Published on December 31st, 2012 | by Guest Contributor0
Kunstler’s forecast for 2013: Contraction, Contagion, and Contradiction (Part 1)
The Oil and Money Predicament
If you understand that the fundamental condition for industrial growth for two centuries was the consistent increase in cheap energy, then you must realize that more and more cheap energy is also behind the modern operations of capital, especially the mechanism that allows massive volumes of interest on debt to be repaid — hence behind all of contemporary banking. And if you get that, it is easy to see how the end of cheap energy has screwed the pooch for modern finance.
In fact, let’s step back for a panoramic view of what happened with that relationship in recent times: In 1970 you get American peak oil production at just under 10 mmbd (million barrels a day). This chart tells the story:
That event was little noted at the time, but by 1973, the rest of the world was paying attention, especially the OPEC countries led by the big exporters in the Middle East. All they had to do was look at the published production figures and by 1973 the trend was apparent.
They realized that US production had entered decline — predicted by American geologist M. King Hubbert — which meant that they, OPEC, could now put the screws to the USA. Which they commenced to do during a decade of rather messy oil crises (messy because they were accompanied by geopolitical events such as the Yom Kippur War and the 1979 revolution in Iran).
OPEC could put the screws to the USA because our still-growing industrial economy required a still-growing oil supply — the growth of which now had to be furnished by imports from other nations. The catch was that those other nations raised the price substantially, virtually overnight, and since everything in the US economy used oil in one way or another, the entire cost structure of our manufacture, supply, distribution, and retail chains was thrown askew.
The net effect for the USA was that our economy went off the rails for a decade and lots of strange things started happening in the financial sector. They called it “stagflation” — stagnant economic activity + rising prices. It was hardly a conundrum. The OPEC price-jackings of 1973 and 1979 made everything Americans had to buy more costly, in effect devaluing the dollar while throwing sand in the gears of industrial production.
Meanwhile, dazed and confused American industry started losing out to Japan and Europe in things like electronics and cars. Price inflation was running over 13 percent in the late ’70s. Interest rates skyrocketed. When Federal Reserve chair Paul Volker aggressively squashed inflation with a punitive prime rate of 20 percent in 1981, the economy promptly tanked.
Now look at this chart:
Notice that our oil consumption kept rising from the early 1980s until the middle of the early 2000s. Now look at the circle in the chart at the right.
That rise of production from the late 1970s to about 1990 is mostly about production from the Prudhoe Bay oil fields in Alaska — one of the last great discoveries of the oil age (along with the North Sea and the fields of Siberia).
US production did not regain the 1970 peak level, but it put a smile on the so-called Reagan Revolution and on Margaret Thatcher’s exertions to revive comatose Great Britain.
Now look at the price of oil (chart below). You can see what a fiasco the period 1973 to 1981 was for US oil prices: huge rapid price rises in ’73 and ’79. But then the price started to fall steeply after 1981 and stayed around the same price levels as its pre-1973 lows.
The price of oil landed close to its pre-1973 levels by 1986 and hung out there (though more erratically) until the mid-2000s. Because of those aforementioned last great giant oil field discoveries, OPEC lost its price leverage over world oil markets.
Through the 1980s and 90s the price of oil went down until it reached the modern low of about $11 a barrel. That was when The Economist magazine ran a cover story that declared the world was “drowning in oil.” It was the age of “Don’t worry, be happy.”
The price behavior of the oil markets after 1981 had interesting reverberations in both the macro economy and the financial sector (which is supposed to be part of the macro economy, not a replacement for it). A consensus formed in business and politics that it was okay to yield manufacturing to other nations. It was dirty and nasty and caused pollution, so let other countries have it.
We followed the siren call of clean and tidy forms of production: “knowledge work!” The computer revolution had begun in earnest. The financial sector began its metastasis from 5 percent of the economy to, eventually, 40 percent, and really cheap oil prompted the last great suburban sprawl-building pulsation into the Martha Stewart bedecked McMansion exurbs.
In effect, financial shenanigans and sprawl-building became the basis for the vaunted “Next Economy.” It lasted about 20 years.
That incarnation of the US economy failed spectacularly as soon as oil prices started to creep up in the early 2000s. And, of course, the final suburban sprawl boom went hand-in-hand with all the shenanigans in banking. So when it all blew up, beginning in 2007 with the collapse of Bear Stearns, the USA was left with a gutted economy, insolvent banks, and a living arrangement with no future.
Coming in Part 2: The present mess, and… a path to a future?
(Originally appeared at Clusterfuck Nation.)