Wednesday, May 21, 2008

Soylent Greenbacks

Tonight I want to have an unpleasant talk with you about a problem unprecedented in our history. With the exception of preventing war, this is the greatest challenge our country will face during our lifetimes. The energy crisis has not yet overwhelmed us, but it will if we do not act quickly.

It is a problem we will not solve in the next few years, and it is likely to get progressively worse through the rest of this century. ...

We simply must balance our demand for energy with our rapidly shrinking resources. By acting now, we can control our future instead of letting the future control us. ...

The oil and natural gas we rely on for 75 percent of our energy are running out. In spite of increased effort, domestic production has been dropping steadily at about six percent a year. Imports have doubled in the last five years. Our nation's independence of economic and political action is becoming increasingly constrained. Unless profound changes are made to lower oil consumption, we now believe that early in the 1980s the world will be demanding more oil that it can produce.

The world now uses about 60 million barrels of oil a day and demand increases each year about 5 percent. This means that just to stay even we need the production of a new Texas every year, an Alaskan North Slope every nine months, or a new Saudi Arabia every three years. Obviously, this cannot continue. ...

Because we are now running out of gas and oil, we must prepare quickly for a third change, to strict conservation and to the use of coal and permanent renewable energy sources, like solar power. ...

Each new inventory of world oil reserves has been more disturbing than the last. World oil production can probably keep going up for another six or eight years. But some time in the 1980s it can't go up much more. Demand will overtake production. We have no choice about that.


-President Jimmy Carter, April 18, 1977


Anything sound familiar there? It's alternately frustrating and amusing to hear the same sort of apocalyptic warnings today. (Strangely, it all stopped around 1981, didn't it?) And they'll probably get more shrill; we haven't yet seen the future shock/eco-dystopia theme become mainstream pop culture as it did in the seventies (Soylent Green, Silent Running, Logan's Run, etc). I'm all in favor of intelligent discussion about "peak oil" and how the downslope of supply/demand is either here or approaching. Unfortunately, it makes for better movies and nightly-news segments than this:

The Federal Reserve's direct loans of cash to commercial banks climbed to the highest level on record in the past week as money-losing lenders increasingly turn to the central bank for funds.

Funds provided through the so-called discount window for banks rose by $2.8 billion to a daily average of $14.4 billion in the week to May 14, the central bank said today in Washington.

Policy makers have increased the attractiveness of direct loans as they seek to alleviate the impact of the credit crunch. Fed Chairman Ben S. Bernanke said two days ago that while markets have improved, they remain `"far from normal," adding that the central bank is prepared to increase its twice monthly auctions of funds to banks.

Last week, several indicators showed Fed-created liquidity at its highest level ever. Consequences: a new bout of dollar weakness, gold up about $70 in the past few weeks (are we "running out" of that too?) and of course oil at $130. And, most important for policymakers during an election year, a surging stock market (until Tuesday). While the Fed was doing its best imitation of Arthur Burns in '72, Bernanke, Paulson, and even Greenspan (not spending his days in a Venice gambling hall, apparently) all claimed that the worst of the credit crisis may be over. So why do the extraordinary measures continue? This madness is ripping the guts out of entire segments of society: wage earners, prudent savers, Social Security recipients and fixed-income retirees, independent truckers, mom and pop restaurants and retailers, the rural poor, long-distance middle class commuters -- basically anyone who doesn't own an oil well, corn field, or sit in front of a half-dozen trading screens in midtown Manhattan. Multiply the impact felt here and here many millions of times over.

Last month, Paul Volcker said the Fed's recent actions "extend to the very edge of its lawful and implied powers." While he later clarified that as criticism more of market participants than of the Fed itself, I predict that if monetary policy continues on its present course the destructive consequences will one day prompt calls for prosecution of those responsible. This might happen based on policy that's already public, or off-the-books measures by the Fed, Treasury, or an administration proxy to support the stock market or specific companies that we'll learn about in the future. Statements like this would do nicely as an exhibit for the prosecution. If I was involved in monetary policy, I'd tread very, very carefully right now. I'd also pray that something came along to blame for the price of oil. Is October too obvious a month for a "surprise"?

In the meantime, it's essential that Congress step up its oversight. The Fed should have to submit a public report once a week, explaining and justifying its specific actions during the previous week. And if Bernanke's determined to keep the spigots open before November's election, thus ensuring even higher prices at the pump and ruinous inflation years into the future, he should testify under the hot lights once a month. Also, instead of using the phrase "some participants felt" and then briefly stating how each committee member voted, the minutes of FOMC meetings should conform to basic standards and indicate by name who said what during the discussion. Better yet, have a representative from Congress or the GAO sit in on all Fed meetings and issue an independent report.

We can count on Congress to take its responsibilities seriously, right?

The House of Representatives Tuesday passed a bill authorizing the federal government to sue OPEC in US courts over alleged price fixing, in the latest swipe at the cartel over skyrocketing oil prices.

The bill passed the Democratic-led House by 324 to 84 votes, on a day when the price of oil soared to a record above 129 dollars a barrel.

The bill would allow the US Justice Department to subject OPEC member nations to the same anti-trust laws as US firms face.

Oh well.

11 Comments:

Anonymous NeilS said...

Pronouncements of Peak oil dates have been made several times and proven so far to be wrong. That doesn't mean that there is no peak oil date, only that we have not yet reached it.

However, the time will come in the near future (10 years?, 25 years?, 50 years?) when recovery rates will begin to decline. At this time we will have to shift to coal and other sources of energy. The coal supply, by the way, is very, very large, both here and more importantly in China. (Anecdotely I was driving through eastern Wyoming a few months ago and in just 30 minutes passed 7 very long coal trains heading east!). The US and China have cooperative efforts to develop gasification methods for coal. This is not to make coal a clean technology, but to make it a viable surce for the car and truck transportation. (You can't run a car on coal.) To their credit their is also research on carbon capture technologies which are essential if we are going to burn coal and not increase atmospheric CO2concentrations. For anyone wanting to look into the China-US efforts check out Wyoming Governor, Freudenthal's website. He recently returned from a trip to China which focused on coal technologies.

Of course, the use of coal butts up against the impact it has on the climate, both of which are big concerns in the West, which has large coal reserves and yet depends on the environment for its tourist dollars.

ps I speak as a geologist, although not one who specializes in energy.

pps One reason that Carter was wrong about the date is that high oil prices resulted in substantial efforts at conservation. The same will probably occur now. As I say to my students, no administration has been as effective at promoting energy conservation then has the Bush administration. Ironic, but true.

5/21/2008 11:45 AM  
Anonymous judyo said...

The Congress has been neutered since 2002.
The executive branch pretty much dictates every facet of our foreign and domestic activity.
Get used to it.

5/21/2008 11:59 AM  
Anonymous Anonymous said...

"This madness is ripping the guts out of entire segments of society..." - True. And thanks for saying it.

The Fed is doing this because it's an election year? And, he hopes this will change the outcome how?

Last week, Letterman was talking to Robert Kennedy Jr, and the topic of why we can't get legislation through to address issues like Global Warming. The response, at least the one I took away - lobbyists. When do our representatives begin to represent "the people"?

Oil price fundamentals - Function of speculation or fundamentals.

The rest of the world is zipping along for a strong future, and we are stuck in the 19th century. This won't bode well for our future.

5/21/2008 12:10 PM  
Anonymous Anonymous said...

Carter recently rubbed it in here

5/21/2008 1:19 PM  
Anonymous Anonymous said...

"I'd also pray that something came along to blame for the price of oil."

It has...pension funds. Now not only are gov't workers to blame for future increasing taxes, but also future inflation. Double-whammy.

5/21/2008 2:35 PM  
Anonymous elfranko said...

not only have i been unemployed for an unprecedented amount of time, but if i REALLY want to be depressed, i come to read TCR.

5/21/2008 2:46 PM  
Anonymous NeilS said...

The increase in the price of oil can't be all due to the decline in the dollar because the price is climbing in Britain as well (listen to this morning's Morning Edition on NPR).

I heard on TV (can't remember where) that as much as 60% of the cost is due to speculation. I find this difficult to believe, and wonder how it could actually be determined.

Paul Krugman at his blog seems to suggest that it is fundamentals that are controlling the increases. There are many comments there, but not being an economist I didn't understand much of what was being suggested.

http://krugman.blogs.nytimes.com/

5/21/2008 3:25 PM  
Anonymous Anonymous said...

Great post -- very thought provoking.

5/23/2008 12:43 AM  
Anonymous goldhorder said...

Never listen to anybody who writes for the NYT. Our financial crap was spread all over Europe also. How's energy prices in Brazil, India, and Russia? Don't know myself just asking?

5/26/2008 12:49 AM  
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