August 13, 2008

Why Russia is like suburbia

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Gas prices have moderated for the moment, but not the discussion about the long-term effects of rising demand and tight supplies, which will keep upward pressure on prices until something changes. This means we’re entering into a historic transition that will have many effects on our material surroundings, the economy, geopolitics. This could hit some violently bad patches, but overall it should be good, inasmuch as it pushes us to stop spewing carbon dioxide into the atmosphere not out of some semi-speculative policy decision but out of economic necessity. 

There’s been an interesting discussion on whether high gas prices will destroy suburbia. Here’s James Kunstler, who says yeah, the subdivision is doomed and vast swaths of the built landscape will soon be worthless:

We face an epochal demographic shift, but not the one that is commonly expected: from suburbs to big cities. Rather, we are in for a reversal of the 200-year-long trend of people moving from the farms and small towns to the big cities. People will be moving to the smaller towns and smaller cities because they are more appropriately scaled to the limited energy diet of the future.

Energy costs aren’t only force shaping American settlement patterns, of course, and it’s notoriously difficult to forecast future economic history. But the pressures of rising fuel costs are already forcing changes in behavior, and it’s not hard to imagine a cascade of changes in our surroundings and routines in the near term, the tempo of which haven’t been seen since the immediate postwar period. (This is not even counting global warming.)

Meanwhile: Russia’s recent resurgence, complete with flag-waving, neo-imperialist wars against defenseless neighbors, owes a lot to the high price of oil. A decade ago Russia was an economic and military basket case. Today the Cold War is back, baby. But today’s Russia is nowhere near the global powerhouse the Soviet Union was. Its heavy dependence on fossil fuels to prop up its economy, the brinksmanship over pipelines, etc. indicate more intrinsic weakness than strength. To the degree the West manages a relatively rapid transition away from fossil fuels in the coming decades, Russia will see both the foundation of its economy and its strategic advantage rapidly erode. If I were Putin, I’d be concentrating not on cuffing Georgia around but on training software engineers.

Update: The commenter is right – the Russian IT industry is robust and growing. My bad. However, it seems far from clear that a Russian economy so heavily reliant on fuel exports, with a relatively small yet growing IT sector still imbedded in a corrupt system, would do well in the event of an oil/gas bust.

 

August 5, 2008

Stay just a little bit longer

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You come across some strange stuff on Twitter. In the past couple of days, some Republican activists have ginned up a primarily Twitter-based campaign called “dontgo,” or in Twitterese, #dontgo. (For those not conversant with Twitter, this is a hashtag. It’s included in postings – sorry, I hate to call them tweets – so search engines will pick them up and sort them with other, identically-tagged messages, like this for #dontgo.)

The DontGo Movement is essentially a bunch of websites and social media tools backed by energy interests. It wants Congress to remain in session in order to relax restrictions on oil and gas drilling and pass other industry-friendly provisions, all on the pretext that Americans are demanding this as a response to high gas prices. This is a new form of astroturfing, the cultivation of faux grassroots campaigns by large, moneyed interests to create the appearance of public support, usually to put pressure on individual members of Congress, who take notice if they hear from enough people in their districts.

But DontGo’s own contradictions make it a pretty big reach. Public support for drilling has grown, but it’s no panacea, and a lot of people know that, and the urgency will likely drop along with the price of oil. Meanwhile, the polling on Congress is unambiguous: Americans don’t think much of it. To the extent they’re paying attention at all, most citizens are undoubtedly relieved the House and Senate are out of session. So you have a Republican campaign that undermines what Republicans claim to stand for, begging Nancy Pelosi to stick around and do a little more damage, pass a little more pork. Not exactly tinder for a populist prairiefire.

 

July 18, 2008

A bubble in energy prices?

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There’s an interesting discussion underway on whether the current runup in oil prices – somewhat deflated this week – is a bubble. It’s a pertinent question: how many of us have asked ourselves, as gasoline prices have risen over the past year, whether this simply the way things are going to be from now on? In other words, the logistics and texture of daily life will change radically. We’ll be paying $10 or $15 or $20 per gallon, inflation will be in the double digits, petroleum-based plastic bags and Happy Meal toys will no longer exist, and I’ll be walking to the supermarket 3x a week instead of driving once. But only until that mass transit line goes in a half block from my house years ahead of schedule. There’s even a book in the er, pipeline (courtesy of Publisher’s Marketplace – subscription required):

Forbes reporter Christopher Steiner’s $20 PER GALLON, pitched as a thought experiment on the same scale as The World Without Us, looking at a very real future that’s already beginning to affect us all, exploromg how the rising cost of gas – from $6, to $8, to $14 per gallon and beyond – will radically change all aspects of our lives and culture, to Rick Wolff at Grand Central, in a good deal, for publication in Spring 2009, by David Fugate at LaunchBooks Literary Agency (World).

This may all be true: there are real-world reason oil prices are rising – demand is going up and supply is flatter than anticipated. These conditions will likely last a while, and while painful have the felicitious side-effect of changing consumer behavior, stimulating investment/innovation in alternatives and altering destructive, car-friendly public policies. If this continues for decades, the changes will be more dramatic still.

But we’ve seen so many bubbles recently that we ought to be skeptical of any “it’ll just keep going up” scenario. Nothing “just keeps going up,” even if the historic trend line points that way – there are always peaks and valleys. There’s obviously a kind of cultural craze underway, set off by high gas prices, and the current situation certainly has some bubble-like qualities mixed in with the objective conditions:

The amount of money dedicated to commodity index trading strategies is estimated to have increased from $13 billion at the close of 2003 to about $260 billion by this past March. In theory, money should be equally-likely to go on the long (“I bet prices will go up”) as on the short (“I bet prices will go down”) sides of this speculative market, but for a lot of practical reasons it is much more likely to go to the long side. This is the most plausible argument for the mechanism by which a bubble might currently be operating, and if history is any guide, there is probably at least some of this. What nobody knows is whether this is worth $1, $10 or $100 per barrel (though it seems very unlikely to be at either of these end-points).

Wait a minute. The value of commodity index trading has increased by a factor of 20 in less than five years? The link is to Senate testimony by portfolio manager Michael Masters, who recounts that institutional investors suddenly began sinking massive amounts of money in previously-small-potatoes futures markets. Those markets went way up, drawing in still more money, which in effect locks up a portion of the actual, physical supply:

Index Speculators’ trading strategies amount to virtual hoarding via the commodities futures markets. Institutional Investors are buying up essential items that exist in limited quantities for the sole purpose of reaping speculative profits.

Think about it this way: If Wall Street concocted a scheme whereby investors bought large amounts of pharmaceutical drugs and medical devices in order to profit from the resulting increase in prices, making these essential items unaffordable to sick and dying people, society would be justly outraged.

Why is there not outrage over the fact that Americans must pay drastically more to feed their families, fuel their cars, and heat their homes?

This is another example of how our various interlocking systems – financial, energy, food – have grown ever more complex and automated, and how choices made in one system ripple across all the others – with the causes often ignored or unnoticed.

 

July 1, 2008

Shock to the systems, part 2

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On the other hand:

The good: historically speaking, the current runup of energy prices isn’t exactly apocalyptic. The bad: prices may have to rise significantly higher to effect major changes in energy consumption, a switch to alternatives, et al.

Another way to look at this: assuming current trends continue, whoever is elected president becomes an instant Jimmy Carter.

 

July 1, 2008

Shock to the systems

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With the oil shock, climate change, and credit/finance crisis, we’ve reached a kind of historical/economic pivot point in which various interconnected systems that used to work reasonably well are no longer functioning, and each malfunction reverberates through all the systems – energy, financial, climate, environment, social/political. It’s quite a predicament, for which there’s no real precedent and no obvious solution. Lower interest rates to juice the economy and the dollar falls, oil prices rise, inflation goes up. Etc. It’s like the wiring on a sound system is all screwed up – turn up the volume, and you get a terrible screech instead. Energy prices are especially worrisome. The U.S. government has precious little say over them, and while there are obvious policy solutions (such raising the price of carbon emissions, building more mass transit, underwriting new technologies/alternative fuels) they seem likely to cause short-term pain with an uncertain long-term payoff.

Still, I became somewhat less morose after reading Daniel Yergin’s testimony before Congress’s Joint Economic Committee. There’s quite a lot to it, and it’s worth a read, but I’ll mention just one thing. Yergin has been speculating for a while about the “break point” – an oil price high enough to force a definitive break with oil – i.e., apparently where we are right now. Obviously such a “break” would be a very, very good thing, and there’s some evidence it’s already underway:

…there is much talk about “peak oil” supply these days. However, we think something else is at hand— “peak demand” —at least in terms of U.S. gasoline consumption. In our view, 2007 may well have been the top, the peak, in terms of U.S. gasoline demand. Both because of changes in the minds of consumers, and the response of automakers in terms of the efficiency of vehicles, gasoline demand may well now be in decline. This has worldwide effects. For the 9-plus million barrels of gasoline that the U.S. uses every day is larger than the total oil consumption of any other nation, including China.

…

The reality of the current oil shock behooves us, as a nation, to consider what would be required to double our energy efficiency over a certain number of years. Today, there are tools in terms of information technology to support greater energy efficiency that were simply not available in earlier decades. In terms of the nation’s gasoline consumption, savings of 7 to 10 percent—as much as 900,000 barrels per day—may be available with little or no penalty or burden on drivers.

Of course, “energy efficiency” is not a “thing”, unlike a power plant, an oil well, a windmill, or a solar panel. It is embodied in other things—changes in behavior, in technology, and in the capital stock. It can be stimulated by regulations, information, and prioritization. But, in a market system, price itself is a powerful driver, and energy efficiency will get much higher priority now than in years when energy was cheap. It is not surprising that sales of SUVs and other light trucks took off in the late 1990s. In 1998, owing to the collapse in crude prices, gasoline prices were the lowest in real terms that they had ever been.

This suggests that our systems don’t have all their wires crossed, and that we may be able to adapt relatively quickly, if not painlessly, to an oil-poor world. Of course, this will require some affirmative, aggressive policy fixes from Washington, and in Washington it’s still the 1990s in many ways, the 1980s in others. When Dick Cheney said that energy conservation “may be a sign of personal virtue,” but was otherwise useless, he was articulating a widely-held belief among the political class, one that current circumstances have probably not eroded all that much – yet. Check back after the election.

 

June 23, 2008

The not-so Strategic Petroleum Reserve

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The Strategic Petroleum Reserve is apparently not all that strategic, according to this Foreign Affairs piece, which notes that many of the world’s Western democracies stockpile oil as a hedge against an energy crisis, but then cannot decide what actually constitutes such a crisis. As a result, the SPR and other reserves are used quite sparingly, sometimes randomly, sometimes for political gain, and almost never effectively.

Oil supplies are so tight than any disruption in production can cause a huge economic shock. Yet we handle our strategic oil reserves like we’re socking cash away in a mattress, occasionally pulling out handfuls of it as needed, and usually after the bills fall due.

The piece argues that the nations with strategic reserves depoliticize and coordinate the management of them – that is, attempt to respond to dramatic, potentially catastrophic shifts in the oil markets as they happen. As the world economy has become more integrated, oil prices are no longer determined by the whims of a few sheiks but actual market conditions. You can’t anticipate every market emergency, obviously. But we ought to treat them as we aspire to treat other kinds of disasters – something we actively prepare for, manage proactively and avert if possible.

Markets process information. Is it too much to ask that our government at least attempt to do the same? Unfortunately, the answer is probably yes – as oil prices rise, it’s doubtful that either Barack Obama or John McCain will want to hand their discretionary power over the SPR off to a board of technocrats insulated from politics.