Energy Security Populism: Oil Prices, American Leaders, and Media
Posted by Robert Rapier on March 26, 2010 - 10:29am
Energy Security Populism:
Oil Prices, American Leaders, and Media
By Kevin P. Kane
American leaders and news outlets often refer to American-company overseas oil field purchases, oil & gas discoveries, freedom-from-oil initiatives, and offshore drilling as vehicles towards energy security. These efforts do not, and cannot, enhance oil security for the U.S. without simultaneously increasing global oil security—defined as insulation from price and supply shocks.
Past & Present Oil Supply Security
In 1980 following Soviet military gains near oil producing states, the Iranian Revolution, the Arab Oil Embargo, and the Organization of Petroleum Export Countries (OPEC) price hikes, President Jimmy Carter contended in his State of the Union address,
“The region which is now threatened by Soviet troops in Afghanistan is of great strategic importance: It contains more than two-thirds of the world's exportable oil… therefore, that poses a grave threat to the free movement of Middle East oil… An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force…”[1]
President Carter went on to argue that by reducing dependence on Middle Eastern oil, this would make America stronger. This argument reflected a zero-sum national security view of oil, one in an era before the emergence of economic integration, before the decline of OPEC’s influence on world prices, and before the evolution of today’s supply and demand fundamental market forces serving as the dominant driver behind oil prices.[2]
The belief that diversifying oil import sources coupled with securing physical supply for national consumption would improve energy security reflected the reality of the Cold War; we are no longer in the Cold War, although some leaders speak of oil security as though we are! Although many informed energy security advisers in the U.S. may view oil from a market lens that reflects vulnerabilities inherent in financial and trade integration, supply nationalism in the form of energy security populism appears to be creeping back into the hallways of the D.C.-area bureaucracy, at least in rhetoric.
A Survey of Leadership Misinformation
President Barack Obama
President Jimmy Carter set the U.S. on a course towards “energy independence” in his 1980 State of the Union address.[3] Like former President Carter, all of the presidents after him sought to “free the U.S. from foreign oil,” including U.S. President Barack Obama. In 2006 speaking before the Governor's Ethanol Coalition in Washington, D.C., in a speech tellingly titled “Energy Security is National Security,” the then-Senator Obama contended,
“During World War II, we had an entire country working around the clock… When we wanted to beat the Russians into space, we poured millions into a national education initiative that graduated thousands of new scientists and engineers. If we hope to strengthen our security and control our own foreign policy, we can offer no less of a commitment to energy independence.”[4]
In 2004 when speaking at the Democratic National Convention, the then-Senator Barack Obama quoted John Kerry and said,
“John Kerry believes in energy independence, so we aren't held hostage to the profits of oil companies or the sabotage of foreign oil fields.”[5]
President Obama and the Democrats are not alone in perpetuating misinformation on oil markets.
Senator John McCain
In 2007 speaking at the Center for Strategic International Studies in Washington D.C., John McCain said,
“As President, I'll propose a national energy strategy that will amount to a declaration of independence from the fear bred by our reliance on oil sheiks and our vulnerability to the troubled politics of the lands they rule… energy security is our best defense. We won't achieve it tomorrow, but we must achieve it in our time.”
In June 2008, John McCain also argued in his remarks on energy security and the economy,
“What we really need is to produce more [oil], use less, and find new sources of power…In the short-term; this requires more domestic production, especially in the Outer Continental Shelf… But as a matter of fairness to the American people, we must assure affordable fuel for America by increasing domestic production.”[6]
Former Governor Sarah Palin
In October 2009 through an Op Ed titled “Drill,” Sarah Palin argued,
“Reliance on foreign sources of energy weakens America. When a riot breaks out in an OPEC nation, or a developing country talks about nationalizing its oil industry, or a petro-dictator threatens to cut off exports, the probability is great that the price of oil will shoot up. Even in friendly nations, business and financial decisions made for local reasons can [destabilize] America’s energy market, since the price we pay for foreign oil is subject to rising and falling exchange rates. Decreasing our dependence on foreign sources of energy will reduce the impact of world events on our economy… It’s about building a more secure and peaceful America, an America in which our energy needs will not be subject to the whims of nature, currency speculators, or madmen in possession of vast oil reserves.”[7]
A Survey of Media Misinformation
Perpetuating misinformation, media outlets and journalists also report on oil drilling, nationally owned oil company (NOC) investments, and national energy initiatives as zero-sum increases in a single nation’s energy security. This becomes particularly true when media outlets cover stories on Chinese oil companies investing in Africa or when Chinese NOCs attempt to participate in mergers and acquisitions, including the example of the failed Chinese company attempt to purchase Unocal.Time Magazine
In 2004, Time magazine ran a major essay written by Mathew Forney, titled “China’s Quest for Oil.” The author attempted to frame the efforts of Chinese oil companies to acquire upstream Exploration & Production (E&P) investments as a national objective aimed at “[securing] long-term supplies independent of the world’s fickle prices.”
Financial Times
On January 20, 2010, the Financial Time released an article by Christian Oliver titled “S. Korea’s [Korean National Oil Company] KNOC eyes $6.5 [billion] oil deals.”[8] The journalist wrote that “Seoul officials have stressed they will strive to avoid being muscled out of resource deals by powerful Chinese competitors…The moves to increase energy security go hand in hand with Seoul’s pledge to reduce wasteful consumption.”[9]
CBS News
On July 17, 2008, amidst high oil prices during the second major peak, only this time driven purely by the fundamentals of supply and demand, Mark Hemingway argued in the National Review Online that,
“An [Oil price] fell another $3.71, to $135.03, and at one point was trading as low as $132… U.S. crude-oil supplies rose by 3 million barrels…but bizarrely, the AP did not mention that…President Bush removed the executive order imposing a moratorium on offshore drilling in the United States. To think that this dramatic and unexpected move by the Bush administration did not have a significant effect on oil prices is folly… The price of gas dropped significantly upon Bush’s word that more domestic offshore drilling was one small step closer to becoming a reality. How much more will it drop if we actually start drilling and producing oil...Of course, it’s not as simple as saying that, if we allow more offshore drilling, the oil companies will have America’s energy problems solved in a mere two years. ”[10]
Summarizing Assumptions: American Leaders and Media
President Obama’s arguments are based on the flawed premises that energy security can be achieved by reducing oil imports without having our trade partners also reduce their oil price exposure, and that oil companies can exert downward pressure on pricing—the converse action of holding hostage the American economy with prices. Naturally, both of the assumptions behind these arguments are flawed.John McCain went so far as to propose a “declaration of energy independence” while arguing that by reducing oil imports, the U.S. will be able to remove itself from the politics of the Middle East. John McCain went to suggest that energy security in the U.S. could be achieved by increasing domestic production. This implicitly suggests to the listener that such a drilling effort would insulate Americans from world prices through domestic supply. Of course, no matter how much the U.S. drills, domestic oil price will always be the exact same as international oil price. Thus, domestic drilling creates globally supply increases and global energy security, not American energy security per se.
Sarah Palin fares no better than President Obama and Senator McCain, suggesting that by reducing U.S. oil imports, Americans can become “free” from the price insecurities inherent with the Middle East. It is of course impossible to be “free” from Middle Eastern oil in a one-world price system where economic linkages connect us to shocks through the stock market, interest rates, foreign investments, exchange rates, derivatives, futures markets, and not to mention the economies of China, Japan, South Korea, and the rest of the world that depend on Middle Eastern oil. She went on to suggest that the U.S. could do something independent of international action through drilling that would insulate it from “the whims of nature, currency speculators, or madmen in possession of vast oil reserves.” Nothing could be further from the truth. All of the aforementioned leaders are appealing to mistruths, or energy security populism.
Time Magazine ran an article that led the reader to believe Chinese companies were on a quest for world oil domination despite the fact that Chinese companies, CNPC, CNOOC, Sinochem, and Sinopec sell—as of 2004—11%, 92%, 98%, and 99% of their oil production on the world market place, respectively.[11] Thus, they contribute to world energy security, not China’s oil supply relative to the rest of the world’s.
The Financial Times ran an article that suggested a nation’s oil NOC could improve energy security through upstream investments on the other side of the world despite the fact that transportation costs force them to sell the produced oil on the international market place. South Korean, or any other nation's, nationally owned oil company investments on the other side of the world do nothing to improve their energy security. If KNOC invests in Canada, this does nothing for Korean energy security since they will likely sell the oil to local markets.
Through CBS News, the National Review Online ran a story suggesting that a change in offshore drilling policy—despite that policy not immediately resulting in a supply inventory change—influenced oil prices. It is obvious to anyone who follows oil markets that a White House statement about investment in the Gulf of Mexico will not result in meaningful price changes in oil prices unless it results in daily production changes so significant it expands global, not American, supply. Correlations are not the same as causation.
Not understanding the nature of oil companies , oil economics, derivatives—risk and hedging, and price discovery in a one world oil demand and supply system, leaders are either misinformed or misleading when speaking to the public about oil prices: both explanations however are equally as troubling. If they are misleading, they are pursuing populism. If they are misinformed, they may not be qualified to lead. Such Views or statements as those described above promote conspiracies, and economically uninformed nonsense about investment banks, oil companies, and OPEC. The continued circulation of massive misinformation on oil supply initiatives will lead to an energy security bubble that will burst at the first chance such energy security measures are tested in our globalized economy.
Correcting the Way we Frame Oil
It’s time for politicians to either read about the fundamentals of oil markets, or if they do already understand them, stop pursuing the low hanging populism fruit by promoting the continued circulation of misinformation through national pride-pandering statements such as those presented by the aforementioned public leaders. Such misleading statements about oil promote energy security populism and the following deeply flawed beliefs among the public,
(1) Domestic oil prices can be eased separate from world prices through increases in domestic supply
(2) Countries acquire oil rather than companies who discover it for market sale
(3) Companies that acquire oil sell it to their home country as opposed to selling it on the market place
(4) Acquiring physical supply benefits countries in a zero sum relationship
(5) NOC and private company upstream investments will increase domestic supply
(6) Oil is a public good when within a country boundary, and consumers are entitled to it
In order to explain what is wrong with the above views, let us take a look at the “Oil 101” fundamentals of the oil market.[12]
“Oil 101”
Oil prices derive first from physical supply and demand fundamentals. Oil futures contract—an agreement to purchase oil at a future date—traders analyze these fundamentals by introducing information on a commodity exchange market—primarily on the New York Mercantile Exchange (NYMEX) and the International Continental Exchange (ICE). They introduce information and factors—such as supply changes, present and expected demand, and spare capacity—they believe determine oil’s market value—defined in prices—in the near and long-term.[13] [14] Through the introduction of this information, traders participate in the process of price discovery.[15] On NYMEX, spot market prices for West Texas Intermediate (WTI) crude oil are discovered, and ICE Brent Crude prices are generally set at or around this price. Oil suppliers around the world base their prices generally on the same, or closely similar, prices as WTI depending on benchmark formulas as well as the benchmark itself.[16] Ceteris paribus, the rest of the world crude oil spot markets and Over-The-Counter (OTC) crude oil market traders are approximately the same price as WTI with the exception of minor occurrences of arbitrage, benchmark formula variances, and transportation costs.[17]
On the issue of the emotionally loaded concept of “excessive speculation,” the OTC market derives oil prices from the futures markets. Thus, investment banks cannot exert any sort of pressure through derivatives on oil prices despite some—excluding the former Commodity Futures Trading Commission (CFTC) senior economist who found they do not influence prices—in the U.S. CFTC trying to encourage us to believe otherwise without any empirical—causal and not correlative—evidence to back up their politically motivated arguments based on time order correlations and “what ifs.”[18]
In addition to our single supply and demand oil market serving as a priori evidence the aforementioned views are flawed, globalization and interconnectedness further complicates oil markets and energy security.
Oil Shocks in an Era of Financial and Economic Integration
Of the newest issues in oil supply security, economic and financial integration appear to be the least discussed aspects of any single nation’s oil supply and energy security calculations. In an era of goods and financial services economic integration, if one globalization-connected country’s economy experiences a supply shortage or price shock, seemingly distant and unrelated, but economically integrated, countries will feel the effects of these shocks in their own trade and financial sectors, just as they did during the 2008-2009 Financial Crisis.[19] Thus, the pursuit of “freedom from oil” and energy independence reflects a pre-globalization view of the world: also known as Cold War thinking. On the other hand, one country in this world has achieved energy independence and freedom from foreign oil: North Korea. Therefore, perhaps not all hope is lost for the donkeys and elephants who aspire to rally Americans behind their campaign for freedom from foreign oil.
The bias in our terminology towards energy security is so commonplace that it permeates even in the most basic terminology we use to describe oil. For example, in our single supply and demand curve global oil market, there is no such thing as “foreign” oil. The term “foreign” before the word “oil” encourages people to view oil supply and the companies that acquire it from a flawed lens since it would have us implicitly assume that there could be a national role in the pursuit of oil resulting hopefully in a two price and supply structure: foreign and domestic. Nothing could be farther from reality and more impossible. First, there is only one kind of oil: not foreign, not domestic. Second, in an age of globalization, U.S.-based multinational companies are not American anymore since they belong to stockholders who may be from any nation around the world. Their profits, successes, and losses do not belong to the American people.
The oil market operates almost exactly the way a perfectly working market would in an economics textbook. With thousands upon thousands of individual players in the global oil market, we all purchase oil from the same exact global pool regardless of where it is produced. Thus, the market is out of the control of any single government or oil company, even Saudi Aramaco. We are no longer in the Cold War.
Energy Security Populism: Changing the Words We Use
In order to move past the Cold War and into our present reality, we have to start with the following approaches to correcting misinformation on oil,
(1) Pressure our leaders to use the direct truth as the basis for persuasion, which requires using vocabulary that accurately represents what a policy will achieve. Our leaders have to correct flawed views and cease the use of pride-pandering statements that relate to oil markets through direct and concise, even condescending if necessary, language.
(2) Pressure media outlets to stop reporting on company oil investments as zero-sum national gains by removing terminology like “energy security” and “foreign oil” from their vocabulary.
Our leaders should trust the American people to be educated enough to understand that, first, we have no natural right to low oil prices, and second, that we should support oil companies not for energy security, but because it gives profits to companies—especially those in the Middle East—that have used their earnings to raise 4/5 of the world out of poverty over the last twenty years thanks to their investments in producing and supplying fuel to the world’s economy.
Our leaders must encourage Americans to embrace the market place as the proper means to determine who will get what rather than their government through freedom from oil and energy security populism. Our leaders must communicate to the truth to the people, that the market place is more powerful than any single country or investment bank. We are all without paddles in the same ocean, trying to steer the boat together with each nation on board. One nation’s energy problem is another nation’s economic problem. This is the reality from which our leaders should initiate their public discourse on oil.
Works Cited
--- [1] Jimmy Carter. "State of the Union Address 1980." (January 23, 1980),http://www.jimmycarterlibrary.gov/documents/speeches/su80jec.phtml (accessed February 09, 2010).
[2] James Hamilton, “Understanding Crude Oil Prices” Department of Economics, University of California, San Diego (May 22, 2008), 20-25, http://dss.ucsd.edu/~jhamilto/understand _oil.pdf (accessed February 09, 2010).
[3] Jimmy Carter. "State of the Union Address 1980." Jan 23, 1980.http://www.jimmycarterlibrary.gov/documents/speeches/su80jec.phtml (accessed February 09, 2010).
[4] Barack Obama. "Energy Security is National Security." February 28, 2006.http://obamaspeeches.com/054-EnergySecurity-is-National-Security-Governors-Ethanol-Coalition-Obama-Speech.htm (accessed Feb 10, 2010).
[5] Barack Obama. “2004 Democratic National Convention Keynote Address.” Keynote, Democratic National Convention, Fleet Center Boston, http://www.americanrhetoric.com/speeches/convention2004/barackobama2004dnc.htm, July 28, 2004. (accessed Feb 10, 2010).
[6] John McCain. “Remarks on Energy Security and the Economy” Remarks. Arlington Virginia.http://www.procon.org/sourcefiles/McCain20080618.pdf, June 18, 2008 (accessed Feb 10, 2010).
[7] Sarah Palin http://article.nationalreview.com/410205/drill/sarah-palin, October 16, 2009 (accessed February 26, 2009)
[8] Christian Olive, “S. Korea KNOC eyes $6.5bn oil deals,” Financial Times Online, http://www.ft.com/cms/s/0/174ce20c-0590-11df-88ee-00144feabdc0.html January 20, 2010. (accessed January 20, 2009).
[9] Ibid.
[10] Mark Hemingway, “The Immediate Benefit of Offshore Drilling,” National Review Online, CBS News online, July 17, 2008,
http://www.cbsnews.com/stories/2008/07/17/opinion/main4267743.shtml?source=RSSattr=Opinion_426773 (accessed March 2, 2010).
[11] Erica Downs, “China,” Brookings Institute, The Brookings Foreign Policy Studies Energy Security Series (2006): 43, http://www.brookings.edu/~/media/Files/rc/reports/2006/12china/12china.pdf(accessed February 10,2009).
[12] Morgan Downey, Oil 101 (Wooden Table Press LLC, 2009).
[13] U.S. Government, “Interim Report on Crude Oil” Inter Agency Task Force on Commodity Markets, Commodity Futures Trading Commission (2008). 17-29. http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/itfinterimreportoncrudeoil0708.pdf (accessed January 10, 2010).
[14] Morgan Downey, Oil 101 (Wooden Table Press LLC, 2009), 331-340.
[15] Ibid, 331-340.
[16] Ibid., 320-322.
[17] Morgan Downey, Oil 101 (Wooden Table Press LLC, 2009), 331-340.
[18] This author thanks Morgan Downey for explaining why the OTC market cannot exert influence on price discovery.
[19] Kevin Kane, “American Freedom from Oil: A Bipartisan Pipedream," The Oil Drum, December 16, 2009. http://www.theoildrum.com/node/6045 (accessed February 15, 2009).
Author Bio
Kevin Kane is an energy market strategist with the Korean Energy Economic Institute, South Korea. Kevin offers energy firms seven years of cumulative experience leading in business development, international project management, energy market analysis, and Asia-U.S. business and strategic government relations.
Presently working on projects related to green growth and oil markets, Kevin looks forward to utilizing his energy expertise coupled with his diverse international strategic affairs experience to work with companies that wish to penetrate and excel in Asian and North American markets.
Email: KevinPKane@Gmail.com
LinkedIn: http://kr.linkedin.com/in/kevinpkane
Website: Energy-Fanatic.com
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I think one thing that makes this topic so difficult is the fact that we all have different ideas of what the future will look like:
1. Business as usual (BAU) - then foreign trade is what to emphasize
2. BAU, but finances to pay for the oil becomes a problem - Need to emphasize US production
3. Slow decline, less imports, world trade continues to be important - World not too different from today, maybe renewables will save the day
4. Collapse, much less population, world trade declines greatly - Plan to get along with solutions that don't require fossil fuel (for example, simple wind powered factories or home wind mills, similar to those used years ago)
Kevin seems to be coming from a View 3 (with perhaps some of View 1) point of view.
Another useful and informative post, and my thanks to the author.
But his arguments only hold if his assumptions hold.For example,for the time being we here in the US are paying the world price for oil, true.But many countries with lots of oil sell it to thier own consumers at a small freaction of the world price.Of course given the current legal realities of the oil business in the US, it would take some truly earth moving leglisation, probably even a constitutuional amendment, to change this situation EVEN IF we were to discover a Ghawar sized field within our borders; but of course the possibility of that happening approaches zero mathematically.
When things start getting truly out of hand,a good number of his assumptions will probably fail to hold.I don't doubt for instance that if we DID discover a Ghawar, laws would be changed so that gasoline would stay cheap in America-regardless of the world price.
I frequently join threads and comment within the context of the assumptions being used in the thread,and doubtlessly most of the discussion of this article will be based on certain assumptions generally accepted here, some explicitly stated, some only implicitly accepted.
A great many of these assumptions are likely to fail to hold.Yogi sez predictin' is hard.
When I am able to divorce my thinking from my wants and desires, which is not always possible for me and is apparently impossible for the vast majority of the human race, I realize that about the only thing I can be fairly sure of is that things are changeing, and for the worse.
Beyond that, only rough estimates of probabilities of what the future holds are possible.Some people here who are doubtlessly more intelligent and better informed than I am are dead certain a Mad Max collapse in the near term is inevitable.
I can't see the "inevitable" part -at least as it relates to the western and rich part of the world over the next few decades- but I take the possibility seriously and am making arrangements just in case-for the same reasons I pay for fire insurance.
Beware assumptions.
In the first job I ever had where I was expected to solve problems, my super, a guy who never graduated high school, told me that "assumptions" will make an "ass" of "u" and "me".
I don't know who said it first, but I would like to.
Kevin, I think one of the reasons this misinformational framing is so durable, is that it contains a kernal of truth (or at least truthiness). I think most of these populist views can be argued to have a bit of truth -in a very weak sense of truth.
For instance, we realize that in a sufficiently threatening situation, as when say a major war breaks out, that the oil market won't function as a free market. Various players will either use military force or pre-existing institutional ties in an effort to secure oil at below the market clearing price. As an example, say China has invested in country X's oil industry and has long term contract to buy a certain volume of oil at a preagreed price. Even if they must pay a nominal marketclearing price, if they "own" the producing firm, the crisis premium may be repatriated in the form of company profits. Country X may not be able to demand a market clearing price, and be forced to honour its long term contract. Perhaps an implied threat of force will be one reason for not abrogating it's contracts. So I think there is at least in a weak sense some truth to the zero-sum mentality. And emotional non numerate emotional thinking which dominates in the political/populist sphere, will seize on a weak-form argument as something with much greater validity than it deserves.
Similarly a distributed supply chain will be more robust against disruption of one or more suppliers then one with fewer suppliers. Most likely some of these flows are at a price agreed upon in a longterm contract and the supplier may not be free to deliver to the highest bidder. So a country whose traditional suppliers are disrupted will have to scramble to secure new supplies -presumably by bidding for the small amount of oil available on the spot market. While consumer market clearing prices of oil and oil products may be priced in spotmarket prices, in the case where say domestic refiners are getting deliveries at lower longterm contract prices the full price isn't being paid by the importing country as a whole -in this case the refiner is making windfall profits that can be untilized by the local economy. Again, I freely admit that this is a pretty weak argument. But its existance weak or not allows the frame to go unchallenged by all but the most epistemologically rigorous thinker (i.e. an insignificant frcation of the electorate). These few rigorous thinkers can be dismissed as elitists.
Even drill-drill-drill, should on the margin have some small downward impact on the expectations of future supply/demand. So again we have a weakform argument which is likely to win in an emotional political debate.
In any case political actors who act upon a good understanding of the world, which is counterintuitive to the bulk of the electorate often find that their actions, however correct, are career limiting. It is tough to get someone to believe something when success in their choosen career field requires that they appear not to understand it. Getting the public educated about counterintuitive or ideologically uncomfortable beliefs is indeed an extremely tough sell. The "educator" will be deeply unpopular with a large segment of the population, who would rather be swayed by emotional hot button arguments. Unless we can get a significant fraction of the population constantly asking themselves, "how do I know what I think I know? How reliable are my combination of information sources and mental processing methods at ariving at a true picture of the world?", the cause would seem to be hopeless.
Excellent summary. Two complaints.....
1) The American people are not intelligent enough to weigh the nuances of 'foreign oil', etc. This is a population that the majority believes the Bible is literal, heaven and hell, etc. As Dick Cheney said, "Our way of life is not negotiable". Does this sound like a thinking population? I see the rise of Sarah Palin and feel fear. It is easy to imagine a movement of brownshirts....minutemen? Sarah Palin and ilk would lead anything if it meant power.
(Obviously, some are informed....I am talking about what I believe would be a majority unspoken consensus).
2) Of course the American people believe they have the right to low oil prices. They believe it is their God given right. Their entire way of life is based upon low prices and an uninterrupted supply.
This is a society that has given us Survivor, etc, and is consumed with buy buy buy as a sense of accomplishment, well-being, and success. The latest is 3 D tv. Come on.
And as many have remarked, most just don't want to hear about PO and other problems. BAU.
A wake up call is what is needed. It won't come through the media or discourse. It will take an enormous shock.
Thanks for taking the time to write this essay Kevin.
I can agree with the other commentators with regards to assumptions, BAU, collapse, etc. But I do think this essay is very good at describing our present day oil markets and current US political dialogue regarding energy policy. I think this essay would be a great read for any college educated American who gets too much of their information from things like cable news. I would hope that those educated Americans may gain some understanding of our current energy situation and the fallacy of "domestic supply" and "national energy independence". As for the masses of uneducated, bible-thumpers I don't hold out much hope for them to gain any kind of insight, much less budge one inch when it comes to their ideology.
I think we can all agree that Sarah Palin is misinformed and definitely not qualified to lead anything, not even a girl scout troop!
As for the other politicians, the debate rages on... ;)
Have a great weekend everybody!
Roger McGillicuddy
PeakSigns.org
The US will become "energy independent" - just as soon as the oil imports cease.
The oil imports will cease long before the world gets to the long right hand tail of the oil production curve. The number of exporters will dwindle until there are none left. (ELM 1.0)
Even before that, it is a mistake to assume that the US will always be able to outbid other importers. Given the troubles facing our economy, that seems to be a pretty dubious assumption. Thus, even if oil is still available for import, we might be outbid for it. (ELM 2.0)
We don't need to really worry about doing anything to make ourselves "energy independent" - that might be happening sooner than anyone can imagine, and will happen regardless of what we do. What we really need to be worrying about is how to cope with that inevitability. There is a lot to do, and not much time left in which to do it.
"Thus, even if oil is still available for import, we might be outbid for it."
With oil priced in dollars, dollars being the WORLD reserve currency, please explain to me how any other country could put up more dollars than US can.
Some other currency becomes more valued than dollar? Backed by what? WRONG.
All Countries in the whole WORLD decide to switch out the dollar and move to another currency as world reserve all at the same time? Who's currency? WRONG.
And of course the US will just throw up its arms and say "OK, we give. You guys can take over now and we will just get all this 1000 military bases and missile shield stuff out of your way. Oh, by the way you might want to keep an eye on old Izzy-real or things could get real ugly real fast".
I am sorry but I see no possible way for any other scenario other than US dollar dominating throughout collapse.
It is truly amazing to me how difficult it is for us to not just plug in common thinking into our prognosticating. This is exactly what I don't like about JMG.
Eyeores
We are out of dollars, in case you haven't noticed,excepting the ones we conjure out of thin air, but the Chinese, the sand country guys and the Japanese collectively have quite a few dollars either in hand or owed to them on notes coming due more or less every month.
Backed by what? How about oil or coal or natural gas or iron ore or simply a govt not already admitted by honest accountants to be hopelessly overextended.
It's becoming obvious. Most of the people I know are out of dollars, too.
The Fed/Treasury created more currency but it was hoarded. There is still residual dollars - there are almost a trillion in circulation - but the demand for them is increasing.
The easiest way to get dollars is to sell Treasury securities or issue debt in dollars as did Portugal and Spain recently. China and Japan have a lot of Treasuries and the spendthrift US government is issuing (borrowing) more which leads to increased dollar demand. China and Japan will sell Treasuries to gain dollars to buy fuel and the US Treasury will sell Treasuries to gain dollars to allow insurance company executives and share/bond holders to hoard dollars in overseas bank accounts.
This dollar buying is taking place while the Fed is cutting back on dollar issuance. The oil world is becoming more dependent on the dollar 'float'.
Oil prices cannot rise much above the current price level without an economic meltdown. At this and slightly lower price levels the meltdown is taking place but is hard to see. Where the economy breaks is the 'upper bound' for price as Chris Cook suggests.
Since the oil price cannot rise without causing a breakdown, the upper bound fixes the dollar value to each gallon of crude oil. Our dollars are 'backed' by something useful ... rather, they are proxies for something useful.
Since dollars are tokens to access available fuel they will become even harder to find. This shortage will make them even more valuable meaning that producers will eventually prefer dollars against other currencies, then finally accepting only them as payment.
Seigniorage will provide 'income' for America but not too much. Excess currency in circulation would both break the economy as well as threaten to dilute the holdings of the establishment. Any new currency will then be hoarded. At the same time, the scarce dollar will be conservation at a remove. Those who spend to waste will soon be bankrupt or will cease wasting as their cash holdings become even more valuable.
The dollar holdings overseas will become too valuable to waste on so- called 'modern' production which is simply waste for its own sake. At the same time, without 'waste' the export economies will lose the customers for their production. Their dollar reserves will be the only wealth these countries possess as their commerce will be both constrained by both dollar and fuel scarcity.
Without commerce, goods exporting countries' dollar reserves will be held more tightly meaning crude producers will have to cut prices. At the same time, their dollar earnings will become proportionately more valuable.
I am convinced the new hard dollar has already triggered the next deleveraging leg. This took place in the middle of November, last year.
This futures chart superimposes the front month dollar price in gold against the front month Brent crude contract. Prior to the middle of November, the same pundits providing mis- information about oil were predicting the demise of the dollar and ascendancy of gold as a substitute 'money'. When gold broke down the concept was the dollar as related to crude took on the characteristics of a hard currency - that is, was acting in place of gold.
I call this inflection point the 'Ides of November'. Here's a chart comparing crude prices and UK sterling:
Here's another one of the euro:
Both the pound and the euro are going into the hopper. Both areas will either have energy crises or will have to allocate funds away from 'productivity' toward buying dollars so as to buy fuel. If they try to buy oil in local currencies the price will go up and do so rapidly. At some near point crude will not be available in pound sterling or in euros.
At that point there would be a run out of those currencies into dollars.
I suspect the euro is dead right now because of the mishandling of the Greek crisis. The ECB and Germany needed to have bailed out Greece in 2008 when the cost would have been minuscule. Now, it's too late. It is hard to see how any energy will be available for Europe offering euros.
There is no way on God's brownish earth for any other peoples to use US dollars to 'outbid' the US for any good. At an extreme, the US can simply repudiate all dollars held overseas! Saudia and others would refuse to accept these overseas dollars and those dollar holders would be stuck with worthless paper!
In fact, the 'Made in USA' dollars would as a consequence become even MORE valuable and desired by producers. The Treasury can simply SUGGEST that it will repudiate and 'Eurodollars' (dollars held overseas) will be discounted. The Treasury can pauperize the Chinese and reduce them to an 18th century economy by repudiating China's dollar reserve holdings. It does not have to fire a shot.
Producer complaints about the quality of payments received was a large factor in the 1973 oil embargo. Middle eastern producers were trading Bretton Woods dollars for gold and were annoyed when Nixon closed the gold window in August of 1971. The Saudis did not care or understand the reasonable concept that one can have either valuable COMMERCE or valuable MONEY but never BOTH ... preferring useless gold instead of truly valuable commerce.
In my opinion, that is the sea change that has taken place the end of last year; the shift in the world's economy from promoting valuable commerce - which cannot be supported by expensive oil - or hoarding valuable money. All the world will soon be buying and selling money in order to gain dollars. This has happened before; in the early 1930's the European powers and the US were engaged in buying and selling currencies in order to gain gold. There was little other business; merchantilism was ascendant along with protectionism. Commerce was stifled. Until the world's nations disconnected their economies from gold - threw off the 'golden fetters' - and broke currency/gold pegs - the Great Depression intensified.
Starting now, there is no way to break the dollar/crude peg. If someone on the Oil Drum can think of a way, I'd like to hear it!
The only way I can think of is for the world's economies to 'go off oil'. That means the US must cut oil consumption to about 1/3d of current so that it gains spare capacity which it can hold in reserve. The alternative is for the four new Saudi Arabias to step up and dump their production onto the market to crush prices and make commerce profitable, again.
If the world cannot go off oil, the dollar peg will discount into oblivion all debt and credit.
Steve,
I've been following your recent posts and find the idea of a dollar/crude peg intriguing but I'm not sure I understand it. What is the mechanism for attaching the two?
It is well established that high crude prices cause recessions so its reasonable that there is a ceiling to crude prices. How is this fact sufficient to attach a fixed value to crude? Or is it that the Saudis have decided they want a fixed dollar price for their crude? In which case this relationship lasts only as long as they want it to.
Thanks.
Kevin
As we get down to the last few oil exporters left, and the amount of exports trickling, don't be surprised if countries like China procure their oil through long-term, nation-to-nation contracts, paid for by a direct exchange of other goods that the importing nation produces and the exporting nation needs. The open, dollar-denominated market might simply be bypassed altogether.
Consider: You are holding the last can of gasoline in the world. Two people offer to buy it from you. One offers a fistfull of dollars, the other several sacks of grain. With whom are you going to conclude the deal?
(And don't tell me that the guy will just pull out a gun, shoot you, and take it. What will actually happen is that you'll hold the gas can up as a shield with a small fire going underneath, guaranteeing that shooting you will result in gas spliled on the ground and exploding, and thus of no good to anyone. That is all militaries are good for when it comes to oil: denying it to everyone. Oil infrastructure is fragile and does not survive military interventions or the inevitable insurgencies that follow in their wake.)
@ Steve
Yours is an interesting argument. I have a few observations, though.
My first point is that the vast bulk of dollars in existence came about through the creation of interest-bearing credit backed by US land/property.
Since an enormous - and understated (through 'mark to fantasy' and 'extend and pretend') - number of these loans are part or non-performing there is a continuing need for credit transfusion (QE) into the system to enable interest payment obligations on deposits to be met.
Now you say in relation to QE that
The Fed/Treasury created more currency but it was hoarded.
My take is that there is no hoarding go on. It is rather the case that a huge and increasing (with unemployment) part of the population is no longer creditworthy, and the rump who are creditworthy are choosing to deleverage, and having done that, to save rather than spend.
It is only systemic structural reform - where I advocate variations on a debt equity swap - which can solve this systemic solvency problem, I think.
Secondly, you say
Oil prices cannot rise much above the current price level without an economic meltdown.
That is only true if oil prices hold their dollar value - in particular against a pegged Yuan, and I think that is where your argument falls down.
This dollar buying is taking place while the Fed is cutting back on dollar issuance. The oil world is becoming more dependent on the dollar 'float'.
It is not necessary to own 'float' dollars created by the Fed or dollar clearing banks because one may price transactions by reference to dollars and settle purchases with something else.
By way of example, I have been informally advising the Ecuadorean central bank in respect of development of a fascinating current initiative whereby VAT-registered businesses may discount VAT invoices directly with the central bank and thereby access credit without using private banks as credit intermediaries. The effect is that businesses will be settling credit obligations/invoices with other credit obligations/invoices - intermediated by the central bank - and doing so not FOR 'fiat' dollars but BY REFERENCE TO dollars as a unit of measure or value standard. This suits the government, by weaning them off dependency on the Federal Reserve, but also enables businesses in this 'dollarised' country to continue to price against dollars as they currently prefer.
The third point is that oil is a relatively small, albeit growing component of UK and Euroland consumption, and the effect of crude oil price rises is massively diluted or cushioned by the fact that (in the UK at least) oil products include a tax burden in excess of 85%. So even a massive rise in oil prices doesn't affect gasoline prices in the way it does in the US.
But I think that you are under a particular (and extremely common) misconception when you say this
At an extreme, the US can simply repudiate all dollars held overseas! Saudia and others would refuse to accept these overseas dollars and those dollar holders would be stuck with worthless paper!
As Henry Liu points out Dollars are credit instruments, not debt instruments like T Bills. The US could repudiate T Bills or bonds by defaulting on them, but cannot default on a fiat dollar bill or account balance.
What the US could do - which is what you are essentially implying - is impose currency and capital controls to avoid a meltdown in its currency, as Malaysia successfully did under Mahathir.
Starting now, there is no way to break the dollar/crude peg.
In my view the crude/dollar peg is made possible by relatively stable supply/demand; some spare capacity; but most of all by what are essentially 'open market operations' by the Saudis, probably, and by US use of strategic reserves, possibly. ie when the price nears the cap, forward sales and if necessary, physical deliveries are made, while near the floor, the 'Oil Bank' buys back forward sales, and if necessary, physical oil.
But this is an essentially unstable equilibrium and vulnerable to shocks because it is limited by physical capacity to deliver on the one hand, and storage capacity on the other.
Finally, the key point is that the Saudis may be happy with a 'floor' of $70 at the current purchasing power of the dollar, but that does not mean that they would be happy if (say) the Chinese decoupled the Yuan and all their imports and services from China suddenly started costing a lot more.
First of all, I would like to point out that your observation of the upperbound relationship between the 'collapse rent' was very astute. Coupled to what is taking place in refining which looks to being stranded by the current price - causing refineries to be closed or sold - the current price is probably the upper bound.
We've had this conversation before. I think the combination of Saudi activity and the approaching upper bound are central to maintaining the peg.
To answer welaka's question - hardness is the point where a currency shifts from being a flow to being a stock. To a large degree, it's a matter of perception. Flows are infinite and dynamic while stocks are not. To gain stock in a finite system, someone who possesses some must be convinced to give it up.
To those here on TOD it is without question that oil in total is finite, it is a stock. Yet, to most Americans, the idea is there is the flow of an endless supply, needing only the application of endless dollars to put it to waste. I look at this as one of those assumptions or truisms that are repeated without thought but do not align with observable reality. If the public perception is shifting to perceive the finiteness of crude and other resources, why not the accompanying perception ipso facto that dollars are finite as well?
As Mac pointed out, there are indeed no dollars readily available to ordinary people, not even to ordinary business! It isn't hard to pinpoint a dollar shortage on the ground that is putting millions out of work and removing the commerce in a perverse and amplifying feedback loop. Users only have to perceive that dollars are scarce ... then to act accordingly.
Okay, where's the money? (See below.)
It would fall down if the yuan traded internationally rather than in Argentina, Belarus and a handful of other countries and only for Chinese goods. Since the yuan doesn't trade, my argument doesn't fall down, either.
The Chinese are too late to float the yuan. Since there is no international market for the yuan, what is it worth? What is it supposed to be worth?
On the other hand, the only trade in all of finance that matters is dollar/crude.
Repudiating a currency is no different from freezing currency assets. It's a administrative or mechanical process rather than the function of ordinary finance. The dollar's final value is only gained here in the USA. What would China do if its dollar assets were frozen? Smuggle dollars into California on cigarette boats?
A (smart, hard- headed) president could freeze dollar assets in a list of countries by executive order. Doing so would repatriate two trillion cash dollars instantly. So ... don't be surprised if it happens ...
Let me get this straight: you are creating - for and with the Ecuadorian central bank - a synthetic short- dollar position ... that is pegged to (against) available Ecuadollars? I understand Goldman- Sachs has a job for you!
This relates to WNC Observer's remark about bilateral agreements or direct exchanges taking the place of trade mediated in dollars or other currencies.
Absent any currency value or having insufficient currency available, such direct exchanges make sense - oil for food or for military hardware, for instance. What will the effect of a valuable dollar have on such deals? It's hard to say. (But, I've been telling people for months on every blog that I comment on to exit all short- dollar trades.) :)
Oil is a platform, not simply a fuel. It is the cars, the roads the cars run over and destinations connected by the roads. All of it represents a cost - some taxed heavily, some not. Input cost effects the entire platform. A user might be able to afford fuel, but not afford the jet ski or vacation home or lawn mower or dinners out or the businesses that make and service these things.
Increasing input costs in a high- tax environment results in the tax revenue being reduced to the government. It borrows more and the result is a debt compounding spiral. It's a trap, too. Raising (fuel) taxes also reduces revenue.
The China/yuan issue requires a lot more space than is available for a comment. I think the 'rising yuan' argument is based on assumptions, which always tend to be wrong. The assumption is the Chinese dollar holding is something other than what it is; a hoard of dollars. (This undercuts your first argument that there is no dollar hoarding, btw :) Since it's a hoard that doens't belong to a US citizen and isn't in a tax haven, the US government feels entitled to it since it isn't in circulation. This explains the Obama/Krugman mewing about tariffs and exchange rates.
This indicates to me how dumb Obama and Krugman are because the Saudis are repatriating dollars to us instead of the Chinese doing so. Since China's fuel consumption is rising - priced in dollars - the Saudi repatriation conduit is more efficient than the Chinese' efforts.
Whether this hoard causes China's goods costs to rise or fall is hard to tell right now. China has a lot of problems - incipient domestic inflation, a property bubble inflated by government self- dealing and corruption at all levels, accelerated energy consumption and a fractious population. Any of these or all together will have some effect on what comes out of China. I think China's exports will shrink dramatically so exports will be subsidized. If China inflates, it's wage advantage will shrink. If China revalues upward (how? why?) other low- cost producers will take China's place until inflation removes their wage advantages in turn.
What I try to do is avoid assumptions and make sense of what people observably do. For example, the Fed has 'printed' a trillion dollars yet nobody has any of it, why? The answer is that somebody must be hoarding it. Why is this happening? Isn't the dollar worth less all the time? If so, why would people bother to hoard it?
Why would the Fed lend cash or Treasury securities under non- recourse swap or repurchase agreements? Don't they expect to be repaid? Why would the Fed do this when the immediate crisis is past? Is the Fed supporting banks or is it supporting individual bankers?
What is the composition of bank reserves? Is it cash or is it bank IOU's? If it is IOU's, where is all that cash? If the cash is in the banking system, why are so many banks technically insolvent and failing including the country's largest banks?
Why are interest rates going up when there is no sign of inflation? Is the economy getting better or is there another reason? Why are Eurozone members selling the euro? How about sterling? Is it because there are problems with those currencies or is it because there is a more desireable alternative?
What about all this real estate- related non- solvency? Who is getting the bailout cash, the homeowners? No, it's the banks. Same with healthcare; who is getting the money, the patients? No, it's the insurance companies. The patients are conduits. What sbout the latest plan to support homeowners who are underwater? Does it really support them? No, it supports the banks - the bondholders who lent money to the banks.
Why doesn't oil go up to $90 or $100 a barrel? Why does the stock market decline after the crude market fails to break to higher levels? Wouldn't a cheaper dollar suggest that oil prices would go into orbit? What else can be used to buy oil? Why did the euro get 'invented' in the first place? Did it have something to do with the Arab Oil Embargo?
If you start asking these kinds of questions the assumptions fall by the wayside.
That's essentially correct. Money is governed by an Equation of Exchange which can be written:
M x V = P x Q
Where M is the total amount of money in circulation; V is the velocity of money, that is the average frequency with which a unit of money is spent; P is the price level; and Q is the quantity of goods and services sold.
What happened in the current US downturn was that, while the government increased M, the money supply; the velocity V went down because the banks refused to lend the new money out. As a result, it had no effect on Q, and the whole point of the exercise was to increase Q.
It was the banks refusing to lend the money and the people refusing to borrow it that created the problem. Money isn't much use to anybody if nobody spends it.
As an aside, I'll mention that in Canada that didn't happen. None of the banks went bankrupt, they continued to lend money, and when the government increased the money supply, the people rushed out to spend it. The Canadian economy has now recovered and is undergoing a rapid expansion.
@Rocky
I think that the conventional theory underlying M x V = P x Q is entirely misconceived - and that is no criticism of you but of the assumptions that underpin Keynesian and monetary economics alike.
In my analysis, money is not a debt instrument, but rather a credit instrument, and you will find economists like Randy Wray whose 'Modern Monetary Theory' is essentially based upon the same premise. Karl Denninger had a good post along the same lines today.
On Deficits and Debt-Financed Government
The reality of our monetary system is that most (>97%) money is created as interest-bearing credit by credit intermediaries aka private banks, and the rest is notes and coin (plus QE). Over two thirds of this money was privately created as credit to purchase existing real property, and thereby inflated land prices to bubble levels.
But the point is that this credit=money is for the most part tied up in legal claims over land, and while equity may have been released and spent, this credit is now static - it is not going anywhere.
Well actually, it is. The inability of occupiers to meet debt obligations means that the money that banks have to pay to depositors must come from somewhere. Since the private sector is not funding this, the public sector must - or we get Defaults and Depression. So all of this QE just acts as a transfusion to replace the haemorrhage from 'extend and pretend' secured loans which are 'marked to fantasy' by the banks.
The depositors in turn who are being bailed out here are mainly wholesale investors (ie the 10% of the population to whom the other 90% are in debt). They are neither trickling it down by spending it nor are they lending it shadow banking style. Instead they are pumping up the existing bubble in financial assets.
The fact is, IMHO, that only a relatively small part of bank credit=money actually circulates at all, and in fact no deposits are necessary for the circulation of credit. The evidence for this is the existence of the Swiss WIR 'credit clearing union', and also the Ecuadorean credit clearing system under development, where IOUs issued by businesses are simply discounted by the Central Bank in the same way that bills of exchange used to be routinely discounted before modern banking came along.
While asset price inflation is a monetary phenomenon, retail price inflation is IMHO almost entirely a fiscal phenomenon. In other words, there are two entirely separate circulations: in the financial economy (Hudson's 'FIRE' economy) and the real world economy, and there is a dysfunctional fiscal mechanism for bridging the two.
If people have purchasing power - which they do with decent wages, which have fallen relative to returns to capital these last 30 years - then they don't need to borrow.
I cannot off-hand recall a case of retail price inflation caused by poor monetary policy, as opposed to inept fiscal policy; unsustainable obligations in foreign currency; or just plain disastrous government, such as in Zimbabwe - where insane land policies destroyed the agricultural production which is the basis of purchasing power in their economy.
I think that the assumptions underpinning conventional economics are purely ideological, and attribute value to something which is actually its diametric opposite. It's not surprising therefore that the relationship of conventional economics with reality is minimal, and the mathematical structures built upon these assumptions just castles in the air.
The equation of state M x V = P x Q considerably preceeds Keynes and is pretty basic to monetary theory, conventional or otherwise. It is not particularily controversial and all the disagreements between different economic schools circulate around which of its factors depends on which other ones. Other than that, it's Economics 101.
I was just explaining what went wrong with the stimulus program, I wasn't addressing why it went wrong.
Mainly, I found it significant that it went wrong in the United States but went right in Canada. Canada and the US have been running quite different fiscal and monetary policies in recent years.
Circumstances have certainly changed since last October:
This indicates how fast the times are a' changing. The balance point on the funds teeter- tooter has been shifted in a few months. Now the dollar is deflated and the risk has shifted away from the dollar toward other currencies and derivatives which are the other forms of 'money'. Market conditions are drifting back to where they were in early 2008 where derivatives' risks are unsupportable even by the expansion of derivative balance sheets.
The down side is that Americans would also be stuck holding worthless paper. Saudi Arabia and the other oil producers would announce that they would only accept payment in Euros; Europe, China, and India would say, "Sure we can pay in Euros", and Americans would be stuck holding non-convertible dollars about as useful in international trade as Cuban pesos.
I find it bizarre that Americans would think the oil exporters would continue to accept dollars for oil if the US made its currency non-convertible. No they wouldn't. They would switch to demanding another currency in an instant. The US would somehow have to find enough Euros or Yuan or whatever to finance its oil imports, which would not be easy given its huge trade deficit.
The oil exporters are already very nervous about the American economy and are already lining up alternative deals with other countries. The US economy is very much at risk of financial collapse given its huge trade and budget deficits.
eeyore:
Nations cannot just keep running trade deficits forever. Sooner or later, something does happen to right the imbalance. In the long run, the US is going to have to figure out how to pay for its imports with exports that others want to buy - or to cut its imports down to whatever our meagre exports are able to buy for us. As long as our labor costs are way above the global mean, our ability to export more is going to be quite limited. We can export some basic commodities - timber, grains & soybeans, coal - like any third world nation, and just about as conducive to national prosperity. We can export a few high-tech goodies and gizmos, which is a lot better, but we are getting more and more competition all the time - especially as we "educate" generation after generation of dummies.
What most Americans haven't been told and don't understand is that we are in the midst of a huge megatrend: the convergence of global wages to a global mean. This is a necessary and inevitable consequence of globalization. Only nations that make substantial and effective investments in their human capital (i.e., education) can possibly hope to command premium wages over the global mean in the long run. The US educational system is a failure and a disgrace, a fact that is only partially hidden by our temporarilly successful importation of minds educated elsewhere. This policy has pretty much run its course, increasing numbers of foreign students and knowledge workers are finding better opportunities back home. It won't take that many years before the US only has its home-grown dummies left to run its economy.
If you think a US economy where the average worker - the lucky few who even HAVE a job, that is - is only making a couple dollars an hour (in real terms, not inflated, obfuscated funny money), if you think THAT US economy is one that is going to be strong and powerful and prosperous enough to outbid the rest of the world for the precious few oil exports still available: well, I've just got to say that I don't think so.
The world is changing. The US is facing huge problems, and its political and business leadership are not facing up to them effectively, if at all. Decline - both relative and absolute - would have been inevitable for the US even without peak oil. Peak oil is just the icing on the cake. It assures that the US is not going to be able to have things its own way when oil depletion really becomes earnest.
This is a very good summary of my own thinking. Of course the US does manage to give a small percentage a good education. I'm striving to get my kids well educated. I have also told them that their best prospects would be through emigration to one of the countries that has got it right. My own favorites are any one of the Scandinavian countries. So I think we are still educating at least a few non dummies, but that we risk losing even these to a brain drain.
Yes, if a kid is smart, and has smart parents, and they are able to get them into one of the few really good schools, then they will usually be able to compete with other world-class intellects. It is when you look at the performance of the broad middle segment of our students (the ones that will actually be doing most of the work in tomorrow's economy), and compare them with most other OECD countries, where the real failure of the US system becomes evident.
Part of it is this strange anti-intellectualism which is deeply imbedded in the American culture. I've never understood it, but it has been there for a very long time. It probably had to do this being a bountiful and empty continent (so mostly just ambition plus brawn and few brains required), and then after WWII the US being just about the only industrialized nation still left standing. In other words, we've had it pretty easy, brain power hasn't been all that necessary, so it hasn't been all that highly valued. The lowest-common-denominator mass-market economy and popular culture don't help, either. Being dummies has been our cultural ideal. We'll see how that works out against an entire world striving to be better than us.
That's completely correct. The US ranks below average in the list of countries in average educational achievement. Here's a comparison as published by the National Center for Education Statistics
Note that the US ranks well behind Korea and is below average in all categories. If you think there is something magical about Korea, note that Finland is #1 in all categories, and Canada, Australia, and New Zealand are all in the top countries in all categories.
Also, note where the various Chinese jurisdictions rank in the lists, and realize there are about 1.4 billion Chinese who are now getting a better education than most Americans.
I fail to see how the US expects to compete against other countries for high-paying jobs if its high-school graduates don't have the education to read the factory manuals and do the basic math their jobs will require in the 21st century. If they can't, they will be competing against workers in countries with even worse educational systems, and there are getting to be fewer and fewer of those every year.
The basic scientific illiteracy and innumeracy of the American public becomes obvious reading many of these comments about monetary and trade theory. They verge on being complete nonsense. Most Americans don't have a clue how money or trade really work. Unfortunately, neither do many of the politicians.
RockyMtn:
Yes, you are exactly right. It is all so very sad, because it doesn't have to be. We don't actually even have to be at the very top of the list, just in the top tier, but we can't even manage that. The great irony is that it isn't as if we haven't dedicated any resources toward educating our people. Far from it, we spend more per capita than almost anyone. What we don't do, however, is spend it well. We might just as well dig a hole, shovel that money in, pour on the gasoline, and toss in a match. Maybe you could at least teach the kids how fire works.
To be fair, the US has a very diverse population, and if you dig into it you'll find that many of the nations at the top of the list have a much more homogeneous population. That does matter, but not so overwhelmingly so as to constitute a completely acceptable excuse. It just means that we have to try harder and think better about how to compensate.
Yes, but Canada is arguably more diverse than the US and ranks significantly higher on the educational results ratings.
According to this OECD paper OECD education systems leave many immigrant children floundering, report shows:
Both Canada and Australia have much higher immigration rates than the US, and also have much higher educational results as well. So, it's the amount of effort that countries put into educating minority groups that is important, not the existence of minority groups.
An interesting perspective - some observations:
1. The narrative jumps around a bit, so it is a tad hard to follow.
2. ...we should support oil companies not for energy security, but because it gives profits to companies—especially those in the Middle East—that have used their earnings to raise 4/5 of the world out of poverty over the last twenty years thanks to their investments in producing and supplying fuel to the world’s economy. I found this to be a rather odd statement. The oil companies exist for their own profit margin, and if nothing else, could just as easily be compared to drug pushers. The decline will see large portions of the population falling back into poverty, perhaps worse overall than before.
3.Our leaders must encourage Americans to embrace the market place as the proper means to determine who will get what rather than their government. I expect the market to be wrenched again in the future and likely in a cyclical fashion. I would instead offer that adoption of the Oil Depletion Protocol would be a far better remedy than the wild west of ELP, IEA false statements, and market panic.
A grand top post, thanks to the author.
The harping on energy independence by US populist politicians (that is all of them, as neatly illustrated) is practically obligatory for anyone exposed to the public in any way. One might also point to the fact that the meme is never seen as tongue-in-cheek, as might be the case for dealing with illegal immigrants, stopping building in East Jerusalem, offering better health care to the poor, exploring space, being first in patents, etc. Note also that other OECD non-producing countries (or mere small producers) don’t hold that discourse and only nibble around the edges with feeble greenery but generally keep a low profile on the issue and usually prefer to avoid it altogether. (Waiting for the proverbial S to H the F.)
The US has, today, to hark back to its past, and re-affirm it in any way possible. It used to be energy independent, and first, for that reason, in many ways; it now has to refer pallidly and automatically to past glory as a continuing right, some divine entitlement, or possible state of affairs that might be conjured up thru sheer will power. Not. As we all know.
Decaying empires tend to cling to fantasy over fact, persevere in fruitless, expensive, debilitating war-mongering, empty displays of power, face to face bullying (that still works) and to make *no* plans for the future.
Too big to fail becomes muddled with The harder they fall ...
An interesting post until this ill-informed assertion:
"especially those [oil companies] (...) that have used their earnings to raise 4/5 of the world out of poverty over the last twenty years thanks to their investments in producing and supplying fuel to the world’s economy."
Did Ms Palin contribute this sentence?
Even if 4/5ths of the world's population had been raised out of poverty over the last twenty years, which is not even remotely true, it can not be attributed solely to oil production, if it can be attributed to oil production at all.
This statement is as well informed and as intelligent as those which contend that oil prices in the US are high because of restrictions on drilling in national parks.
C-
Yes, this sentence makes no sense at all. Usurping all the hardwork behind poverty alleviation (which is no where close to 4/5ths) to Saudi royals and others who made all that money purely out of luck.
Thank for your comment "Troll for oil."
However, if you would read a little more, you would learn that China and India account for most of that 4/5, and they were able to due so because of low oil prices. Thus, I am correct.
Are we talking about the US?? They won't be leaders for long. Ron Paul tried this approach. Very limited results.
If anyone is waiting for U.S. politicians to speak the truth you would better off believing that everything in the bible should be taking literally. In my long(almost over) life when a politician opens his/her mouth it is to misinform or misdirect.
hotrod
I don't think Ron Paul was saying anything comparable to "direct truth". Ideology is by definition a distortion of reality.
Ron Paul has only said a few things things that "we" would consider 'true'. 'Round these parts the 'truth' of an Austrian Economic vision that as a resource becomes 'harder' to get, increasing price will increase production. (and in Ron-land if it doesn't happen - blame the government) I believe that Mr. Paul understands that oil is limited and that the US economy will be hurt by a lack of cheap oil - my memory is he's said similar things. Yet he'll go by default to a Libertarian POV that what stops production is not physical reality but Government.
Dr. Congressman Paul ia closer to some 'truths' that the US is overspending and overextended wrt the military. This position avoids the 'truth' that the military helps keep the US Dollar #1 internationally. At some point this will flip from the present position and an expression like "deficits don't matter" to a 30 Xanatos pileup.
America is a society in secular decline. Although I'm an American, I acknowledge that it's going to become increasingly irrelevant to even talk about America as though it means anything. We have 5% of the world's population and do not control the price of oil - which, for all intents and purposes, means we are powerless. The military can only do so much - it can't invade Latin America, India, and China just to stop them from using oil. Right now we are playing our last card - military might - in a desperate move to secure oil for the major oil companies (not even, mind you, to secure oil for the American population to use).
The entire infrastructure of our cities is based upon cheap oil. Take away cheap oil and you no longer have a way for airlines to be profitable, or for people to afford long commutes from bedroom suburban developments to their places of work. Moreover, any attempt to transition - such as puny electric cars or mass transit or bikes - will be seen by American alpha males and rednecks as a huge step backward, and who knows what kind of havoc that will play with our culture.
Our government is trying, simultaneously, to pay for military might, entitlements for an aging population, and bailouts for insolvent financial institutions. I don't even think "guns or butter" even comes close to describing the choices we face in the future after this insanity is over.
The United States as a political entity won't exist forever, and I suspect that it's going to break up sometime within the next 50 years as new autonomous regions develop. Which would give it a lifespan of 300 or so years which certainly isn't bad, but is decidedly average if you look at the arc of human history.
In the long run, on a cooked planet withoit oil, North America may just be the place to be. We have large amounts of land including arable land, the Great Lakes and many large river systems. We still have a considerable amount of coal and natural gas. We have the deserts of the Southwest for solar energy, and plains and a long shoreline for wind - although I admit the capital might never be there to develop these technologies on a large scale. Moreover, a large amount of land in present day Canada might open up to settlement should the globe really start to warm up.
Nevertheless, the timeframe for the ultimate renewal of the North American continent from the ashes of the present day political and economic system is so far off as to be meaningless to anybody reading this.
'Our government is trying, simultaneously, to pay for military might, entitlements for an aging population, and bailouts for insolvent financial institutions.'
You need to include health care for everyone, student loans that will never be paid back, and keeping car companies afloat.
hotrod
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Oil prices derive first from physical supply and demand fundamentals.
This is of course true, but I am afraid that I must disagree with much of Mr Kane's Oil 101 analysis concerning the relationship between the physical market, exchange trading, and the OTC markets.
My views published on the Oil Drum on the subject are here
The Market is the Manipulation
and
Saudi Arabia and the Oil Bank
But I don't think Mr Kane's - in my view - erroneous analysis of the oil market mechanism affects the points 1 to 6 he makes that much because the financial oil markets are about securing price, while the physical and forward oil markets are about securing supply, which neither hedge funds (speculators) nor ETFs (hedging inflation) are in any position to do, because they are incapable of making or taking delivery on any oil market, on or off exchange.
WTI is almost entirely irrelevant these days, and is the tail on the BFOE oil market dog.
Because of the inability of funds to secure supply (which is not the case in other markets like metals) then the pervasive myth that speculators and investment banks are principally responsible for high oil prices is almost totally unfounded: these players ARE responsible for excessive volatility on futures markets, however.
The culprits for high oil prices are oil producers - who are the principal beneficiaries - and their unwitting accomplices are the ETF funds hedging inflation whose interest-free loans - intermediated through the very easily and routinely manipulated Brent/BFOE complex (which sets the global oil price) by investment banks - enables the producers to keep the oil price supported.
This price is, I believe, held in unstable equilibrium by financial oil leasing - which is analogous to open market operations by a Central Bank.
I suspect that the US and Saudi Arabia have tacitly agreed an 'upper bound' managed peg ($70 to $80/bbl or so) for dollars priced in oil, which has been maintained for more than six months, and accounts for:
(a) the remarkably uneventful recent OPEC meetings;
(b) the 'perfect' oil price we hear about from the Saudis etc; and
(c) Saudi Arabia abandoning the WTI contract in favour of ASCI because (I guess) they were losing too much in friction costs.
The key determinant of the forward curve of the oil price is in my view - in the absence of backwardation - the dollar yield curve.
You will see in my citations a paper written by James Hamilton. It involves econometric modeling. No reliable evidence exists in the world that the futures or OTC markets have adversely affected or distorted oil prices.
You can find on my blog a presentation on oil prices that includes a simple line chart showing that futures contracts where not pushing up prices in 2008.
What you say is all well & true under BAU.
But in times of crisis all this can be thrown out of the window. We say after 9/11 how quickly people were willing to give up on ideas and ideals cherished for centuries in the hope of feeling a little safer.
I'm sure that almost all countries will compel domestic oil producers from first selling in the domestic market when the supplies run thin. We will get some form of rationing and possibly price controls. So it is useful to have domestic sources of energy.
But unlike some others here who assume OPEC will continue to sell oil very cheaply to domestic consumers even if they can't export are wrong. OPEC will curb consumption and export as much as possible since that is in most cases only way to get foreign currency which they need to import food.
This is gobbledegook as far as I can tell. I think our author needs to get the language a bit clearer, rather than trying to sound learned and academic.
I will do better to simplify my language. You are 100% correct.
Mr Kane neglected to mention that "Energy Independence" started with Nixon.
'Nixon also launched Project Independence, declaring, "Let this be our national goal: At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving." '
http://reason.com/archives/2004/07/21/energy-independence-the-ever-r
Yes, every President since Nixon has had "Energy Indepence" as one of their stated goals.
The fact that they have all failed miserably at achieving it should have told them something about its feasiblity. For Nixon, failure came as a complete shock, but for his successors it should not have been so much of a surprise.
It is not important to me who it started with, although you are correct.
I agree with Mr Kane about the absurdity of energy independence. If being energy independent is so important why not apply that principle to manufacturing and other areas of the economy. Where were these politicians and pundits when we unilaterally created one way free trade in things like automobiles, textiles, home appliances, heavy machinery, banking, internet services, etc. We dropped trade barriers but the countries we import from keep their barriers up.
Many of the comments so far imply that somehow if the American workforce would just accept lower wages then everybody would be better off. Somehow dropping our standard of living to that of Asian peasants would be good for everyone. It may be good for Mr Kane's desire to export more goods from Asia into North America but in the long run the importation of goods means the exportation of jobs.
That is the Pauper-Labor argument and its flawed. The basis for trade is not cheaper goods, but "comparative advantage," although due to labor-inflexibility, their can be welfare costs in the short term. Here is the solution, Americans have to read and increase our aggregate higher skill tradable jobs.
This is complete nonsense, Americans would have to live on $1.50 a day to be comparable to Bangladeshi factory workers. Higher skill tradeable jobs? Last I looked the unemployment rate for young people is especially high, that includes those just out of college. Free trade has been a complete failure, comparative advantage does not apply unless there is full employment. Throw up tariffs and put the Koreans and Chinese out of business.
If you would read some basic Borders Bookstore economics, you would learn that labor productivity is what is important, not the wage itself. If someone India can make one cellphone an hour at a dollar wage per hour, and an American can make five cellphones per hour at 5 dollars per hour, both are equally as competitive in the market place.
Free trade is smart! If Americans are loosing jobs in a global market place, it is because their technological change and labor productivity is not increasing fast enough, not because of free trade.
So lets go with your terrible idea to impose tariffs. Other countries will impose them in response to your bad idea. So imagine I am an American business owner. Because you raised tariffs on foreign goods, the foreign countries will raise tariffs as well, and so I, the American exporter, will be punished. I will sell less goods to foreign countries and so I either have to cut wages or fire some employees, unless the government wants to impose rules on my wages and further ruin American industry. So what am I to do? I will move my company overseas because that is my free right: to live where I please.
It is more complicated than you think it is Mr. Floridian.
The energy independence rhetoric is indeed oversimplified for populist reasons, but I don't think it is as big a problem as this article implies. Being a realist, it seems to me that the energy independence rhetoric has some useful results (probably more useful than trying to teach everyone trade economics...if it requires quantitative thinking most Americans seem to ignore it). Energy sources that America can supply itself are likely to be around much longer than cheap oil is going to be available. The only workable path to supplying most of our own energy is gradual electrification of transportation which is a step in the right direction. Although trade has many advantages, I don't trust the stability of the global trade system enough to want large fractions of my food or energy to be shipped in from the other side of the planet.
So I generally agree that the politicians sell a highly oversimplified populist notion of energy independence, but it seems like the right thing to say given the audience and the effect that is desired. The notion that politicians should always tell their constituency the full complex truth as they understand it is incredibly naive. I try to figure out from the entirety of what the politician says and does whether they themselves understand or not.
Thank you for your reply. I think its not naive, but disappointing in the American education system. I learned living in Seoul that most people here learn economics in high school as a mandatory class. That's why Chinese and Koreans both embrace free trade, because they read about it.
I think it could be conversely argued that its both naive and condescending to think that people do not have the analytical capacity to understand complex things.
I have an MA in IR theory, and being a realist doesn't mean you by default agree with manipulation as a viable means. Realism would imply that people would agree with a leader if they told them the straight truth and it favored their interests in a zero-sum fashion, because realists assume people are driven by Thomas Hobbes-like selfish interests.
Chinese and Koreans embrace free trade because it benefits them. They don't really even practice it, many of their industries are significantly subsidized. All it does it drag wages to the global mean. Comparative advantage does not work in practice when labor can be done by a monkey or a machine in a country with no regulations.
China doesn't even use a floating currency.
You definitely do not read. Korea's labor costs in the auto industry are higher than they are in Alabama an Georgia. They trade because they embrace competition as a means to innovate. They trade because they are not afraid to face competition even though in some cases in South Korea they have higher wage or higher land costs. They trust in themselves to innovate around competition. Americans like you should have more trust in the ability of Americans to compete.
Read any economics 101 textbook before returning with a comment. Labor costs are not important, but labor productivity is important.
Oh and Korean companies do not receive subsidies, but American farmers do!
There's nothing special about Korean manufacturing, especially in sectors such as automobile manufacturing. I've looked at KIA and it's cheap junk. Much of the equipment moved from former factories was taken overseas. The GDP of the state of Florida is about half of that of South Korea. Yet South Korea has about 3 times as many people. It is simply cheaper to move manufacturing jobs overseas, manufacturing is not difficult.
Korea only appears better educated because they don't allow any immigration.
You present a really convincing and analytical argument. I mean... you can look at a car and derive that it is junk. You should work for Automobile magazine! I wish you the best in your wing-it as you go analyses. lol. How about reading a little?
And as for Canada, Australia, and New Zealand, all of which which allow more immigration than the US - why do they appear to be better educated than either the US or Korea?
Country.......... Immigrant Population
Australia........19.9%
Canada...........18.6%
New Zealand......15.5%
United States....12.8%
I realize that Americans like this "All our problems are caused by immigrants" excuse for their problems, but it gets a little thin when you compare the US to other countries with higher immigration rates.
Look at the immigrant sending countries and the screening done. Australia especially does not let anyone waltz into their country and set up shop. It is not total immigrant population which matters but the type of immigrant let in. Unskilled labor with little social capital drags things down. In the U.S. there's also the issue with counting people born to foreigners as citizens, the U.S. percentage is realistically much higher due to a large number of illegals and their offspring. Look at their test scores, they are one of the reasons the U.S. does so poorly.
Most of the Immigration to the U.S. is chain migration. Australian and New Zealand immigration is dependent upon education and able to have a job that is in demand. They use a point system.
Australia ended its "White Australia" policy in 1973, and now 1/5 of the immigrants are from Indian and China. However, they put them all through the same educational system and achieve the same results.
See: Asia migrants flock to Australia
However, Canada (which ranks higher than Australia in the school ratings) never really had a "White Canada" policy. Since the early 1970's the majority of immigrants have been what are described as "visible minorities", i.e. people who don't look particularly European. The population of Canada is rapidly turning into a "Heinz 57" mixture of people whose ethnic group they can't really figure out.
To quote Multiculturalism in Canada
(The University of Toronto is Canada's biggest university with over 70,000 students, and is considered by many to have the highest academic standards.)
Over half the population of Toronto is now immigrants, mostly from non-European countries, but the authorities just run all their kids through the same school system, and they all come out thinking, acting, and speaking more or less the same.
This is really an exercise in quality control. No matter who goes into the process, they all come out meeting the same standard specifications.
Canada uses a point system, too. Feel free to rate yourself at Skilled workers and professionals: Self-assessment test If you pass, you too could become Canadian immigrant.
And if you fail, there's still hope. Most of Canada's illegal immigrants come from the United States. Just sneak up to the border in the middle of the night and make a run for it. Don't swim, the cold water will kill you.
The "multiculturalism" stuff is some sort of religion of the left. At best it's enjoyable, at worst it's physically dangerous. In a world constrained by limited resources there will be more important matters at hand.
Actually, in Canada it's more than a religion, it's written into the Constitution: "This Charter shall be interpreted in a manner consistent with the preservation and enhancement of the multicultural heritage of Canadians" - Section 27, Canadian Charter of Rights and Freedoms.
Canada is not particularly constrained by limited resources, being as it is the second largest country on Earth, bigger than the US, bigger than Europe, but having few people than California.
Australia is even less densely populated than Canada, so while it hasn't written multiculturalism into its constitution, it does realize that it needs more people to fill up its vast, empty spaces.
And both countries have high-quality school systems, so educating the children of immigrants is just an exercise in running them through the system and producing a high quality product.
According to this article: NO ROOM FOR BIGOTS - How have Canadians managed to make a go of multiculturalism when it's in trouble almost everywhere else?
I don't know about Canada but I'd worry about Australia's food supply. Most of Australia is a desert. How sustainable is modern agriculture with these large fossil fuel inputs? Canadians will be affected by Peak Oil, you are too close to the U.S. not to be. As the U.S. continues to slide, Canada will be dragged down with it as it is dependent upon exports to the U.S.
Population density overall does not matter when you have massive deserts with population centers reliant upon water pumped out of aquifers or distant rivers or mountainous terrain that can never become densely populated. The Southwest of the U.S. is a great example of this.
I'm not sure when that particular section was added to the Canadian Constitution but it's no wonder you've had so many problems with Quebec over the years. I don't think it would be far fetched in the not so distant future for the Quebecois to really mean "Je me souviens" when they say it. Canada is not going to ignore Peak Oil and it's effects because of the indigenous resource deposits.
Both these countries produce huge food surpluses, even in a drought year. It's a matter of having very few people and large amounts of agricultural land. Canada has 33 million people (fewer than California) and is somewhat larger than the entire US. Australia has 21 million people (fewer than Texas) and is somewhat smaller than the US lower 48 states. Only 5% of Canada and 6% of Australia is arable land, but that's a huge area in proportion to their minuscule populations. The rest is underlain by vast, unexplored mineral resources.
Both countries have more fossil fuels than they can use. Canada is the largest supplier of energy to the US and exports more oil and products to the US than it uses itself. Australia is a huge exporter of coal to Asia, and recently signed a $60 billion export deal with China.
Yes, but you have to realize that neither Canada nor Australia locates large population centers away from rivers or agricultural land. The major Canadian cities all sit on major rivers in agricultural areas near the southern border; the major Australian cities all sit on major rivers in agricultural areas near the ocean. There's nothing even vaguely resembling Los Angeles, Las Vegas or Phoenix, major cities in the desert with no major river. If you go into the Australian desert, the biggest city there is Alice Springs, pop. 27,000. The basic principle is - don't build cities where there is no water or food.
Multiculturalism became official policy in Canada in 1971, and was written into the Constitution in 1982. Since then, Quebec separatism has been less of an issue than it was previously. The Quebecois have become more upset about Muslim women wearing veils in public than what English Canadians do.
Australia followed the Canadian lead and adopted multiculturalism in 1973, although I don't think they've written it into their constitution.
No, Peak Oil is going to be a big money-maker for Canada - oil sands, you know.
The average IQ in America is several points lower than the average IQ in China or South Korea. That explains most of the difference in educational performance.
I agree with this assesment. Usually the politician has decided upon a politically possible policy. Then he needs to sell the country that he is the one to implement it. Then he needs to motivate individual citizens to take constructive actions. He chooses a framing for his policy, which is designed as a policy marketting tool and/or as a behavior marketting tool. We may not be able to get John Q Sixpack to giveup his SUV because it is the right thing to do, but we may be able to get him to do it becaause he has been sold the idea that he is starving a terrorist. So the public debate is bogus. But of course the "bogus" debate also constrains the politics. We can't achieve the ideal: expert mandarins determining an optimal strategy, and PR experts plus government decree implementing it.
Regards energy independence: It is inevitable. The oil producers will produce less and will stop exporting.
The argument shouldn't be against energy independence as a political goal. Energy independence is a practical necessity that will be forced upon us by developments in other countries. The argument should be against inadequate policies to prepare for this eventuality.
I might agree with you, but if what you are saying its true, than we have a scary world ahead of us.
I agree Kevin, however there is a possible solution to the energy crisis looming on the horizon with the exhaustion of oil and gas. Liquid Fluoride Thorium Reactors (LFTR) operating at 500º to 900ºc could provide all of the power to replace oil and gas as an energy source, however just the mention of the (N) word shuts off any discussions with most of the organized environmental groups, and the politicians they control. Unlike current Pressurized Water Reactors, (PWR), LFTRs can can go from idle to full power without moving control rods, in fact they don’t even have control rods. They don’t have highly reactive coolants like 300ºc water, or liquid sodium. This makes them much safer needing containment for anti sabotage, and not to contain the reactor melt down products. There are numerous other advantages over the other energy contenders, but the anti-nuc rant shuts down discourse.