Thursday, September 6, 2007

Scarcity at Staples

While the (financial) world has been watching for cracks in the global credit market, a few developments have gone relatively unnoticed: first, oil prices have been creeping up ever-closer to all time highs (today they are around $76.50 a barrel, a gain of 7.7% in the past two weeks alone), and gold prices today topped $700 an ounce. Both these indicators reflect most clearly a loss of confidence in the dollar, though the rise of oil prices is also due to "surprisingly" constrained supplies. Worth noting is that the rise of oil prices is happening in the absence of any real significant events impacting on oil production, but rather based upon the merest rumor of the remote possibility of the tiniest inkling that something may happen to impact supply - such as a low pressure weather system off the coast of Bermuda! Meanwhile, Mr. Market may be pricing in the likelihood of a Fed cut in a few days' time - which might please the high finance boys, but won't be happy news for the dollar and anyone who uses them to buy actual stuff. Gold at $700 suggests that people are dumping dollars for something of substance. Indeed, high commodity prices may dissuade the Fed from cutting rates, which would likely have the effect of (momentarily) deflating some of those prices, but would also roil the credit markets and send the economy into a severe recession (we'd also have the treat of watching Jim Cramer descend into an incoherent apoplectic rage - again!). In either scenario, stagflation looks to be making a return appearance - and the Fed's only real option is whether there will be more stag- or more -flation.

The prices of oil and gold are both ominous signs amid growing evidence of an increasingly severe downturn in the housing market. At the moment when worldwide oil supplies are self-evidently becoming scarcer, the dollar will buy less of all those goods we now produce overseas, while our sole source of "wealth" over the past decade - housing - may be about to bite the dust. The following example is wholly anecdotal, but some neighbors have postponed renovating their house out of concern with the state of the housing market and fear that they'll end up with negative equity. Multiply their decision times thousands upon thousands of similar decisions, and we can see the makings of a serious decline in "consumer spending" - calculated to account for 2/3ds of the U.S. economy. Without our houses as ATM machines, many are discovering that what they really own is debt.

I was thinking today about how we will handle real hardship, should it come to pass - as it well may. Today I was at "Staples" (TM) looking for three subject notebooks for my son at the start of a new school year. Apparently, so was the rest of Northern Virginia, and when a manager brought out the last box from the storage room in the back, there was a mad scramble to grab as many of these precious notebooks as hands could grasp. What would happen if it were the last box of food, or the last gallon of gas? Could we survive a week without our fleet of ships and trucks providing us with all the products produced overseas, or the products of industrial farming that depend entirely upon petroleum? Two days? An hour? How quickly we would learn that money doesn't create food, and that food doesn't come from supermarkets.

One reads in biology books about the behavior of animals which, from time to time lacking a natural predator, overpopulate an area until they consume all the nourishment. They then turn upon each other in a ferocious contest for the remaining scraps, and equilibrium between supply and demand is only restored after a significant portion of the creatures die off. As I wrestled with other suburban parents for a few precious notebooks, I had visions of scavenging, hoarding and violence over products that are actually necessary for life. I shook my head, paid for the prized notebooks with my increasingly worthless dollars, and burned some more oil on my return to my comfortable, if tenuous, suburban house.


Anonymous said...

I had visions of scavenging, hoarding and violence over products that are actually necessary for life. I shook my head, paid for the prized notebooks with my increasingly worthless dollars, and burned some more oil on my return to my comfortable, if tenuous, suburban house.

My friend, I think you need to go home and relax.

First, let me say I'm "in your camp", so to speak. I own one car, walk everywhere, eat only unprocessed foods, own very little, buy everything in bulk, have my own well, keep a years supply of food on hand.

I have worked as an engineer in oilwell drilling for a long time. I am very familiar with peak oil and all that jazz. I've been involved with energy research at national labs. I'm not some wacko who is spouting; I'm educated, suspicious, and have given these issues deep thought.

However: I think your economic analysis is over the top. The world is not about to end. Shortages are not on the horizon. Peak oil's consequences are quite a ways off still - just look at the proven reserves. High prices, sure, but not high enough to cause real problems. Look for $300-500/bbl before a crisis, and we are a long way away from those.

Good book for you to read is
Knowledge and the Wealth of Nations, which addresses many of the reasons why the economy keeps defying doomsayers. I think you would like it.

Anonymous said...

To give you a quick intro to the book, and in my opinion what your analysis lacks;

Back in the early days of the industrial revolution, everyone thought land, labor, and capital were what decided wealth. And before the industrial revolution, this was generally true.

However, we know today (demonstrated by mathmatical theory and evidence both) that people, ideas, and things are what drive wealth.

The history of the world economy ever since biblical times has been "increasing returns" - constantly getting richer due to technology and economic growth, rising productivity, economies of scale, networks, and knowledge spillovers.

Now, I know you think that peak oil will shatter this model - that the industrial revolution is 100% fueled by cheap oil. I agree, but only somewhat. Don't underestimate the power of technology to transform the economy.