$3/gallon gas, $100/barrell oil, and US foreign policy

[nerdgirl 0]

One used to hear that if oil hit $90/barrel, the US (&/or oil-importing nations) would descend into recession, e.g., from the Wall Street Journal in 2005 (after oil rose to >$50/barrell): http://online.wsj.com/article/SB111270255444198252.html.

We’re at $90 and probably heading for $100/barrel without strong indicators of recession. (The sub-prime mortgage market collapse seems to be impacting the economy more than $90/barrel oil.)

If for whatever the reason, one begins to question the ‘common assumption’ that some $$$/barrel price of oil will push the US into a recession, what are the implications for US foreign policy?

Energy security and access to global energy sources, including concern w/r/t China’s energy demands, are part of the US National Security Strategy (p.19+, http://www.whitehouse.gov/nsc/nss.pdf). See also remarks by Under Secretary of State Alan Larson as part of State’s comments on the U.S. Foreign Policy Agenda, (http://usinfo.state.gov/journals/itps/1202/ijpe/pj7-4larson.htm):

“We need to secure reliable supplies of energy at reasonable prices in order to foster economic growth and prosperity, and to ensure that oil cannot be used as a weapon. We must deal with some hard facts about the international oil markets. Two-thirds of proven world oil reserves are in the Middle East. Europe and Japan, like the United States, rely on imports to meet a growing portion of oil needs. Aftershocks from global oil supply disruptions will ripple through the global economy. Finally, problem states control significant amounts of oil.”

From Former Special Assistant for Strategic Futures, Office of the Secretary of Defense (OSD), Pentagon, Tom Barnett's book The Pentagon's New Map emphasized the importance of parts of the Middle East, energy globalizatization, and the importance of bringing tint the world community those Middle Eastern oil-producing countries that are part of the "non-integrating" gap. Excerpt at: (http://www.theglobalist.com/StoryId.aspx?StoryId=3964): "Six OPEC members located in the Persian Gulf — Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates — control two-thirds of the proven, "conventional" oil reserves and over 90% of the excess productive capacity in the system."

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[algboy 0]

Personally, I find it hard to "short" the economy when there are so many vested interests wanting to keep the gravy train rolling.

Have you seen all the "two-o-clock turnarounds" lately? Been a lot of them lately in the equity markets. [Yeah--I've got the Reynolds Wrap chapeau strapped tightly on].

Nevertheless, I'm betting on recession, perhaps even the big "D", but I also think things will hold together a while longer than even "bears" such as myself believe is possible.

I also think the house of cards could tumble in a NY minute if there is another terrorist event or BushCo starts bombing Iran. Kiss affordable gas good-bye and life-as-you-know-it.

Short answer: we're screwed. Short-term or long-term. Either way, keep your powder dry.

[AdD 1]

Go read "the party's over" or "Powerdown" by Richard Heinberg, it will all make more sense.

"We are all peakists now." Dr James Schlesinger, former US Sec Energy

The world will likely never produce substantially more crude oil than was supplied in 2005.

Life is ez
On the dz
Every jumper's dream
3 rigs and an airstream

[nerdgirl 0]

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Go read "the party's over" or "Powerdown" by Richard Heinberg, it will all make more sense.

Thanks for the suggestions.
What will Heinburg, with whom I'm not familiar, tell me about geopolitics & the best choices for US foreign policy?

If "we are all peakists" should that not imply that the US economy should be becoming more sensitive to the price of oil and should not the expert economists (such as those I mentioned in the WSJ article I cited) be right?

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[nathaniel 0]

Where have all the oil shocks gone?

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Oil prices are near record highs, which raises a fascinating question. In recent years, the U.S. and world economies have typically shrugged off oil price increases. By contrast, oil price increases are a major part of the conventional story of the economic turmoil of the 1970s. Why the difference?

...

The economy is far more energy-efficient today than it was in the past, in part because economic activity is based more on services and less on manufacturing. As a result, energy prices matter less today.

The author of that blog post is a Harvard professor and a former adviser to Bush the Lesser.

My advice is to do what your parents did; get a job, sir. The bums will always lose. Do you hear me, Lebowski?

[nerdgirl 0]

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Where have all the oil shocks gone?

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The economy is far more energy-efficient today than it was in the past, in part because economic activity is based more on services and less on manufacturing. As a result, energy prices matter less today.

Great link - thanks! Kilian's paper that Mankiw links to looks very interesting (to me).

So what does it mean for US foreign policy if Thomas Friedman is right (& the world is flat) ... or another way of saying it ... geopolitically, why does the Middle East matter? That's why I referenced the National Security Strategy & the Under Secretary's words, because according to the current US National Security Strategy, energy security is very important. The calculus w/r/t the rising energy demand of China & India has had implications on defense and foreign policy.

Energy security is necessary but not sufficient alone w/r/t foreign policy. If the perceived impact on US economy is removed (i.e., what all the experts and models predicted), how should that impact US foreign policy?

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[joedirt 0]

It's a good question, but I don't think the jury's out yet on the results. Supposedly "Inflation" isn't a problem, but precious metals have skyrocketed, oil has skyrocketed, real estate has skyrocketed. We're just now starting to see it affect real estate. With US interest rates so low, and the dollar being devaluated, oil WILL rise. If the world wide demand is still there it will stay. If incomes are not rising by the same amount it should eventually be a problem.

Edited to add - Just my humble opinion, who the hell can figure this stuff out anymore.

[nathaniel 0]

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geopolitically, why does the Middle East matter?

We still use a lot of oil. It has certain advantages that science has not yet replicated, namely a combination of energy density, portability and affordability. Not to mention all of our cars and many of our generators large and small are geared to run on it.

The invisible hand is hard at work, and there's a tremendous amount of research on just about every conceivable front to replace oil... As substitute technologies become available it will be a matter of replacing infrastructure. You can bet that OPEC will be very busy as such technologies come on line, manipulating supply such that prices stay competitive.

Consider Brazil, where most of their cars can run alternately on alcohol derived from local sugar crops or on gasoline. How much does Brazil care about Saudi Arabia or Kuwait?

My advice is to do what your parents did; get a job, sir. The bums will always lose. Do you hear me, Lebowski?

[Zipp0 1]

Actually, several economists are beginning to rtalk about a looming recession. I'm betting on a hard fall in the next 2-3 years. When the SHTF it's going to be ugly.

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Chuck Norris doesn't do push-ups, he pushes the Earth down.

[nerdgirl 0]

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Actually, several economists are beginning to rtalk about a looming recession.

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Could you point to the specific economists? And to what cause(s) are they basing their assessments, e.g., $120/barrell oil, collapse of subprime mortgage market, or something else?

There's been speculation that the Federal Reserve Board may not decrease interest rates or only decrease by 1/2% due to concerns over inflation.

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

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[NCclimber 0]

Right shoulder top this week, then Katie bar the door.

[Zipp0 1]

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Actually, several economists are beginning to rtalk about a looming recession.

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Could you point to the specific economists? And to what cause(s) are they basing their assessments, e.g., $120/barrell oil, collapse of subprime mortgage market, or something else?

Sure.

David Wessel of the WSJ on NPR this morning:
http://www.npr.org/templates/story/story.php?storyId=15746095

David Rosenberg of Merrill Lynch:

http://online.barrons.com/article/SB119368315916475198.html?mod=googlenews_barrons

http://www.businessweek.com/investor/content/oct2007/pi20071027_258564.htm?chan=top+news_top+news+index_businessweek+exclusives

There are others. Search google news for "recession."

As to what causes they are basing their assessments, go ahead and see for yourself. I don't have the time for all that....

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Chuck Norris doesn't do push-ups, he pushes the Earth down.

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[kelpdiver 2]

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Actually, several economists are beginning to rtalk about a looming recession.

There are always several economists talking about a looming recession. Usually the same guys. Eventually they're right.

[skinnyflyer 0]

this is a good article;
"U.S. Economic Energy Intensity:
Why $80 oil hasn't impacted our economy, but why $162 oil will"

http://www.financialsense.com/Market/cpuplava/2007/1003.html

here are some great websites for articles and discussions about energy and peak oil;

http://www.theoildrum.com/

http://peakoil.com/

"Death is more universal than life; everyone dies but not everyone lives."
A. Sachs

[kelpdiver 2]

The world pecking order will be up for grabs with peak oil. The nation(s) that figure out how to meet their needs with other methods will be at a huge competitive advantage by the end of the century. Could be as big a shift as England when its navy defeated the Spanish and took over the seas, and later when the US emerged from WWII as the only intact nation. Would be a bit funny if Brazil won this sweepstakes, though doubtful with their corruption and education woes.

Hopefully American leadership will get that soon. Spending 2T on energy research and development rather than securing oil supplies will pay off in the future. Not tapping resources in Alaska now will help later as well.

[AdD 1]

US foreign policy... well what should be done in the future depends on the moral code one operates under. The current policy is shaped by a "last man standing" philosophy under which the american way of life in not negotiable and securing foreign oil access is the invisible hand. This is bound to increase conflict between the US and other countries.

Heinberg suggests that the world adopt the Oil Depletion Protocol, in other words the importing countries should reduce imports, and exporters should reduce exports at a rate equal to the decline of world conventional crude supply. (yes is it decreasing, 1.3% over the last 2 years according to the EIA) This will give us more time to deal with the problem of peak oil, it is not in itself a solution obviously.

Life is ez
On the dz
Every jumper's dream
3 rigs and an airstream

[nerdgirl 0]

Thanks for the links. While echoing concerns about the potential for a downturn in the economy, the references focus on the impact of the housing market and credit over-extension (i.e., subprime mortgages) rather than oil.

David Rosenberg’s article (in WSJ) says nothing about oil. He does reference two other economists: “The better GDP numbers [as forecast by Citigroup economists] reflect an improvement in trade. But notwithstanding the export gains apparent in recent corporate earnings reports, most of the contraction in the trade deficit reflects slower import growth resulting from weaker domestic demand.”

&

“Robert Kessler, head of the eponymously named Kessler Investment Advisors in Denver, which specializes in managing Treasury portfolios for institutions and very high net worth individuals, sees that process as the inevitable result of U.S. consumers' binge on credit of all stripes -- not just for housing.”

Wessel (WSJ on NPR) gives a mixed outlook and does consider high oil prices in the milieu:

“Housing is worse than we anticipated ... oil prices are higher and going higher" and tightening credit conditions will make it harder for consumers and businesses to borrow….But many forecasters believe the resilient U.S. economy will avoid a recession.

"The more optimistic people say that exports will bail us out of this," Wessel notes. "The dollar is weak and that makes our exports more attractive to foreigners. And foreign economies — China, Europe — are pretty strong, so that gives us a ready market."

Optimists also say that as long as the job market holds up, "people will have money to spend and they'll keep spending," Wessel adds.

But he says that exports and the job market aren't strong enough to offset the downsides of a housing slump, high oil prices and a credit crunch.”
And he goes onto talk about housing market slump.”

Even with all the combined factors, “Wessel says his guess is that the economy will go into a short and shallow recession, and that the Federal Reserve will cut interest rates enough to prevent a sharp downturn.”

Business Week’s Peter Coy is even more specific: “More than anything, what's behind the likely cut is the continued decline of the housing market, which threatens to drag down the entire economy.”

W/r/t recession: “First, not all economists are as worried as Rosenberg is about recession. Wachovia economists wrote Oct. 26 that, although they expect a rate cut in October and another in December, it's not a crisis situation: "Strong gains in consumer spending and a significant rise in exports more than offset" a big drop in residential construction, they wrote.”

W/r/t inflation: “That concern undoubtedly intensified this week when inflationary pressures strengthened from two sources. Crude oil for December delivery rose nearly $5 a barrel during the week to a record of $91.18 on the New York Mercantile Exchange. The threat of U.S. conflict with Iran, which is a major oil producer and a significant military power, was largely responsible for lifting oil far above its natural level based on current supply and demand. High oil prices will probably lift gasoline at the pump back to well above $3 per gallon.”

That’s the most interesting piece to me, because I’m interested moreover in the foreign policy ‘puzzle.’ As the gathered economics experts cited in the 2005 study mentioned in the WSJ (http://online.wsj.com/article/SB111270255444198252.html) asserted $90/barrel oil was going to push us to recession. We’re there. What we saw in 1973 is not happening. There are lots of reasons. Some argue we’ve already passed peak oil.

But the US maintains the importance of energy security as linked to Middle East as part of the National Security Strategy and foreign policy. Is it time to re-examine that precept?

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[Zipp0 1]

Well, since the dollar is so weak, isn't the oil actually cheaper than $90?

As far as energy security's impact on Middle East policy, I'd bet that it's more about money than security. It usually is.

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Chuck Norris doesn't do push-ups, he pushes the Earth down.

[nerdgirl 0]

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US foreign policy... well what should be done in the future depends on the moral code one operates under. The current policy is shaped by a "last man standing" philosophy under which the american way of life in not negotiable and securing foreign oil access is the invisible hand. This is bound to increase conflict between the US and other countries.

That’s one way to express it. Albeit that a large percentage of foreign oil is in the Middle East, it's not the only place.

You could also say that a keystone of US foreign policy is the advancement of democracy; [one can debate the effectiveness of the execution and planning behind the current implementation plan for achieving that goal, but it’s part of the strategy].

So how are oil & “the American Way of Life" connected, less w/r/t late 20th Century American consumerism and more w/r/t ideals of the American Way of Life?

In addition to declaring the world flat from globalization, Friedman has proposed his “First Law of Petropolitics” hypothesis (“theory” to social scientists) that there is “a literal correlation that could be measured and graphed—between the price of oil and the pace, scope, and sustainability of political freedoms and [market-based] economic reforms,” i.e., lower oil $ =’s more freedom around the world (http://www.foreignpolicy.com/story/cms.php?story_id=3426).

“The First Law of Petropolitics posits the following: The price of oil and the pace of freedom always move in opposite directions in oil-rich petrolist states. According to the First Law of Petropolitics, the higher the average global crude oil price rises, the more free speech, free press, free and fair elections, an independent judiciary, the rule of law, and independent political parties are eroded. And these negative trends are reinforced by the fact that the higher the price goes, the less petrolist leaders are sensitive to what the world thinks or says about them. Conversely, according to the First Law of Petropolitics, the lower the price of oil, the more petrolist countries are forced to move toward a political system and a society that is more transparent, more sensitive to opposition voices, and more focused on building the legal and educational structures that will maximize their people’s ability, both men’s and women’s, to compete, start new companies, and attract investments from abroad. The lower the price of crude oil falls, the more petrolist leaders are sensitive to what outside forces think of them.”

Now democracy does not = freedom … nor does correlation = causality. But doesn’t it make you go “hmmm?” (Okay, there’s probably some out there who are going “yawn.”)

I disagree with Friedman’s conclusions from his observed correlations.

I appreciate, however, his looking for other factors than just “higher oil price” =’s “US recession.”

Thanks for the synopsis of Heinberg.

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[NCclimber 0]

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Right shoulder top this week, then Katie bar the door.

And so it goes.

[nerdgirl 0]

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Right shoulder top this week, then Katie bar the door.

And so it goes.

Do you mean that something unstoppable is coming?

VR/Marg

Act as if everything you do matters, while laughing at yourself for thinking anything you do matters.
Tibetan Buddhist saying

[kallend 1,619]

And the $US is still dropping against major foreign currencies.

Even the loonie and UK pound are looking strong by comparison.

...

The only sure way to survive a canopy collision is not to have one.

[NCclimber 0]

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Right shoulder top this week, then Katie bar the door.

And so it goes.

Do you mean that something unstoppable is coming?

VR/Marg

I can't really comment on whether or not a major selloff (possibly a recession) is unstoppable, I just think the top is in and we're headed much lower.

[Andrewwhyte 1]

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Well, since the dollar is so weak, isn't the oil actually cheaper than $90?

I think the price of oil is still rising against most currencies. The $CAD is up about 75% over the last few years and oil in $CAD terms is still up. Your point is still valid that oil is not up anywhere nearly as much for most people as it is for Americans. I think it's fair to say your debt and deficit situation (governmental and personal) are to blame. You simply cannot afford those wars you are fighting. Wars are bad. Tell your leaders.

[kallend 1,619]

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Right shoulder top this week, then Katie bar the door.

And so it goes.

Do you mean that something unstoppable is coming?

VR/Marg

I can't really comment on whether or not a major selloff (possibly a recession) is unstoppable, I just think the top is in and we're headed much lower.

Gut feeling? Professional knowledge? Insider information?

...

The only sure way to survive a canopy collision is not to have one.