Wednesday, November 7, 2007

Uh Oh

Those pesky Chinese. So uppity. Now they're selling our dollars. Something about wanting a "strong currency." What's so bad about the dollar? Don't they have any loyalty?

Well, it seems they may not be that happy about "Printing Press" Ben Bernanke cutting rates and undercutting the massive Chinese investment in U.S. bonds. Of course, Mr. Bernanke was in a bit of a pickle: don't cut and financial firms panic and Wall Street plummets; cut rates, and watch the dollar fall off a cliff.

We should notice the implications of China's move to diversify out of dollars. They don't mind if we can't afford their cheaply produced products anymore; China is now reaching the point at which domestic wealth can absorb the purchasing that Americans will no longer be able to afford with their weaker dollar. The weak dollar policy of Bernanke and China assures that Wall Street stays happy for a few more months, but is impoverishing millions of average Americans. Let's face it though: they're screwed either way. Pick your poison: housing foreclosure or stagflation and loss of purchasing power. The latter option is politically preferable, since we'll experience it like a frog experiences the slowly rising temperature in a pot of water until suddenly it's reached a boil.

The most basic and visible sign of our increasing poverty is the rising cost of oil, the price of which is increasing almost proportionally to the loss of value of the American dollar. Since oil is priced in dollars, "the market" is demanding more of them to make up the difference of their lost value and a commodity of real value. Oil closed above $97 dollars a barrel today, and in after-hours trading is hovering around $98 a barrel. A few months ago a commenter asked when I thought oil would hit $100 a barrel, and I replied probably some time next year. It's looking like, for once, I was not pessimistic enough.

Another indicator of the declining purchasing power of the dollar is the price of gold, which - in case you haven't noticed - is galloping upward. Gold closed today up nearly $12.50 an ounce to nearly $836 an ounce. While the stock market also rose today, its worth in dollars has actually fallen in recent weeks. Unless you've traded in your dollars for Euros or Yuan, commodity stocks or futures, or precious metals, you are now poorer today than you were yesterday and significantly poorer than you were several months ago. You won't necessarily feel it by looking at your bank or stock fund balances; you'll notice it when you go to the pump to fill 'er up or to the supermarket to buy a 2,000 mile Caesar salad (in Kunstler's inimitable words). Everything made out of oil is getting more expensive, which is just another way of saying that everything is getting more expensive. There is less of it, and our status as a debtor nation is going to make it hard for us to purchase what's left.

This scenario wouldn't be so bad if we as a nation were still producing things of value. However, the consequence of the official policy of the nation being the outsourcing of jobs to low-cost markets for the past few decades (all premised on the permanent purchasing power of the dollar) has been the decline of production of "stuff" here in America. My kids sometimes pester me with requests to buy them something, so I took them to Wal-Mart one day and told them that I would buy them whatever they wanted, on one condition - it had to be made in America. We walked out of the store that day empty-handed, two tired and discouraged kids in tow. We had a good talk in the car on the way home.

In some previous posts on our possible future, I predicted what the peaking of oil production would mean to the modern world and to America in particular. Since I won't assume many people read the back list, I'll rehearse some of what I wrote there here. Let's see how my predictions of early 2007 are looking:

Declining oil production does not solely imply more costly commutes; indeed, when considering the profound effects of higher energy costs (i.e., less net energy in the world), higher commuting costs seem to be of comparatively negligible importance. The effects of peak oil throughout the economic system (including in the most obvious form of higher transportation costs) have far-reaching and world-altering consequences.

First, declining amounts of energy raises serious questions about the viability of “globalization.” This phrase, taking the descriptive form of a process, implies an apparently inevitable and irreversible set of actions that no human activity can resist or prevent....

Globalization, simply put, describes a world in which ever-greater interpenetration of culture and peoples has occurred as a result, at base, of economic expansion and interconnections. These economic interconnections themselves have been the consequence of the spread of free market economic system worldwide, a system that has depended essentially upon thoroughgoing mobility and ease of transportation. The current form of global capital rests on a worldwide labor market in which low-cost markets produce goods for more wealthy high-cost labor markets, which in turn trade for developments in technology and what Robert Reich has called the “products” of “symbolic analysts.” We inhabit a world almost unthinkable, if nevertheless attributable at least in theory, to Adam Smith, in which extremely low cost markets, producing goods largely made of plastic and chemical derivatives (i.e., petroleum), supply high-labor markets with products produced more cheaply than if those same products were produced in the same town as the consumer. The low cost of the raw materials (forms of petroleum) and the overall low cost of bulk transport (shipping and air-freight, propelled by petroleum), result in the cheap production of a nearly unimaginable array of products, all of which rest significantly on a platform of cheap and ample fossil fuels. Peak oil implies higher costs. However, higher prices are themselves a signal of a more fundamental phenomenon, namely less overall energy and less overall material. To the extent that the material form of globalization rests upon this base, the arrival of peak oil means that this basis of globalization will begin to unwind.

“Symbolic analysts” and hence advanced modern economies will be also adversely affected. In the simplest form, declining energy (as was evidenced in 1971) will result in less overall economic activity. A contraction of the economy will occur, and with it, the basis of many of the jobs that now result from an economy based upon growth. Much of the financial services industry will unravel; indeed, banking itself will come under extreme stress as fiat currencies loose value worldwide, and inflation makes existing and future loans increasingly worthless and dries up sources of investment. Material and technological development itself will stall as there is less overall investment, and the basic platform of modern high-tech communication and computing – electricity – will become increasingly expensive. High electrical costs may be forestalled with the increased reliance upon nuclear energy, but that very increased reliance will quickly manifest itself in the form of higher prices due to limited worldwide supplies of uranium.

Movement of products and people will become more difficult and less frequent. There is significant question about the future viability of commercial aviation. Once exclusively the privilege of a wealthy elite, it is likely that commercial aviation will again become the province of the very well-off and a rare experience for a middle-class that has come to take it for granted – but only after significant contraction in the number of existing carriers and, accordingly, flight routes. Many parts of the country and the world that were once isolated will find themselves again less accessible, and less easily departed from. Inasmuch as globalization has particularly rested on the long-term expansion of aviation, with the imminent arrival of peak oil, its future is deeply in question.

Domestically, the national economic system depends extensively upon trucking. This industry will become increasingly strained with the arrival of peak oil, most immediately in the form of higher energy costs which will be passed on to consumers in the form of higher prices for goods and services. The interstate highway system will come under stress, inasmuch as the primary ingredient of pavement – petroleum – will make repairs on roads more costly and therefore rare. Higher prices will mean less ability to afford even what have come to be regarded as the necessities of civilization. These include not only “necessities” such as labor-saving devices, pharmaceutical products (many of which are themselves based on petroleum products), household items and the like, but perhaps most importantly of all, food. Indeed, the implications of peak oil upon food costs, and food production itself, border on the apocalyptic.

The imminence of peak oil directly and adversely impacts our ability to grow and transport sufficient quantities of food. The amount of fossil fuels used to grow basic agricultural commodities, and hence, to provide feedstock and ultimately fill our supermarkets, in the form of fertilizers, fuel for farm equipment, refrigeration and food transportation, is enormous. It is estimated by some that it takes approximately the fossil fuel equivalent of ten calories to put one calorie of food on our tables – significantly higher if one considers a meat diet. Another way of considering this equation: the equivalent of approximately 300 gallons of petroleum or its derivatives are necessary to produce our annual diet. Still another way to consider this fact: our daily diet would require the equivalent of 111 hours, or three weeks, of human labor. With the arrival of peak oil, our capacity to continue to produce adequate food supplies for a planet of 6 billion people will increasingly come into question. Already it has been noted that the demand for corn for the processing of ethanol has led to a steep increase in food costs, particularly given the extent to which corn lies at the root of much of the modern industrial world’s diet. Some of the gloomiest prognosticators of the peak oil phenomenon foretell the horrors of a global “die off.”

The declining amounts of worldwide oil will result in a worldwide decline of the standard of living, manifest not only in most leading economic indicators, but in necessary changes to our daily habits, the ways in which we organize our lives together, and even our diets. One direct effect of peak oil will be the opposite of globalization – i.e., re-localization. The form of living arrangements that have been devised throughout the twentieth-century will come under profound stress and may have to be abandoned. Suburban life depends extensively upon a base of cheap petroleum: long commutes, long supply lines to “big-box” stores and supermarkets that exist at significant remove from residential areas, an extensive network of roads and interstates, and the replacement of farmland for housing tracts, many of which have converted productive land for sprawling yards. The increasing size of homes in these suburban enclaves require massive amounts of heating and cooling, all of which will become increasingly expensive, and make this housing less financially sustainable. With peak oil, the housing market will itself be subject to collapse – the most fundamental basis of investment and wealth of average citizens of modern industrial economies. Economic contraction will make it increasingly difficult for people to maintain payments of exorbitant and often gimmicky mortgages, leading to a wave of foreclosures and added stress to the banking and financial industry. The loss of many citizens’ form of net worth would prove devastating, both economically and politically. A downward spiral of economic contraction and bankruptcy, of decreasing supplies and rising prices, of economic dislocation and disillusionment, could easily result in a potential economic and political catastrophe.

The strains on the food system – again, manifested in the form of higher prices – will make the need for more local production essential. Increasing numbers of individuals will need to return to the life of farming, now on a more regional and local basis. Delivery of food from afar will decline – again, will become the province of the very wealthy – and the need for local production will necessarily rise to replace declining food stores. A more local and agricultural-based economy will again arise, one that will have to be formed in close proximity to increasingly more densely-populated town centers. The necessity of more local forms of farming – and the decline of petroleum-based fertilizers and irrigation – will reveal, once again, that certain parts of the country and world are largely uninhabitable, or at least that certain climates cannot maintain large centers of population. One can expect something of a “rewind” of population settlements that occurred throughout the twentieth century, now away from the arid southwest and west and the tropical south, and back toward the Northeast and mid-west, both of which can provide arable land and ample supplies of non-irrigated water. Living arrangements will essentially draw closer toward the center, and will necessarily be organized in the image of earlier forms of human settlement, with water, food, climate, and accessibility by water or rail forming the core reasons for the viability of future living arrangements.

Much of life will return to a local basis. An issue close to home to readers of this essay, as it were, will be significant implications and challenges for higher education. Elite institutions have increasingly embraced a role as global or cosmopolitan institutions. As globalization itself declines, these institutions will necessarily return to a more local identification, including their student bodies and even faculty. Cosmopolitanism as a governing philosophy will again be the fancies of slightly kooky philosophers. However, before this happens, the era of ever-growing endowments will end, and with it, the growth of the modern University. Those institutions that survive will nevertheless shrink, and the educational objective will return to providing an education for the benefit of localities and regions rather than for a globalized economy. The land-grant institutions, in particular, will return to their original mission and will bear a special responsibility in re-educating a populace in the arts of farming and cultivation.

There is no shortage of potential implications of the full brunt of Peak Oil. As far-fetched as these “prophecies” might seem, they are the logical extrapolation of the reality of declining worldwide energy, and with it, declining wealth and the end of expansion and growth. Short of a miraculous invention that can replace the one-time source of profound energy and hence economic boom provided by fossil fuels, our future is more likely to resemble what I have described rather than a fanciful portrait that continues to assume unbroken growth and material progress. And, if this portrait is even somewhat correct, then the scenario is good, because the alternative is much worse.

Species have always exhibited the most brutal and vicious behavior in situations of declining resources. As the world begins to face the fact of inevitable limits, there will be – indeed, there already is – a scramble for the remaining scraps at the table. The wealthiest nations will plunder the poorest in order to maintain their way of life and their immense investments. Nations blessed with remaining energy stores (e.g., Russia, Iran, Venezuela) will begin to use them as weapons against their neighbors (indeed, already have). As we come closer to the “top of the mountain,” the great fear is that the world’s great powers engage in a last gambit, a militarized fight to the finish over the remaining resources in order to positions themselves best for a post-oil glut future. As President Bush I declared in 1992, “the American Way of Life is non-negotiable.” Andrew Bacevich has observed that we are already in the midst of fighting World War III if not World War IV, and that this war is now being fought over the remains of the world’s oil resources. As those remains decrease, one can expect the fighting to become fiercer and even cataclysmic. The war in Iraq – already the first of the battles of the peak oil era – may only be a prelude of what lies ahead. As in all times of warfare – and it can be expected that this will be a situation of near-perpetual hot or cold warfare – power necessarily accrues to executive and military authority. Already the nation has seen a significant shift in power away from Congress to the Presidency, and ever-greater encroachments of executive power on civil liberties in the name of security. It is possible that constitutional democracy will cease to exist as we have known it, and that people – in the face of a decrease of all they have become accustomed to – will not only support the further rise of the imperial Presidency, but demand it. Whether, over the long term, constitutional democracy will survive the end of the oil age is an open question. The worst-case scenario is one of perpetual warfare, massive numbers of deaths, the potential for nuclear war and the end of modern civilization.

Th-th-th-th-that's all folks... We'll revisit in another six months or so and see how we're doing. If we're still here.


Anonymous said...

A few months ago a commenter asked when I thought oil would hit $100 a barrel, and I replied probably some time next year. It's looking like, for once, I was not pessimistic enough.

Hey, it's not $100 yet! Didn't you know tar sands will solve everything next week?

Seriously, good call. And as the high price doesn't seem reflected by low inventory levels, it seems we might be near a market consensus of peakish oil.

Anonymous said...

Junkyardblog thinks the Chinese are running plays from "Unrestricted Warfare."