule the day?
I find higher fuel prices a good effect to wake up people and government. We must increase that effect by taking away all lawmakers government vehicles and gasoline credit cards. They should feel the pain and let it affect their thinking.
- Posted by Gunther St
Don't expect to see any drop in the prices you pay at the pump -- or at the grocery store or anywhere else -- from any decline in the price of commodities. The price of gas at the pump actually climbed to a new high at $3.983 a gallon last week, according to automobile club AAA, even as the price of oil was falling. (And it kept on climbing, to $4 a gallon, on June 8 after a two-day rally in crude oil prices.)
You can expect the same from other commodities that have tumbled in price. Consumer prices will stay high even as commodity costs come down. Wheat prices are down. From a record $13.95 a bushel on Feb. 27, the most actively traded contract on the Chicago Board of Trade had dropped 42% to $7.78 a bushel on June 5. The prices of most other commodities -- well, except for corn, which has soared as heavy rains have held up planting -- have tumbled in recent weeks. See any drop in the price of bread or in a meal at your favorite restaurant?
June 16 | Bloomberg
Gazprom Aims for $1 Trillion Club on $250 Oil: Chart of the Day
OAO Gazprom Chief Executive Officer Alexei Miller made two forecasts last week that, if they come true, indicate more pain for consumers and a boon for Russia's government.
Oil will reach $250 a barrel ``in the foreseeable future,'' about 85 percent more than the current price, he said at a strategy briefing in Deauville, France, adding that the market value of state-run Gazprom will triple to $1 trillion as early as 2015.
Gazprom wouldn't be the first to reach the latter milestone. PetroChina Co. became the world's first trillion-dollar company on Nov. 5, when Class-A shares tripled on their Shanghai trading debut. PetroChina has since plunged 62 percent.
The chart of the day shows the market capitalization of the top three energy companies by value, Exxon Mobil Corp., PetroChina and Gazprom, since Jan. 23, 2006, when the Russian company began trading on the Micex Stock Exchange. Exxon's day-end peak was $527.2 billion on Oct. 18. The chart also shows the price of crude oil.
``These staggering figures may have been a shock tactic to stress one of the key themes of the day -- that Europe should accept a growing role for Gazprom,'' Morgan Stanley said in a report on June 11. Miller's comments ``seemed to us less a formal prediction than a point to highlight that oil and gas markets were undergoing structural changes,'' the report said.
To contact the reporter on this story: Lee J. Miller in Bangkok at firstname.lastname@example.org
June 6, 2008
Jim Hamilton is right: this looks like a major oil shock. At $140, oil would be twice its average level in 2006.
$140 oil for the rest of the year implies an average oil price for 2008 of around $120 (maybe a bit higher)
Concretely, a rough calculation would suggest that this implies that the US will spend about $250 billion more on oil imports this year than last year. I don't quite see how the US trade deficit can improve in the face of that kind of shock.
The Mess That Greenspan Made
There are two new views today on who to blame (or who not to blame) for the recent run up in oil prices that has galvanized the country and the world, citizens across the globe prodding their lawmakers to take action, to do something - anything - to stop energy prices from rising.
In conjunction with the release of their Statistical Review of World Energy, BP chief executive Tony Hayward characterizes the blaming of speculators for pushing crude oil prices higher as "a myth".
He says it all comes down to supply and demand - too much demand and too little supply.
According to the annual review, total production fell by 130,000 barrels per day last year paced by production cuts of 350,000 barrels a day by OPEC. This was a decline of 0.1 percent, the first drop in production since 2002.
This story is just in from the AFP (Agence France-Presse) - the June 22nd meeting in Saudi Arabia to discuss record-high oil prices is to be at the "head-of-state" level and Wall Street investment banks and hedge funds are invited too.
OPEC Secretary General Badri would not be drawn on which heads of state would attend the one-day gathering announced by Saudi Arabia on Tuesday, which was less than a week after the price of crude struck a record high 139.12 dollars a barrel.If the oil market was well supplied, it would produce more than is consumed (which is not the case) and, as for the role of speculators, would there really be any sort of market without speculators?
The Organization of Petroleum Exporting Countries (OPEC) maintains that the oil market is well supplied and that current prices do not reflect market fundamentals of supply and demand.
"The price has nothing to do with a shortage of oil. There's a lot of oil on the market. It's because of speculation and OPEC cannot control speculation," he added.
That's their purpose - to set the market price.
From Wikipedia:When a harvest is too small to satisfy consumption at its normal rate, speculators come in, hoping to profit from the scarcity by buying. Their purchases raise the price, thereby checking consumption so that the smaller supply will last longer. Producers encouraged by the high price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant, they sell. This reduces prices, encouraging consumption and exports and helping to reduce the surplus.
Reader Michael e-mailed us this story from Platts. Note that by Japanese standards, this is an unusually pointed discussion:Japan's vice minister for economy, trade and industry, Takao Kitabata, said Monday that current oil market fundamentals only supported a crude price of $60/barrel, less than half current levels.
Speaking to reporters, Kitabata said current oil prices could not be explained by fundamentals and blamed speculative funds for pushing up prices, according to a transcript of his press conference in Tokyo...
"About three weeks ago Goldman Sachs said crude oil prices would exceed $140/b, and prices shot up by $10/b from levels of around $120/b. Then Morgan Stanley said oil prices would reach $150/b during the driving season by US independence day [July 4]," Kitabata told reporters.
"Oil prices rose to above $130/b after the Goldman Sachs announcement, but retreated to $120/b levels after the US Commodity Futures Trading Commission's announced investigation."
"However, prices have risen by $10/b after Morgan Stanley's announcement," Kitabata added. "I said [three weeks ago] that it was hard for us to define the cause [of high oil prices], however I must express anger [over the movements]."
The vice minister said the rise of oil prices above levels than can be explained by fundamentals would lead to oil-producing countries receiving more money than they need for their exports, while at the same time hurting consuming countries, especially developing countries without their own oil production.
"We believe producing countries' economies will function if oil prices hover more or less at $60/b," Kitabata said. "Despite the weakening of the US dollar, we believe Saudi Arabia's [economy will function] if oil prices are at $45/b and Kuwait's [economy will function] if oil prices are at $55/b," Kitabata added.
When asked why energy ministers from the G8 -- the US, Japan, Canada, the UK, France, Germany, Italy and Russia -- failed to have sufficient discussion at their July 7-8 meeting on the link between high oil prices and flows of money from investment funds into the oil market, Kitabata argued that the ministers had had "spirited discussion on the matter."
By David Oakley and Robert Wright in London
Published: June 8 2008 19:38 | Last updated: June 8 2008 19:38. The cost of renting ships that transport key raw materials such as iron ore and coal have risen to all-time highs and put further pressures on inflation and the global economy.
With oil at record levels, food prices at highs and warnings from central bankers over inflation risks, it is another danger signal for companies and consumers as price pressures force up overheads and jeopardise growth.
The cost of renting a Capesize ship, used to transport iron ore and coal, rose to $233,988 a day at the end of last week – a near 200 per cent jump since the start of the year when the cost stood at $80,000.
"At $4 per gallon gas, $125 per barrel oil and $10 per million Btu natural gas, a lot of activity becomes uneconomical,'' says Mark Zandi, chief economist at Moody's Economy.com ...
The lifestyle of the exurban commuter may be one casualty.
Emerging suburbs and exurbs -- commuter towns that lie beyond cities and their traditional suburbs -- grew about 15 percent from 2000 to 2006, nearly three times as fast as the U.S. population, as Americans moved further out in search of more affordable houses or the bigger ones that are sometimes derided as McMansions.
``It was drive until you qualify'' for a mortgage, says Robert Lang, director of the Metropolitan Institute at Virginia Tech in Alexandria, Virginia. ``You can't do that anymore. Your cost of transportation will spike too much.''
The US government's Energy Information Administration (EIA) concluded in its most recent monthly Short Term Energy Outlook report that US oil demand is expected to decline by 190,000 barrels per day (b/d) this year. That is mainly owing to the deepening economic recession. <
Chinese consumption, the EIA says, far from exploding, is expected to increase this year by only 400,000 barrels a day. That is hardly the "surging oil demand" blamed on China in the media. Last year, China imported 3.2 million barrels per day, and its estimated usage was around 7 million b/d total. The US, by contrast, consumes around 20.7 million b/d. <
That means the key oil-consuming nation, the US, is experiencing a significant drop in demand. China, which consumes only a third of the oil the US does, will see a minor rise in import demand compared with the total daily world oil output of some 84 million barrels, less than half of one percent of total demand.
OPEC has its 2008 global oil demand growth forecast unchanged at 1.2 million barrels per day (mm bpd), as slowing economic growth in the industrialized world is offset by slightly growing consumption in developing nations. OPEC predicts that global oil demand in 2008 will average 87 million bpd, largely unchanged from its previous estimate. Demand from China, the Middle East, India and Latin America is forecast to be stronger, but the European Union and North American demand will be lower. <
So the world's largest oil consumer faces a sharp decline in consumption, a decline that will worsen as the housing and related economic effects of the US securitization crisis in finance de-leverages. The price in normal open or transparent markets should presumably be falling not rising. No supply crisis justifies the way the world's oil is being priced today.
In response to the collapse of the credit and speculation boom, the Fed has set a deliberate re-inflationary objective in order to reverse falling asset prices. It has aggressively resumed its expansionary monetary policy since August 2007, cutting the federal funds rate from 5.25% to 2% with a consequent faster expansion of money supply, resulting in a rapidly depreciating dollar and disrupting stability in commodity markets, propelling oil prices from US$65 to $135 per barrel. <
A depreciating dollar and rising oil prices have gone hand-in-hand. Oil prices are quoted in dollars; a falling dollar results in an increasing dollar price for oil. Given a falling dollar, oil producers and others with surplus dollars are reluctant to store their wealth in dollars but instead are diversifying into other currencies, largely the euro and the yen, again putting further pressure on the dollar and again driving up oil prices; or in some cases producers cut back output as they are reluctant to hold more dollars. <
The reluctance of oil producers to expand oil output is best illustrated by Saudi Arabia's recent lukewarm response to US pressure for increased oil production. As inflationary expectations have become firmly rooted, oil and food producers know they can generate more revenues by restraining supply. This vicious circle is all but obvious to anyone whose head is above water. Yet, it has somehow seems to have escaped the Fed's radar in Washington. <
In large part because of the Fed's actions above and more specifically because of low or negative real interest rates, a falling dollar, economic uncertainty and volatility, investors and speculators have exacerbated market conditions. With low or negative real interest rates and a depreciating dollar, investors have been reluctant to accumulate dollar-denominated assets. <
Commodities, especially oil, have afforded them a good hedge. Speculators, understanding fully the weaknesses of the Fed's current policy and its imminent consequences on oil and natural gas markets, have seen an opportunity to profit from the prevailing policy stance. This added demand of investors and speculators has also fueled the oil market, but to what extent nobody can tell for sure. <
Mystery of missing output
In most markets, rising prices can be expected to encourage more output or supplies, albeit sometimes with a lag. Why has this not happened in the oil and natural gas markets? First and foremost, oil is not a commodity such as shoes. It takes anywhere from about three to 10 years to develop an oil field and bring the oil to market, depending on the location and other characteristics of the field. <
Second, given low oil prices from the mid-1980s until the late 1990s, there was little incentive to develop new fields. As a result the level of excess capacity to produce oil has been low. So when markets are tight, as they are today, there is little additional production that can come on line quickly. Making matters worse, the small excess capacity that exists today, on the order of 500,000-1,000,000 barrels per day (mbd) and in the range of 1% of daily global consumption of about 87 mbd, is all in members of the Organization of Petroleum Exporting Countries (largely in Saudi Arabia). <
But the real issue that seems to have escaped all these oil analysts is the overriding reason why additions to oil supplies (and the capacity to produce more oil) have been so small in recent years? This can be laid at the door of the White House; the George W Bush administration and its predecessors have caused the current supply shortage through their policy stance towards the Persian Gulf region and especially towards Iran and Iraq.
By Peter D. Schiff
It's unfortunate that the U.S. Supreme Court, in its ruling last week that U.S. currency is unfair to the blind, did not make the next logical step and declare it unfair to everyone who buys gasoline.
In their search for explanations as to why oil has surged past $130 per barrel, Washington, Wall Street and the financial media are as clueless as cavemen after a freak summer snowstorm. Despite the head-scratching, the blame game is nevertheless in full force.
Speculators and big oil companies are being trotted out as scapegoats, and increased margin requirements and taxes on windfall profits and futures trading have been mentioned as appropriate sanctions. It should be clear that this is pure farce, and that no one understands what is actually happening.
The reality is that after years of reckless consumption and dollar debasement, Americans are now being priced out of the very markets over which they formerly held unchallenged title. As more affluent foreigners consume more of the resources and products they previously exported to us, Americans are being forced to cut back. The rising dollar-based price of gasoline is simply an illustration of this global trend.
Poorly concealed behind contrived government statistics, the signs of America's falling standard of living are everywhere; all one has to do is look. We are unloading our SUVs for less-desirable compacts, and are paying more to fly on crowded planes (where we pay to check luggage and dine only on what we bring onboard). We now buy our lattes from McDonald's Corp. (MCD) or not at all, and we increasingly forego dining out, trips to the mall and vacations - just so we can scrape together enough to fill our gas tanks and kitchen pantries, pay taxes and insurance, or make credit card, mortgage or car payments.
The collective belt tightening is simply the down payment on the U.S. government's massive bailout of Wall Street investment banks and mortgage lenders. As the U.S. Federal Reserve creates money to buy bad mortgages and other shaky securities held by banks and brokerage firms, the value of the savings and wages of everyone on Main Street will continue to fall. As a result, the costs of products previously taken for granted have begun to bite.
The various housing bills and stimulus packages now passing through Congress will add significantly to the staggering final price tag. In the end, the "free lunch" currently being dished out by Washington will be the most expensive meal ever served. The cost will be borne by ordinary Americans citizens every time they open their wallets. And $4 gasoline is just the beginning.
For all the talk of increased global demand, few seem to understand from where it actually comes. The surge in global demand is both a function of the increased purchasing power of foreign currencies and the fact that foreigners are choosing to spend more of their incomes themselves.
In other words, former Fed Chairman Alan Greenspan's famous "global savings glut" is turning into a global consumption binge, with Americans unable to crash the party. This trend will only get worse as the dollar-denominated price of just about everything that is either imported, or capable of being exported, goes through the roof.
We can look for scapegoats all we want, but the simple fact is Americans are going to have to get used to a much lower standard of living. Those who have been putting all the food on our tables are finally pulling up chairs and are serving themselves.
Operation Iraqi Freedom has been a smashing success, and only appalling Wilsonian wimpiness in the US government has prevented the United States from taking full advantage of it. Iraq's known oil reserves have been increased by about 100 billion barrels since the invasion, as competent US oil companies have been free to explore for new oil employing techniques more advanced than the 40-year-old dowsing sticks used by Saddam's oil operation. At today's oil price of $130, less a generous $20 for drilling and extraction, those additional reserves have a value of $11 trillion – approximately 10 times the most alarmist estimate of the cost of the war to date.<
The problem is that the US did not secure itself a proper royalty on the new oil finds (even 10% would have been worthwhile -- $1.1 trillion over the next few decades.) Nor did it ensure, by setting up a privatized oil company and a trust fund for the Iraqi people diverting oil revenues from the Iraqi government, that the new oil finds would be exploited in an efficient manner and the supplies directed properly into the world oil market. Any future invasion of an oil producing country should avoid these two mistakes and thus make itself self-financing.<
The obvious place to invade is Venezuela (even if current estimates of Venezuelan and Saudi reserves are wrong and there is in reality more oil in Saudi Arabia that could be unlocked if ExxonMobil and the boys were given free rein, the Saudis are nominally our allies, so an invasion would be considered unsporting by world opinion.) Since the 1.8 trillion barrels of Venezuelan oil deposits consist largely of the Orinoco tar sands, a Venezuelan oil-related invasion would impose an additional requirement: to keep the environmentalists away, in order that reserves could be exploited with maximum efficiency.<
... ... ...<
In summary, a sharp rise in US and world interest rates is the best way to solve the problem of spiraling energy and commodity prices, which will probably not solve itself. If that doesn't work or is "politically impossible" it's time to prepare the 82nd Airborne for jungle warfare in the Orinoco Basin.
...To achieve energy independence, the U.S. needs to cut consumption of petroleum from 21 million barrels a day down to 10-11 million barrels a day (MBD), and quickly. The ignorant cheerleaders (many of whom seem to have gained elected office) are always yammering about "endless new sources of energy" but under close examination with basic high-school science, every single "miracle source" turns out to have real-world limitations.
I have covered some of these limitations in the past few months, and will mention just two (again) of the most popular "miracle cures to our need for more energy:" shale oil and coal gasification. Canada and the U.S. have hundreds of years of shale oil, tar-sand oil and King Coal, we are constantly told, yet in a peculiar oversight, nobody seems to mention that turning these hydrocarbons into liquid fuels is horrendously energy-intensive, complex and limited by physical constraints.
The best estimates by those who actually know about moving entire mountains of shale and tar sand, heating it up with vast quantities of natural gas, etc., is that total top production will reach about 2 million barrels a day--about 10% of the oil the U.S. consumes (not to mention Canada's consumption).
Gasifying coal sounds like a neato-peachy-keen "solution to our energy shortage" until you go to a vast Western strip mine and take a look at the infrastructure needed to make a paltry 2 million barrels a day. The notion that we can turn billions of tons of coal (yes, we already burn a billion tons of coal a year, and China burns 2 billion tons) into 20 million barrels of liquid fuels per day is simply absurd.
Like many of you, I think nuclear power technology has advanced (like all other technologies) since the 1960s designs which are in operation today; to dismiss nuclear power out of hand is another form of ignorance, especially when you consider the alternatives, like $300/barrel oil going to $1,000/barrel. (Yes, it could.)
But it will take years to build 100 more nuclear power plants, and they do, after all, only generate electricity, not liquid fuels. And yes, we can move to hybrid vehicles and electric tractors but those lithium-ion batteries are costly to make and replace; as the saying goes, there is no free lunch.
... ... ...
Drum roll please: here are a few obvious ways to encourage conservation and making the U.S. far more energy-efficient. I know, I know, none of these are politically viable; we'll just have to watch oil go to $300/barrel before Americans will get off their duffs and start dealing with reality. But hey, it's fun to dream:
1. start supporting basic research on efficiency and alternative energy on a much larger scale. Take a look at this chart of Federally-funded research:
Here is the source article in the San Francisco Chronicle: Dan Kammen: Clean energy and America's future.
Yes, the "marketplace" is responding with its own investments but the "low cost" of oil is driving pernicious "incentives" to rely on "cheap" coal and oil. The problem is that when these "cheap" sources of energy become expensive, they will do so very quickly, and the vaunted "marketplace" won't have time to catch up.
Let's also not forget that the vast majority of technological advances can be traced back to government-funded research, work often done in University settings (like, say, nuclear technologies, the Internet, etc.), not "market-based" investment. Even most of the miracle drugs can be traced back to government research, not the pharmaceutical industry.
2. require all electronic/electrical devices to shut off rather than remain in power wasting "standby mode." Something like 5% of the entire U.S. electrical consumption is wasted by millions of transformers and inefficient circuitry in tens of millions of TVs, stereos, computers, etc.
3. mandate another round of serious efficiency improvements in all appliances. The supposedly efficient "market" did absolutely nothing about energy efficiency until the government (yes, the "evil, can't do anything right" government) imposed efficiency standards in the wake of the 1973 and 1979 oil shocks.
4. raise the mileage standards of all vehicles to 40 miles per gallon effective next year. Please don't tell me it's impossible unless you're an engineer with Honda Motor Company, in which case I would ask you to look at your own company's vehicles from 1972.
The ICE (internal combustion engine) I know best, the basic Honda CVCC, has risen from about 85 horsepower to about 120 HP in the past two decades, with a comcomitant decline in mileage (yes, some of that increase in HP is due to technology, but there are still trade-offs) . The current crop of Honda 1800CC engines could be scaled back to 1300CC with a reduction in unnecessary horsepower and a substantial increase in mileage.
And for everyone who whines that their SUV or truck needs 200 HP, recall that a Volkswagen bus (the original hippie SUV, van and truck combined) operated quite well (albeit slowly when ascending steep grades) with a 45 HP engine that was terribly inefficient.
A standard Honda-type engine of 1300CC would very easily generate enough horsepower (when properly geared) to power non-bloated pickups. Larger vehicles would work just fine with "larger" 1800CC engines producing 125+ HP.
The only real trade-off is a loss of acceleration. Autos and trucks have gotten bigger, heavier and faster, all at the expense of efficiency and mileage. Reverse those trends and you will see immediate reductions in transportation consumption, which accounts for 2/3 of U.S. oil consumption.
... ... ...
5. lower speed limits to 65 MPH and enforce the limit. This is the easiest, most obvious way to boost mileage by 10-20%--lower speeds from 75+ MPH to 65 MPH. We'll all still get there, believe me. Just as an experiment, the last time I drove home from Los Angeles (380 miles) I drove about 65-67 MPH most of the way. I wasn't in a big hurry, thiugh it certainly seemed like everyone else was; most of the vehicles whizzing past were traveling in excess of 80 MPH. (This was at night, by the way.)
The slower pace added about 20 minutes to a 7-hour drive, but is this really the end of the world? Meanwhile, because we keep our 1998 Honda Civic properly tuned and the tires properly inflated--not exactly brain surgery--I got about 42 miles per gallon in a standard ICE production engine with 10-year old technology--more than most hybrid cars which cost much more and require hideously costly batteries.
If Honda cut the engine size and HP down a bit, I could probably get 50 MPG without any reduction in driving pleasure or convenience. And so could everyone else. And I'm 6 foot 2 inches tall, so please don't tell me you need a huge vehicle. (The guy in the video link above is 6 foot 5 inches tall.)
6. close entire streets to vehicles, creating safe, convenient bikelanes. My brother-in-law and I took a pleasant bike ride recently, in honor of his visiting us, and our 40-mile roundtrip (70 KM) ride on marked bike lanes eventually took us onto the shoulder of I-580--a freeway. I am not kidding--the bike lane merged onto the shoulder of a freeway for quite some distance. A single sign marked "share the road" with a bike logo on it denoted that the drivers whizzing past should not think the two bicyclists were insane and should be arrested. Was that part of the ride enjoyable? Do you reckon?
This is in "astoundingly environmental" California.
We all know Americans are too fat for their own good, and riding a bike is, for at least much of the year in most of the country, a convenient way to get about. (You can always put on a rain slicker like people do in other countries.) But it's only pleasant and convenient if roads are closed to cars and trucks. Yes, such closures would impose a burden on vehicles, but the time for wimpy half-measures like bike lanes on freeways and busy 4-lane roads is long past.
7. subsidize bus, train ans subway rides with a $1/gallon tax on gasoline, diesel and jet fuel. To repeat: the time for wimpy half-measures like subways and trains which cost a bloody fortune to ride is long past. If we want to modify behavior to conserve energy, then we have to make it nearly free to ride a bus, train or subway and very dear to drive a car.
Yes, you can argue about commutes and how big the West is and fairness and exurbs and all the rest, but it's really very simple: if it's nearly free to take public transport or carpool, people will do so and find some way to get to the station or pickup point. Ditto for carpools and other huge, practical, behavioral (not technological) efficiency-boosts. Even a 15 MPG SUV becomes efficient when there's six people being transported in it.
8. make building in the distant suburbs/exurbs either impossible or extremely expensive, and make building more low-rise housing in the city and inner ring essentially quick and cost-free to developers, non-profit and for-profit alike. I happen to live in a college town with population densities rivaling Hong Kong (in the south of campus area), yet there are very few buildings over three stories in height. You don't need highrises to increase density, you simply need mid-height buildings (see Paris or equivalent European cities for examples; six-story buildings create a very liveable scale.)
It's a simple idea, encouraging people to live closer to their jobs, and yet we as a nation have created all the wrong incentives: it's been dirt-cheap to build 50 miles from the city but costly and tiresome to obtain permission to tear down an obsolete structure and build a liveable moderate-density building in or near the city.
You can probably add another 8 or 16 or 24 other obvious, non-fancy ideas which would require little real sacrifice. You want sacrifice? How about no light at night? How about cold water baths? How about walking 10 miles to and from school/water/work/market? This is normal life in much of the world; just how awful will it be to have a street without cars? Is that really so unbearable? How about a car which doesn't accelerate like a race car? Is that really such an immense burden that we can't bear to give it up?
Funny, nobody thought life was miserable and awful and wretched and they had to cry themselves to sleep in 1957; have you ever driven an old American pickup truck from that era, a truck with a simple engine and wood slats in the bed? They didn't exactly accelerate like greased lightning, yet somehow (breathlessly, we ask, how? How? It's impossible!) the farmwork and building got done despite a horrible, soul-draining lack of horsepower and acceleration.
Then fine, the world will take it away from us in it's own time--which will be sooner than most of us can possibly imagine.
Extra-special bonus idea: convert all large U.S. Navy ships to nuclear power plants. The U.S. Military uses as much oil as the entire nation of Sweden; surely there are some efficiencies which could lower this stupendous consumption (along with curtailing U.S. involvement in Iraq.)
Companies are now facing a squeeze. Figures from Britain this week showed that firms had pushed up their output prices by 7.5% over the previous year but this rise, while startling enough, was nowhere near sufficient to compensate them for a 23.3% gain in raw-materials prices, the biggest since 1980.
It will be even more difficult to maintain profit margins when consumers are under pressure. Again, higher oil prices are part of the problem. Goldman Sachs reckons that some $3 trillion of wealth was transferred from oil consumers to oil producers between 2001 and 2007 and the pace of transfer is running at $1.8 trillion a year. In general, producing countries save more, and spend less, than consuming nations. At the same time, of course, falling house prices in America, Britain, Spain and Ireland threaten to make consumers feel the pinch.
Moreover, central banks may be unable to give consumers much help. With British inflation rising faster than expected, the Bank of England may join the European Central Bank, the Bank of Japan and the Federal Reserve in keeping interest rates on hold for the foreseeable future. So far oil has been the "dog that did not bark"; but it may yet give the global economy a nasty bite.
I keep hearing on CNBC and reading at some blogs that if cars get better mileage that people will drive more by enough to offset the improved mileage.
I can see that people could drive more because of the savings. But to argue that reducing mileage by 20%, for example will lead to people increasing their driving by more then 20% seems like a very questionable conclusion. I'm willing to listen to an argument that increasing gas mileage would be partially offset by increased driving, but not that the responses would be more than 100%.
Does anyone have any idea of the original source or research of this belief by so many Republicans, Conservatives and Libertarians?
Is it just another Wall Street Journal editorial page finding that is too good to be true?
Libertarians want to say that, given increased fuel efficiency, to say 400 miles per tank, people will choose to live further out from city centers, their jobs, and services. If that's true, then it's a wash.
Constraints on the consumption of time make this type of response nonlinear, perhaps highly so. Doubling the efficiency may make it possible to double the driving distance at the same price; but it doesn't address the problem of greatly increased driving time.
Michael Cain | 05.23.08 - 9:49 pm |
===The effect is real but small -- it's called the 'rebound effect' in fuel economy rulemaking speak. The current CAFE notice of proposed rulemaking assumes an elasticity of vehicle-miles traveled with respect to per-mile fuel cost of -0.15. So reducing fuel consumption per mile by 20% would (holding price constant) be expected to increase VMT by about 3%.
Tom Bozzo | Homepage | 05.23.08 - 10:35 pm | #
My visceral reaction (no hard data) is that these WSJ people are idiots who live in an intellectual vacuum, well apart from the real world. Here in the real world, people are trying to reduce their fuel *expenses*, not be able to drive more for the same cost. Morons.
Idaho_Spud | 05.23.08 - 10:37 pm | #
I'm not sure that mileage has improved 20%, if that is the figure mentioned. The EPA released a report on "real world" estimates which flat-lines fuel economy (or worse) from the mid-eighties. A chart and link to that report is on my blog thedailychart.blogspot.com
Furthermore, for the past 4 months or so traffic volumes have been decreasing, a link to the February Federal Highway Admin Report is also on my blog.Leo | Homepage | 05.24.08 - 12:22 am | #
The level of ignorance required to believe this effect dominates is astounding. The largest single contributor to consumption of gas is incomes. Since incomes have risen in real terms, consumption of energy has grown. Period.
Most of the other effects are swamped by income growth. To try to look at consumption without considering income growth is absurd.
Greg | 05.24.08 - 4:29 am | #
The Twelve Steps:
1. Stop deluding ourselves. The era of cheap, readily-available oil has ended. Prices may fluctuate, but the underlying trend is up, up, up. We have to get used to using less.
2. Demand that politicians take the issue seriously. Make it an election issue. Don't take 'we've got everything under control' as an answer.
3. Stop building new roads. They're a monumental waste of money, time and effort. They encourage, rather than ease, congestion, and besides, the growth in car travel that's used to justify them isn't going to happen anyway.
4. Divert that money and effort into measures that address the challenges of oil depletion and climate change.
5. Make a major investment in public transport. It needs to be better, faster, more comfortable, more regular, and more predictable. It needs to cater for everyone, not just peak-hour commuters - though they need a better service as well.
6. Make a major investment in broadband internet to allow more people to work from home, and change tax and business practices that discourage working from home. The more car trips we can avoid, the better.
7. Electrify transport where possible. New Zealand is well placed to use renewable electricity for transport. We should be electrifying commuter rail where it is not already electric, using light rail (trams) in cities, and looking at electrification of the main trunk line. On the other end of the scale, electric bikes and scooters can make a big difference in our cities. And electric cars show promise, though there's a lot of questions to be answered yet.
8. Don't use cars unless there's no alternative. Take the bus. Take the train. Switch to a scooter. Walk or cycle – both your wallet and your doctor will thank you.
9. Deal with other aspects of our oil dependence. Agriculture, for example, is highly dependent on oil. We're going to need to change the way we grow and distribute food. Let's get to work on that now, not wait until supermarket shelves start to empty.
10. Stockpile or manufacture vital products currently imported from overseas. When oil runs short, will that still be possible? Let's take stock now and work out what we may need to start stockpiling or making in New Zealand.
11. Think local. Ending our oil addiction isn't just up to central government, though it can play its part. Communities can work together to make themselves more resilient. Join or start a Transition Towns group in your local area.
12. Accept reality. The age of cheap oil is over. It's not coming back. As individuals and as a nation, we have to adapt.
The Debate Challenge
Before the debunking commences in earnest, I want to reiterate a debate challenge I made to Khosla. Following his essay at The Huffington Post entitled The Big Oil Companies Have Been Ripping Californians Off -- And Not Just at the Pump, I issued a challenge to Khosla to debate his claims. I repeat that challenge here. We can engage in a written debate (so claims can be referenced and verified) hosted at The Oil Drum, or at the venue of his choice. The focus will be on various ethanol claims that he has made. I will show that many of his claims are simply incorrect, and a lot of it is propaganda.
Debunking Selected Claims
Let's focus on some specific claims that Khosla made in his presentation, and see if they hold up to scrutiny. If they don't, then I want to ask why anyone takes his claims seriously, and why we are allowing him to influence energy policy. I want to ask those who encounter him to vigorously challenge him on his exuberant claims (and make sure he knows about the debate challenge). Because if he is wrong, and political leaders are betting that he is correct, we will be throwing good money away and wasting time while we could be going after real solutions.
During the video presentation, at the 3:50 mark Khosla makes the following claim:Vinod Khosla: Brazil has replaced 40% of their petroleum use with ethanol already.So, is this true? No. As I documented in the article on ethanol that I wrote for Financial Sense:According to BP's recently released "Statistical Review of World Energy 2006", Brazil consumed 664 million barrels of oil in 2005. In 2005, Brazil produced 4.8 billion gallons of ethanol, or 114 million barrels. However, a barrel of ethanol contains approximately 3.5 million BTUs, and a barrel of oil contains approximately 6 million BTUs. Therefore, 114 million barrels of ethanol only displaced 67 million barrels of oil, around 10% of Brazil's oil consumption. In other words, Brazil's energy independence miracle was 10% ethanol and 90% domestic crude oil production.
According to BP's recently released "Statistical Review of World Energy 2006", Brazil consumed 664 million barrels of oil in 2005. In 2005, Brazil produced 4.8 billion gallons of ethanol, or 114 million barrels. However, a barrel of ethanol contains approximately 3.5 million BTUs, and a barrel of oil contains approximately 6 million BTUs. Therefore, 114 million barrels of ethanol only displaced 67 million barrels of oil, around 10% of Brazil's oil consumption. In other words, Brazil's energy independence miracle was 10% ethanol and 90% domestic crude oil production.
most investors are in denial about unpleasant truths:1. Financial assets are far riskier than the press, the textbooks, and conventional methodologies indicate. The models that the pros use are based on assumptions that are fundamentally flawed. The dangers of the erroneous belief that financial assets are safe is now being revealed.
2. The people who control the markets (the intermediaries) have their own, and not the publics', best interest at heart. Due to the proliferation of OTC markets and the value of assets involved, they cannot be dispensed with. And the regulators lack the skill and will to ride herd on them. As Keynes remarked,When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
We see ample evidence of that problem, yet seem to lack a way out.
So in a way, these gnawing issues do come around to Waldman's point. In times of crisis, people look to leaders for guidance. But in our prevailing doctrine of free markets, there are no leaders, just agents interacting in ways purported to produce virtuous outcomes. And the parties who ought to step into the breach fail to understand the need for that role right now. That is why an old fashioned (and very tall) banker like Volcker is so reassuring. He handled a crisis; he's not afraid to take the reins or say things are bad and changes are needed.
We are at the end of a paradigm: large scale OTC markets, lightly regulated players and instruments, dollar as reserve currency, US as the most important global economic actors. Waldman is good here:People are losing faith in financial assets for good reason. Rather than organizing productive economies, the machinery of finance has recently functioned as an anesthetic, masking the pain while resources were mismanaged and stolen. We need a solid financial system, but confidence cannot be imposed or legislated. It will have to be earned. There has to be a plan.
But Yeats is better:Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity
What do oil sands, drilling in very deep oceans, corn ethanol and resource wars (Iraq, Afghanistan..) have in common? They are very low EROEI energy sources compared to the rapidly declining high EROEI sources (e.g. Texas and Mexico). The fact that we have to increasingly depend on them to meet demand is the surest proof that "cheap" oil is rapidly becoming a thing of the past. And this, ladies and gentlemen, is as good a definition of Peak Oil as any.
In closing, you may wish to read this article from UK's The Daily Telegraph: Oil Is Expensive Because Oil Is Scarce.
May 14, 2008 | Sudden Debt
A friend of mine with many decades in the finance business has a saying: "If this goes on much longer they will end up with all the money in the world". He uses it to point out various cases of extreme pricing and market power, which sometimes (but not always) evolves to become a bubble. Prima facie evidence suggests that in today's environment his saying readily applies to crude oil.
Look at the chart below: at $120 per barrel, revenue from exporting crude oil and its products comes to over $1.85 trillion per year. The Middle East alone gets nearly a trillion and the former Soviet Union $300 billion - and that's before including natural gas.
Export-Import Data: BP (2006)
At current oil prices, this is by far the largest capital recycling and concentration pump in the entire history of the world. A dollar may not buy as much as it used to, but a trillion every year still buys plenty, even after liberal handouts pour epater les bourgeois. Very plenty, in fact: US and European banks, other resource companies like ore and coal miners, shipping and port operators, electricity, water and telecom providers and a host of other essential businesses. That's where all the SWF and private oil money is going, most commonly channelled through secretive private equity funds.
Obviously, the oil exporters are furiously planning for their post-Peak Oil future: sensibly, they don't want to ride camels again. And if this goes on much longer, by the time their oil wells start to decline they will own everything that matters and will be sitting - literally - atop all the money in the world.
What are the rest of us - Americans and Europeans alike - doing to plan our post-peak future? Next to nothing, is the painful answer. If a few EU nations like Germany, Denmark and Spain are attempting to face the alternative energy challenge, the US as the largest oil consumer is making a momentous mistake by its absence. Stubborn reliance on imported oil is rapidly impoverishing the nation. That sucking sound we all hear in our pockets is money vacuumed out by the oil exporters, only to come back as foreign equity ownership of everything.
The American administration is repeating the glaring mistake of the French and German armies' Russian invasion, albeit in a different context. Like arrogant generals whose prior easy victories made them blind to current harsh realities, Bush & Co. are throwing away America's post-Cold War advantage into the maws of the giant oil recirculation pump. Like Napoleon and Hitler before him, George W. Bush has failed to provide the nation with the protection of a sensible energy plan.
To make matters worse, the current monetary policy is designed solely as a bail out of a bankrupt shadow financial system. By preventing the liquidation of excessive debt that could result in a more efficient and sustainable economy, it keeps the dollar/oil recirculating pump going at full speed.
America is in the unfortunate position of being at the hands of a dogmatic incompetent and a near-sighted academic. For different reasons, both blithely believe they are right beyond doubt. One because he converses with God and the other because he trusts his econometric models with religious fervor.
But if they are wrong the price of failure is the end of Empire. That's too much to bet, by a long shot.
The U.S. strategic Petroleum reserve currently stockpiles 698 million barrels of oil. Bush announced last year that he intends to double this amount by 2027 to 1.5 billion. Has this become a revenue stream for the federal government? In a single day, a jump of $3 represents a $4.5 billion dollar return on investment. Oil is removed from the reserve at a much slower rate. There are hedge markets for oil, there are consumer incentive pricing to lock in an oil price at today's rate, airlines and other transportation companies are savy about these things (or they fail). Chrysler hopes to sell cars by offering a fuel-price guarantee (on the first 12,000 miles of a new car) … which Cerberus Capital Management (the new owner of Chrysler) will pay for by hedging the price. These are new players in the market … new revenue streams for private enterprise and government entities alike.
- Posted by E.L.
Keep running enormous trade deficits, a government operating with an annual deficit, and a national debt that consumes 15% of the federal governments revenue and I promise the price of oil will continue to increase even without the very real increases in global demand and the dawning realization by more and more people that peak oil has been reached and production will slowly decline.
One, Two, Three Strikes and You're OUT!
- Posted by Gene L Payne
"…a realistic view of what's happened over the past few years suggests that we're heading into an era of increasingly scarce, costly oil."
All you need to do is a little research and crunch the numbers. For example, based on published/proven reserves, at the current rate of usage, the world has a total reserve life of 44 years (this includes everything, including Canada's oil shale deposits). Yes, that's right, 44 years. And this doesn't take into cosideration increasing demand, which is surely happening.
To illustrate further just how fast the world is consuming oil (80 million barrels every day), calculate how long it will take to burn through the 16 billion barrels optimists claim to exist in the Arctic National Wildlife Refuge: 6 months. The US, a little longer: approx. two years.
I'm an optimist too, but a realist. Oil will soon be gold in a world unprepared to deal with a deepening energy crisis.
- Posted by TomV
1. I agree that the Strategic Oil Reserve could have used a mention.
2. As to supply and demand, has supply gone up in the last 5 years (domestic refined)? No. Has demand abated (domestic)? No. Therefore there was plenty of supply 5 years ago as the price was going up. What has changed to make now any diferent from then?
3. Mass Transportation. Not that I need a reason to be Anti-Obama. But, if you look at his "energy plan" (cough cough) Mass transport is not a priority. "Democrats and Busing" jokes aside, this seems to be a faithful Left of Center soldier that is MIA.
4. Oil is Gold like in it's inverse relationship to the Dollar. Dollar, Gold and Oil are essentially currencies unto themselves.
5. I've known Paris, Paris was a friend of mine, NYC is no Paris! It makes no sense to compare European cities to the US population model because of the vast suburban landscape of the US.
- Posted by Dredpiraterobts
See this weekend's USA Today where there was a series of articles about how families are coping with higher fuel prices by going car-less on the weekends and eliminating and consolidating trips requiring use of the family's cars.
- Posted by Spiv
- Posted by Sherry Donaldson
- Posted by Gene Weinshenker
1. The price of oil increased
rapidly after the Iraq invasion in 2003.
It seems that security costs for the Middle
East have increased enormously.
2. Contrary to what most people believe, the US gets around 70% of its gasoline from a combination of Mexico, Venezuela, Canada and Nigeria. So, while we get 30% from other nations, our real problem is with these other nations. Mexico has extreme problems with drug lords (some have referred to this problem as an outright war) and crazy weather problems, Venezuela has their current "dictator" who has just recently nationalized most of the foreign companies that are extracting its oil (Exxon, Chevron, etc.) and Nigeria has a huge problem with an uprising in the Delta region that is hampering the cost of oil.
3. Add to the fray that the Dollar is worthless. The idea is that most nations don't use Dollars as their national currency, so the oil companies extract oil in the local national currency, sell the oil in Dollars (requiring conversion), most of the nations around the world have their own currencies, thereby selling those $s off again and the cycle continues. So yes, the Dollar value has a HUGE part to play on this issue.
4. Gold is considered more of a luxury good. Gasoline is considered a necessity and most of the world has already proven that they are willing to pay almost anything to drive their gas driven vehicles, not to mention, the US has proven that they will drive, regardless.
5. So, one question might pop-up, why don't for example Europeans pay less for oil since its purchased in Dollars? The reason is because most governments are using the rising oil cost to increase their tax revenues to pay for whatever they need. For example, the Netherlands made an extra 3 billion Euros on top of their expected income in 2006. They spent that money by cutting back on taxes in other areas.
- Posted by Chris
If inventories are the only thing which are used for crude oil price determination in this discussion and using U.S. inventories rather than world inventories as the primary metric, U.S. crude oil inventories peaked in absolute terms in the summer of 2007 at 354 million barrels. In days of supply this was 23.1 days. Using the front month NYMEX crude oil contract, crude oil prices averaged $74.15 per barrel in July 2007.
By the end of 2007 U.S. crude oil inventories declined by 72 million barrels to 282 million barrels by January 4, 2008; based on EIA's formula, crude oil inventories in days of supply was unchanged at 18.4 days on January 4, 2008. Crude oil prices averaged $91.74 in December 2007. So far, it seems reasonable that prices would rise.
U.S. crude oil inventories have rebounded since the beginning of the year to 313 million barrels on April 30, 2008 and 22 days of supply. Nevertheless, crude oil prices (based on the NYMEX front month contract) averaged $107.18 per barrel in April.
U.S. gasoline inventories have exhibited similar behavior as U.S. gasoline consumption has declined sharply since the end of 2006 (see U.S. highway administration data for that).
While more analysis is required, it appears that inventory changes have little to do with the recent rise in crude oil prices.
Perhaps it is important to look at the large flows of dollars into commodity investment vehicles tied to commodity indices; these indices are weighted between 70% and 80% to energy.
- Posted by Max Pyziur
Gold prices are tracking fairly close to oil prices, no?
OPEC is getting paid AS IF they were being paid in gold. Go figure!
- Posted by Barnegat Leight
- Posted by Dave
For an example of this sort of thinking, let's turn to a recent interview with Silicon Valley venture capitalist Vinod Khosla, who is justifiably renowned for his foresight and investing acumen. In this interview, he predicts $1/gallon biofuels will make oil and gasoline uncompetitive; who bother with oil when biofuel is so much cheaper?
ON THE RECORD: VINOD KHOSLA (S.F. Chronicle)I have no question that in 10 years, there's no way oil will be able to compete with biofuels. Even in five years. Now it will take a long time to scale biofuels, but I'm the only one in the world forecasting oil dropping in price to $35 a barrel by 2030. I'll put it on the record: Oil will not be able to compete with cellulosic biofuels.According to Department of Energy Quick Oil Facts, the US consumes about 390 million gallons of gasoline per day. At 28 gallons of gasoline/barrel of crude that amounts to 13 million barrels of crude oil equivalent-- about 65% of the crude oil consumed by the USA (21 million barrels a day).
So even if wind, solar, geothermal, nuclear, tidal, etc. was generating all the nation's electrical power, our current lifestyle would require about 450 million gallons of gasoline or equivalent per day.
(Recall that biofuels only provide at best 85% of the energy density of gasoline, hence you need 115 gallons of biofuel to generate the same energy in 100 gallons of gasoline/petrol.)
Is it plausible that giant algae farms, switch grass, wood chips, lawn clippings, etc. can possibly generate 450 million gallons of liquid fuel a day?
And what if these enormous new industries actually require more energy than the current petroleum complex to operate? Then perhaps we'll need 500 million gallons of gasoline equivalent liquid fuels because the harvesting, cooking, distilling, refining and transporting of biofuels requires more energy than pumping, cracking and transporting petroleum products.
Away from the glow of wishful thinking, it seems there are a couple of serious problems with biofuels:
1. it requires turning over the entire U.S. arable cropland from growing food to switchgrass or what-have-you for ethanol
2. the process requires so much energy it is net-negative, i.e. requires more energy than it produces.
Let's start with an article from Scientific American: Biofuels Are Bad for Feeding People and Combating Climate Change By displacing agriculture for food-and causing more land clearing-biofuels are bad for hungry people and the environmentThe studies do find some benefit from biofuels but only when planted on agricultural land too dry or degraded for food production or significant tree or plant growth and only when derived from native plants, such as a mix of prairie grasses in the U.S. Midwest. Or such fuels can be made from waste: corn stalks, leftover wood from timber production or even city garbage.Here is the academic paper which blew the doors right off the fantasy that biofuels could replace fossil fuels in some sort of seamless transition that left all 220 million vehicles in the U.S. purring along on billions of gallons of biofuels.
But that will not slake a significant portion of the growing thirst for transportation fuels. "If we convert every corn kernel grown today in the U.S. to ethanol we offset just 12 percent of our gasoline use," notes ecologist Jason Hill of the University of Minnesota. "The real benefit to these advanced biofuels may not be in displacement of fossil fuels but in the building up of carbon stores in the soil."
I strongly recommend reading the entire 12 page paper, which is written in clear English and is supported by tables and well-sourced data. Ethanol Production Using Corn, Switchgrass, and Wood; Biodiesel Production Using Soybean and Sunflower.
Here is the summary:Energy outputs from ethanol produced using corn, switchgrass, and wood biomass were each less than the respective fossil energy inputs. The same was true for producing biodiesel using soybeans and sunflower, however, the energy cost for producing soybean biodiesel was only slightly negative compared with ethanol production.Consider the consequences of these points from the report:
Findings in terms of energy outputs compared with the energy inputs were:
• Ethanol production using corn grain required 29% more fossil energy than the ethanol fuel produced.
• Ethanol production using switchgrass required 50% more fossil energy than the ethanol fuel produced.
• Ethanol production using wood biomass required 57% more fossil energy than the ethanol fuel produced.
• Biodiesel production using soybean required 27% more fossil energy than the biodiesel fuel produced (Note, the energy yield from soy oil per hectare is far lower than the ethanol yield from corn).
• Biodiesel production using sunflower required 118% more fossil energy than the biodiesel fuel produced.About 50% of the cost of producing ethanol (42c/ per l) in a large-production plant is for the corn feedstock itself (28c//l) (Table 2). The next largest input is for steam (Table 2).Now perhaps it could be argued that if the U.S. scaled up alternative sources for electricity to some nearly unimaginable height, then the excess power could be converted to steam to cook and process 500 million gallons of liquid fuel a day.
Clearly, without the more than $3 billion of federal and state government subsidies each year, U.S. ethanol production would be reduced or cease, confirming the basic fact that ethanol production is uneconomical (National Center for Policy Analysis, 2002).
If the production costs of producing a liter of ethanol were added to the tax subsidies, then the total cost for a liter of ethanol would be $1.24. Because of the relatively low energy content of ethanol, 1.6 l of ethanol have the energy equivalent of 1 l of gasoline. Thus, the cost of producing an equivalent amount of ethanol to equal a liter of gasoline is $1.88 ($7.12 per gallon of gasoline), while the current cost of producing a liter of gasoline is 33c/ (USBC, 2003).
Therefore, even using Shapouri's optimistic data, to feed one automobile with ethanol, substituting only one third of the gasoline used per year, Americans would require more cropland than they need to feed themselves!
The cost per ton of switchgrass pellets ranges from $94 to $130 (Samson, Duxbury, and Mulkins, 2004). This seems to be an excellent price per ton.
However, converting switchgrass into ethanol results in a negative energy return (Table 4). The negative energy return is 50% or slightly higher than the negative energy return for corn ethanol production (Tables 2 and 4).
The cost of producing a liter of ethanol using switchgrass was 54c/ or 9c/ higher than the 45c/ per l for corn ethanol production (Tables 2 and 4). The two major energy inputs for switchgrass conversion into ethanol were steam and electricity production (Table 4).
But exactly what are the cost and resource inputs for this stupendous amount of energy? Thermonuclear power? Nice, but that is science fiction at the moment, not science.
Given the evidence before us, it seems completely improbable that the U.S. can produce billions of gallons of biofuels without burning stupendous quantities of imported petroleum to do so.
The cycles and the end-games are intersecting, and technological fantasies are not actually addressing the problems at hand. Energy densities will have to drop significantly, and net energy production must rise significantly (energy produced minus fossil fuels required to harvest, mine, process and transport the alternative fuel). There is precious little evidence that biofuels can be produced in such massive quantities without using equivalently massive quantities of fossil fuels.
Whenever Congress puts together a bill attempting to find a solution to some sort of real or imagined problem, my immediate thought is that the bill do one of four things:
Consider the ethanol plan. Growing corn to produce ethanol was supposed to help make us energy independent. What happened was that subsidies to grow corn (an energy wasteful process without the subsidies), did not cause gasoline prices to drop, instead it diverted food products to inefficient energy processes. This raised the price of grain which feeds livestock and corn syrup (used in practically everything as a sweetener).
- It will worsen the problem at hand
- It will do nothing to solve the problem but instead create a new problem somewhere else
- It will worsen the original problem and create new problems
- In the very best case it will do nothing at all
As we transit to a world of resource depletion and the reversal of the Permagrowth model, what is the proper monetary and currency regime? Clearly, not the existing fiat/credit currency, which depends entirely on financing present consumption by discounting future growth that may never occur. Just as bad would be a throwback to precious metals. It would suppress economic activity without providing incentives for developing alternative energy resources.
Instead, I believe we should implement a monetary system that uses renewable, "green" energy as a benchmark. In previous posts I have called the new currency the "Greenback", an allusion to the fact that for most people nothing would change in their daily routine. Same dollars, same bank accounts, same credit cards. The monetary institutions would also be retained: the Fed and the fractional banking system. The only change - admittedly a big one - would be the rate at which money supply is allowed to expand. Let's call this rate "M green", or M(g) for short and see how it will be calculated.
To begin with, we have the following energy consumption data from the US Energy Information Administation (EIA, see chart below). The discrepancy in percentages is in the original data, but it is very minor.
Data: EIA (2006)We see that of the total 99.4 quadrillion BTU the US consumed in 2006, 86% was produced by "black" fossil fuels, the rest from nuclear and renewable sources. Adding the last two together gives us the percentage of "green" energy. Though I hesitate to call nuclear "green", it is an indispensable energy source in transiting away from fossil fuels.
For any given period, then, the allowed growth in money supply would be calculated by this formula:
M(g) = ΔE(g)/E(b)where:
- ΔE(g) is the change in "green" energy consumption from the previous period, in BTU.
- E(b) is the total "black" energy consumed in the previous period, in BTU.
For example: let's say that in 2008 we consume 85 black BTU and 15 green BTU. The following year, we consume the same 85 black BTU but increase green to 17 BTU.
M(g) = (17 - 15)/85 = 0.0235 = 2.35%i.e. broad Greenback money supply (the equivalent to M3 today) would be allowed to expand by 2.35%.
This is a follow-up post on common sense evidence that easily accessible crude oil is in depletion and its relationship to debt and central bank policies.I just watched a TV documentary about the Alberta tar sands and the way oil is mined by Syncrude. Some facts:
- The teeth of the giant shovels that scoop up the tar sands have to be replaced every 12 hours. That's a lot of steel to chew through in half a day - it surely isn't beach sand...
- Imagine rubbing #40 sandpaper on your skin. Now guess what happens to every pipe, vessel, pump and valve that handles the tar sand slurry. The company has two separate process trains working in parallel, switching from one to the other in order to constantly replace worn parts.
When it comes to evaluating resource depletion, deeds speak louder than words. Oil isn't available for the price of a straw stuck in the sand any more. Back when "gushers" were common, easily accessible crude had EROEI of as much as 100-to-1. Saudi crude is now extracted at 10-to-1 and tar sand oil at 5-to-1. We can argue dollar prices forever, but a kilowatt is always a kilowatt. Try this simple thought experiment: instead of thinking of oil prices in dollars per barrel, reverse the point of view and think in terms of barrels per dollar. That is, price the artificial entity (dollars) in terms of the real item (oil). Do you see the difference?
- The giant 400-ton trucks that carry the sands cost $6 million. Their 3,550 HP engines have to be replaced every two years, at $1+ million a pop. Tires cost $60,000 - each.
As I see it, our global human society has two choices. We can keep our heads buried in the (tar) sands, perma-consuming until all we have left to bequeath our children are dregs. Or we can stop right now and start moving towards a sustainable regime. The current debt "crisis" is not only a warning sign that we have already consumed too much of our future. It is also a golden opportunity to reverse some of the excess, to un-mortgage humanity's future by letting some of the debt go bust.
In this sense, repeated bailouts by central banks (BOE is the latest addition) are profoundly wrong, misbegotten and ultimately dangerous. Speaking in thermodynamic terms, they are trying to convince us that their kilowatt is worth more than one kilowatt. They are just drilling their heads deeper into the sand, forcing us along for the ride. Unfortunately, we will have to work that much harder to dig ourselves out - assuming we will still have some food left over.
Note: A reader asked for a book recommendation on Thermoeconomics: Try "The Entropy Law and The Economic Process". It's now on the Amazon bar on the right.
Will increasing world demand for limited resource supplies pose a threat to world economic growth, or will technology keep peak oil and other such commodity peaks safely out in front of us?:
Running Out of Planet to Exploit by Paul Krugman, Commentary, NY Times: ...Last week, oil hit $117. It's not just oil... Food prices have also soared, as have the prices of basic metals. And the global surge in commodity prices is reviving a question we haven't heard much since the 1970s: Will limited supplies of natural resources pose an obstacle to future world economic growth?
How you answer ... depends largely on what you believe is driving the rise in resource prices. Broadly speaking, there are three competing views.
The first is that it's mainly speculation - that investors ... at a time of low interest rates have piled into commodity futures, driving up prices. On this view, someday soon the bubble will burst and high resource prices will go the way of Pets.com.
The second view is that soaring resource prices do, in fact, have a basis in fundamentals - especially rapidly growing demand from newly meat-eating, car-driving Chinese - but that given time we'll drill more wells, plant more acres, and increased supply will push prices right back down again.
The third view is that the era of cheap resources is over for good - ...we're running out of oil, running out of land to expand food production and generally running out of planet to exploit.
I find myself somewhere between the second and third views.
There are some very smart people ... who believe that we're in a commodities bubble... My problem with this view...: Where are the inventories? ...inventories of food and metals are at or near historic lows, while oil inventories are only normal.
The best argument for the second view, that the resource crunch is real but temporary, is the strong resemblance between ... now and ... the 1970s.
What Americans mostly remember about the 1970s are soaring oil prices... But there was also a severe global food crisis...
In retrospect, the commodity boom of 1972-75 was probably the result of rapid world economic growth that outpaced supplies,... bad weather and Middle Eastern conflict. Eventually, the bad luck came to an end, new land was placed under cultivation, new sources of oil were found..., and resources got cheap again.
But this time may be different: concerns about what happens when an ever-growing world economy pushes up against the limits of a finite planet ring truer now than they did in the 1970s.
For one thing, I don't expect growth in China to slow sharply anytime soon. That's a big contrast with ... the 1970s, when growth in Japan and Europe ... downshifted - and thereby took ... pressure off ... resources.
Meanwhile,... Big oil discoveries ... have become few and far between, and in the last few years oil production from new sources has ... barely ... offset declining production from established sources.
And the bad weather hitting agricultural production this time is starting to look more fundamental and permanent... Australia, in particular, is now in the 10th year of a drought that looks more and more like a long-term manifestation of climate change.
Suppose that we really are running up against global limits. What does it mean?
Even if it turns out that we're really at or near peak world oil production, that doesn't mean that one day we'll say, "Oh my God! We just ran out of oil!" and watch civilization collapse into "Mad Max" anarchy.
But rich countries will face steady pressure on their economies from rising resource prices, making it harder to raise their standard of living. And some poor countries will find themselves living dangerously close to the edge - or over it.
Don't look now, but the good times may have just stopped rolling.
But could oil prices fall sharply?
Setting aside peak oil arguments for now, it's important to realize that both the supply and demand curves for oil are, in general, very steep. If there is little unused capacity, it takes time for more oil production to become available since this involves huge capital intensive projects. And, in the short term, demand is fairly inelastic over a wide range of prices; people stay with their routines and keep their same vehicle. With two steep curves (supply and demand), a small increase in quantity demanded will lead to a large increase in prices.
And, of course, the opposite is also true. A relatively small decrease in demand (or increase in supply) would cause a significant drop in price.
As the U.S. economy weakens, there is waning demand for oil in the U.S.:According to the US Energy Information Administration's weekly inventory report, the overall consumption of oil and crude products dropped 3.2 percent in the last four weeks compared to the same period last year.Perhaps the growth in demand in China and India (and elsewhere) will more than offset the small decline in U.S. demand. But there may be another important factor - the behavior of the GCC countries.
What if the supply-demand curve for oil has multiple equilibrium points? And what if the GCC countries have been limiting production because of the lack of other investment opportunities? The following is from a paper by Professor Krugman several years ago: The Energy Crisis RevisitedThe fact that oil is an exhaustible resource means that not extracting it is a form of investment. And it is an investment that might look attractive to a national government when oil prices are high. If a country does not want to spend all of the massive flow of cash generated by a sudden price increase on consumption, it must do one of three things: engage in real investment at home, which is subject to diminishing returns; invest abroad; or "invest" by cutting oil extraction, and hence reducing supply.
The U.S. economy is a bubble economy -- going from bubble to crash to the next mania -- and the new bubble is likely to be clean energy, says Wall Street insider Eric Janszen in the cover story of the February Harper's.
We've seen two bubbles, internet and housing, within a decade, writes Janszen, "each creating trillions of dollars in fake wealth."
"There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle."
Here's why Janszen thinks the necessary next bubble will be clean energy. The new bubble sector must:
1. Already be formed and growing as the previous bubble (housing) deflates. Check.
2. Have in place or in the works legislation guaranteeing investors favorable tax treatment and other protections and advantages. Check.
3. Be popular, "its name on the lips of government policymakers and journalists." Check.
4. "Support hundreds or thousands of separate firms financed by not billions but trillions of dollars in new securities that Wall Street will create and sell." Is that coming? Janszen is quite expansive in his definition of clean energy, including a massive retooling of the country's transportation and power infrastructure.
Janszen, a one time venture capitalist and serial entrepreneur, thinks the financial sector is driving the U.S. economy (and, per force, much of the global economy). The financial sector gets behind whatever new thing they think can provide the hyperinflated returns they require. And they bring to bear massive political influence, well lubricated by money, to insure whatever public policy they require.
Advocates of renewable energy might say bring on this bubble. But Janszen cautions: "Bubbles are to industries that host them what clear-cutting is to forest management. After several years of recession, the affected industry will eventually grow back, but slowly."
In an email interview I asked Janszen if a clean energy bubble was a good thing - bringing massive investment to vital new industries - or bad, leaving those industries struggling in the wreckage of the inevitable crash down the road.
"The term 'bubble' is pejorative," he replied. "The alternate title for the Harper's piece was 'The Good Bubble.' These are changes we need but lack the political ability to make due to the inertia of entrenched interests...Employment of the bubble system that was responsible for the tech and housing bubbles may be the only means available both to fight the impact of the debt deflation recession that started in Q4 2007 and also to deploy resources on the scale required."
In this scenario, the big losers will likely be the investors or taxpayers, as in the housing collapse.
Ah, good - I've been meaning to do something like this myself, but never got around to it. Jeff Frankel sorts speculation into three types and notes that only one of the three types, "bandwagon behavior," is worrisome. However, there's little evidence that this type of speculation is present in commodities markets:
Commodity Prices, Again: Are Speculators to Blame, by Jeff Frankel: ...Many currently are trying to blame speculators for the high prices of oil and other mineral and agricultural products. Is it their fault?
Sure, speculators are important in the commodities markets, more so than they used to be. The spot prices of oil and other mineral and agricultural products - especially on a day-to-day basis - are determined in markets where participants typically base their supply and demand in part on their expectations of future increases or decreases in the price. That is speculation. But it need not imply bubbles or destabilizing behavior.
The evidence does not support the claim that speculation has been the source of, or has exacerbated, the price increases. Indeed, expectations of future prices on the part of typical speculators, if anything, lagged behind contemporaneous spot prices in this episode. Speculators have often been "net short" (sellers) on commodities rather than "long" (buyers). In other words they may have delayed or moderated the price increases, rather than initiating or adding to them. One revealing piece of evidence is that commodities that feature no futures markets have experienced as much volatility as those that have them. Clearly speculators are the conspicuous scapegoat every time commodity prices go high. But, historically, efforts to ban speculative futures markets have failed to reduce volatility.
One can distinguish three kinds of speculation in the face of rising prices. First, there is the "bearer of bad tidings"... The news that, in the future, increased demand will drive prices up is delivered by the speculator. Not only would it be a miscarriage of justice to shoot the messenger, but the speculator is actually performing a social service, by delivering the right price signal that is needed to get real resources better in line with the future balance between supply and demand. Without him, the subsequent price rise would be even greater, because supply would be less. But it does not appear that speculators played this role in the commodity boom that started earlier this decade: as already mentioned they, if anything, lagged behind the spot price.
Second, when the price is topping out, stabilizing speculators can sell short in anticipation of a future decline to a lower equilibrium price. This type of speculator again adds to the efficiency of the market, and dampens natural volatility, rather than adding to it.
Third, in some case, when an upward trend has been going on for a few years, speculators sometimes jump on the bandwagon. Market participants begin simply to extrapolate past trends and self-confirming expectations create a speculative bubble, which carries the price well above its equilibrium. Examples of previous bubble peaks include the dollar in 1985, the Japanese stock and real estate markets in 1990, the yen in 1995, the NASDAQ in 2000, and the housing market in 2005.
It is the third kind of speculation, the destabilizing kind (also called bandwagon behavior or speculative bubbles) about which politicians, pundits, and the public tends to worry. There is little evidence that this has played a role in the run-up of commodity prices. So far, that is. Just because the boom originated in fundamentals does not rule out that we could still go into a speculative bubble phase. The aforementioned bubbles each followed on trends that had originated in fundamentals (respectively: rising US real interest rates, 1980-84; easy money and rapid growth in Japan, 1987-89; US recession, 1990-91, and Japanese trade surpluses; the ICT boom in the late 1990s; and easy US monetary policy after 2001). It could happen yet in commodity markets.
Alex Tolley says...
"Speculators have often been "net short" (sellers) on commodities rather than "long" (buyers). In other words they may have delayed or moderated the price increases, rather than initiating or adding to them. "
No chance this is the physical owners hedging then?
The idea that that there is "good" and "bad" speculation depending on how prices move is silly and, I suspect, unfounded. Far better to recognize that speculative instruments like futures can represent volume many times the underlying physical or money instrument and thus can take on a life of its own, un-anchored. Currency markets have been chronically like this for over 30 years at least, creating wild gyrations in forex rates. Low transaction costs lubricate these markets.
I don't know if one can mitigate this trading without either incurring regulations that limit the # of transactions or increasing transaction costs. Alternatively we could go back to the bad old days of fixing prices by fiat. None of these choices seem desirable to me.
Posted by: Alex Tolley | Link to comment | July 25, 2008 at 12:11 PM
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