Home     Writers     Op/Ed     Book Reviews     News     Bookstore     Photoshops     Submit     Search     Contact Us     Advertise  
  You are here: 

Mon

05

Nov

2007

Ignoring the Obvious - James Howard Kunstler
Monday, 05 November 2007 22:51
by James Howard Kunstler

One of the biggest laughs of the season came out of a New York Times business section story last Tuesday by reporter Michael Grynbaum, who wrote, "Oil is on a steady march toward toppling the inflation-adjusted high of $101.70 it set in April 1980, analysts said, though many are at a loss as to what keeps driving the price." (Italics mine.) Actually, lots of people know what is driving up the price — just not anybody who works at that once-august and now-clueless newspaper. It can be stated simply — the demand line has crossed the supply line — though that simple fact has many curious ramifications.

Among the most subtle is a theory out of Doug Noland's latest Credit Bubble Bulletin (published every Friday).
"There are literally trillions of dollars of liquidity sloshing around the world keen to hold “things” of value. Liquidity sources include the massive central bank reserve holdings as well as funds at the disposal of the sovereign wealth funds. Importantly, the more apparent becomes U.S. financial fragility, the keener they are to stockpile real 'things'. . . . Indeed, it should be noted that this is the Federal Reserve’s first attempt at reflation where U.S. securities are not the speculators’ or foreign central banks’ asset class of choice . . . . Not only is the pool of potential global buying power unparalleled in scope. It is fervidly attracted to tangible assets — as opposed to U.S. securities — and is highly speculative in character. At the same time, an unwieldy global boom is stoking unprecedented demand in China, India, Asia generally, and the other “emerging” markets including Russia and Brazil. Throw in various weather related issues and energy production constraints and the prospect for some very serious bottlenecks and shortages has developed."
In short, foreigners stuck holding dollars that are hemorrhaging value would rather spend them on something other than dollar-denominated financial paper, and nothing is more crucial to the maintenance of industrial economies than oil. Noland's theory comes on the heels of reported oil and gasoline shortages in China, bad enough to have caused some civil unrest — and bad enough for China's leadership to want to spend some of its vast US dollar reserves bidding up oil prices in the open markets to quell that unrest.


This is nothing more complicated than hoarding behavior on a global scale, a mounting crisis of frightened self-interest that has already been well-described by investment banker Matthew Simmons. Simmons was only one of many analysts who spoke at the mid-October Houston conference put on by ASPO-USA (the Association for Study of Peak Oil) — to which The New York Times failed to send a reporter. Simmons has also said that the American public (and its leaders) will probably not "get" the fundamental problem with oil until rising prices are joined by spot shortages — i.e. gas station lines, which will represent hoarding behavior on the basis of individual motorists.

Behind the hoarding dynamics are several clear circumstances.

One biggie is the growing export crisis, described by geologist Jeffrey Brown. Countries like Saudi Arabia and Mexico that sell oil to importing nations like The USA and Japan are using more of their own oil and producing less. Mexico's trajectory is so steep (due to the severe depletion of its giant Cantarell oil field) that it could easily go from being America's Number 3 source of imports to zero in less than five years. The anticipated yearly growth in worldwide oil demand next year will equal 80 percent of the USA's entire oil production.

The export crisis is only an additional layer on top of the general peak oil situation, but it illustrates the way that complex systems we depend on — and oil markets are one — are liable to wobble and fail just as the world comes off the all-time oil production peak for good. Finance is another complex system and it, too, is entering a stage of robust instability. Food production is yet another, with a grain scarcity that has driven wheat prices to all-time highs. The roster of complex systems entering phase change is long and gruesome.

Another big element behind rising oil prices is oil nationalism. The old "major" oil companies — Exxon-Mobil, Shell, BP, Chevron, et cet — now only account for about five percent of world oil production. The other 95 percent comes from nationalized oil industries like Saudi Aramco, Mexico's Pemex, Petroleos de Venezuela, and Brazil's Petrobras. Russia's Lukoil and Rosneft are effectively state-controlled. Not only is worldwide oil in depletion (past peak) generally, but most of the remaining oil is controlled by entities that are inclined to both withhold (hoard) some remaining oil for their own future use and to direct whatever oil they do sell into places other than open auctions on the futures markets. Selling oil to favored customers will be an extremely potent instrument of geopolitics in the decade ahead, and is only one aspect of a desperate global resource contest that could turn ugly and violent. For the moment, though, its meaning for the US is that the two-thirds of our daily oil supply composed of imports is in jeopardy.

Another big element of the oil price story is the condition of the equipment used all over the world for getting it out of the ground, moving it around the globe, and refining it into useful byproducts like gasoline and aviation fuel. The world is woefully short of drilling rigs, and the cost of steel is way up. The demand for new equipment is out-of-sight. The existing worldwide inventory of equipment can be fairly described as decrepit. As Simmons points out, there is a frightening gap between the need for investment in new rigs, tankers, and refineries and the money available to just keep production at current levels. The outlook is grim. In fact, the worldwide lack of will to invest in oil industry equipment is itself a symptom of the crack-up of global finance as a complex system under duress. On top of the equipment problem is a human resource problem: the world us not producing enough oil technicians and engineers to keep up with production, let alone increase it, and every year another wave of senior specialists retires out of the system.

Beyond these parts of the oil price story are even more sub-plots, like the political strife in Nigeria that effectively holds its oil industry hostage, not to mention the fragile state-of-affairs throughout the Middle East, and dare we leave out the insane habits of America's Happy Motoring utopia.

There is really no excuse for The New York Times and the rest of the mainstream news media to not understand what is going on out there. The pervasive cluelessness is a symptom of another complex system out of whack — the system that informs us what's going on. Meanwhile, the danger mounts. The heating season is underway and the furnaces are clanking. Many Americans will have to start choosing whether to pay their mortgage, fill the tank of the Chevy Suburban, buy that brick of Velveeta, or pay the heating oil guy. It looks like China will be spending more of its accumulated dollars bidding up the price of oil (or making favorable contracts with foreign suppliers) instead of buying Freddie Mac bonds. The USA could not find itself in a less favorable position among all these forces roiling the scene. It certainly can't afford to continue its pathetic pose of cluelessness.
More from this author:
McMarching Through Georgia (9485 Hits)
by James Kunstler My travels last week took me to small college town in Georgia and into the heart of Vermont, and the contrasts...
Ass Kicking Republicans (7711 Hits)
by James Kunstler If an American political party was ever in for an ass-kicking, it's the current incarnation of the Republicans....
Democrats and 'Energy Independence' (9331 Hits)
by James Kunstler The day after the impressive Democratic election victory, Senate Majority Leader-to-Be Harry Reid declared that a top priority...
The American Fiasco - a Moment of Clarity (8512 Hits)
by James Kunstler Last week, I had one of those clarifying moments when the enormity of the American fiasco stirred my livers and lights...
Not So Wonderful (7494 Hits)
by James Kunstler It's a Wonderful Life, Frank Capra's 1946 Christmas card to America, is full of strange and bitter lessons about who we were...
Related Articles:
James Petras' New Book: The Power of Israel in the United States - Book Review by Stephen Lendman (24280 Hits)
by Stephen Lendman James Petras is Professor Emeritus of Sociology at Binghamton University, New York. He's a noted academic figure on the US...
An Open Letter to the People and Government of the US - James Petras (8998 Hits)
by James Petras (And a Reply to the FARC) On a November 9, 2006, the Revolutionary Armed Forces of Colombia-Peoples Army, (FARC-EP)...
US and Latin America: Overview for 2006 and Perspectives for 2007 - James Petras (8651 Hits)
by James Petras Introduction: Escalation of Warfare To understand US-Latin American relations this year and its likely trajectory ...
Forecast For the Year Ahead - James Kunstler (11839 Hits)
by James Kunstler Forecast For the Year Ahead First a Look Backward Let's get this out of the way up front: the worst call I made...
The Warming - Kunstler (7530 Hits)
by James Kunstler Everyone was walking around upstate New York delirious in their shirtsleeves on Saturday as the thermometer soared into the...


Add this page to your favorite Social Bookmarking websites
Trackback(0)
Comments (2)add comment

wondermike38 said:

0
peaking world crude oil extraction rates
There is little point in trying to sway the majority of U.S citizens regarding peak oil. The best one can do is gather a variety of coping strategies for rapid change on the individual and local community level. A person can also attempt to cast off the expectations of a white picketed fence, the swimming pool and the 3 cars in the garage mentality.
 
November 08, 2007
Votes: +0

augusta7909 said:

0
3 car garage
Good comment on the 3 car garage, 3 cars in a garage is stupid. That 3rd bay is for the ski boat, the SUV that tows it is parked outside. And it's not just a swimming pool it's a lap pool, anything less than 25yds long would be embarrassing. How else am i going to "cope" with the stress of life, not to mention fictional "peak oil"?
 
November 09, 2007
Votes: +0

Write comment
smaller | bigger

busy
 

adsense

Top