All About Oil....
By Perry Hicks and Keith Burton Filed 10/26/07
Editor’s Note: As this report is posted, adjusted for inflation, the futures price for a barrel of oil is just below record levels, with analysts predicting current prices of a barrel of oil to exceed $100. The rapid rise of the price of what the world pays for oil over the last few years and months means more than the increase in cost, but what the higher cost will do to the U.S. economy and the world of politics and business. If you haven’t heard of the phrase “Peak Oil,” you will know it soon. The ramifications are already in effect.
From the vantage point of a business executive in a glass-walled office 60 stories above New York City, the immediate demands of day to day business cannot share space with a concept like Peak Oil. One’s brain simply cannot wrap around it. So, the looming specter of affordable oil being out stripped by demand is pushed to the back of the mind and business goes on as usual.
For the average man or woman, tied to a mortgage, kids and just living day-to-day, the reality of the price of oil is just something in the news. Life is too hectic and to complex to see what is going on. In this report, we will try to help put some perspective into what is happening. In one sense, a look at the forest and not just the trees is needed.
As great an error as it is, willfully disregarding
Peak Oil is understandable. Society’s level of prosperity is
directly linked to the consumption of petroleum- not just because it is
used for heating, manufacturing, and transportation, but also because it
is the raw material for plastics and other synthetics, fertilizers, drugs,
and detergents just to name a few. Modern material life is literally
poured out of a barrel of oil. In every action that has come to represent
modern industrialized life, oil lies at the foundation. Even production of
other raw materials is depended upon the availability of cheap oil.
America’s experience from the 1970s was that oil supply disruptions as little as 5% can lead to recessions and 15% can plunge an economy into depression. Once the peak supply plateau has passed and the downward slope has begun, most experts estimate the decline in global crude oil supply to be about 3% per year. We remind readers of the sharp spike in gasoline prices after hurricane Katrina in 2005.
Shifting away from an oil based economy would mitigate the shortfall in oil supply and provide a soft landing. However, that also would require rethinking everything a society does as would the expectations, as well as the definitions of success, for most outcomes.
For example, food would have to be grown differently and perhaps with far less crop yields per acre. Travel would be dramatically changed, too, perhaps requiring far more time to accomplish. Different materials would have to be found to manufacture new products, or perhaps landfill mining would become an essential function to sustain industry.
Accordingly, such a complete and utter change is too great a task to be considered by individuals, much less executed. What is needed is a clarion call to action on the order of President Kennedy’s Lunar Landing Program. Nothing less than mobilizing the entire nation will even come close to getting the job done.
In regard to taking action a line borrowed from the movie Apollo 13 might best sum up the situation: In the film there came a point where the Lead Flight Director had to remind the Mission Control crew, “Failure is not an option.”
Editor's Note: GCN’s intention is not to suggest that we must make do with less, but instead to alert the reader that there is a distinct possibility that we may be able to do more with what we have.
Unfortunately, leadership has not stepped forward to tell the public the truth, state the vision of what must be done, and make the call to mobilize the nation. Each day is treated just as if it were any other, and business is allowed to go on as if in the future, everything would go on as usual.
This lack of action has not gone unnoticed by world markets and is being felt by all Americans right now.
Peak Oil’s Time Has Come
By definition, Peak Oil is the point where an oil field has reached its maximum pumping capacity and is about to go into decline. The model for predicting it was originally conceived by Royal Dutch Shell Oil geologist, Marion King Hubbert.
The model can be applied to a single oil field, a region, or even the entire planet. In 1974, Hubbert predicted that global Peak Oil would occur in 1995, but decreases in consumption (due to more efficient cars, and increased use of natural gas as well as some new discoveries) ultimately moved the estimated date upward to 2005.)
Some believe the date has been extended to 2010 or even beyond. However, China’s rapidly expanding industrial economy has elevated the global demand for oil to such an extent, the theoretical date is moot: Peak Oil is already upon us.
By 2030 China’s demand for oil alone will have tripled from today’s levels to match current consumptions levels of the United States, and we have not yet factored in India and the “Asian Tiger” economies of South East Asia. Due to factors to be explained later, it is even quite possible China could be the world’s leading consumer of crude oil.
Even if total world supply of crude oil could be sustained, the emergence of these economies are outstripping the availability of oil and there are no known low cost, easy to reach reserves waiting to be exploited.
The rise of these economies will likely mean the peak plateau will either be short, and the plunge downward thereafter very steep, or what new oil finds that can be had (deep water, Arctic, etc) will be very costly oil to extract. In any case, because of the high demand, from whatever its source, oil will become very expensive and increasingly scarce.
Today, we are at the point where a “major find” can be exemplified by one not over dry land, but 270 miles out from shore in the Gulf of Mexico, and over 31 thousand feet below sea level.
Russia has just planted a titanium flag on the North Pole sea floor to claim “territory” beyond the internationally agreed 200 mile limit. The metal Russian flag sits 14 thousand feet below the ice surface.
What follows with the peak output of global crude oil production is a steady decline resulting in spot shortages, ruinous price increases, and even resource wars. Societies will have to remake themselves to meet the new challenges of declining energy supply because as stated previously, prosperity is traditionally directly linked to oil consumption. Sadly, no matter what environmentalists tell you, there are currently no alternatives- not wind, sun, or hydrogen. There are not even enough known deposits of uranium to meet global atomic energy demand.
The earth’s nation states will then find themselves fighting for the dwindling energy resources, struggling to sustain internal control and social order over millions of suffering citizens, and cope with invasion levels of equally suffering illegal migrants, and crumbling financial and industrial systems.
As the effects of Peak Oil begin to be felt, the first cracks form in the monetary system.
Rise and Declining Influence of U.S. Dollar
The impending valuation crisis with the U.S. dollar was actually born of critical flaws in monetary policies established at the close of World War II. At that time, the United States was the most powerful nation on earth having the only intact industrial base, possessed most of the world’s capital, produced most of the world’s oil, had the most powerful military capable of projecting power almost anywhere on the face of the earth, and enjoyed a stable, democratic political system. (Photo Left-Mount Rushmore)
At the close of the war, the U.S. dollar was fixed to gold at $35 per ounce and was the only currency strong enough to finance the massive post war rebuilding required on a global scale. Because of Britain’s post-war weakness, the dollar replaced the British Pound Sterling as the principle medium of global exchange, or reserve currency.
As the victor over both Nazi Germany and Imperial Japan, it was not difficult for the United States to lead the formerly great colonial powers, exhausted by war, to adopt an international monetary management system. This was done in 1944, at Bretton Woods, New Hampshire. The system became known as the Bretton Woods System after the location of the conference that created it.
Bretton Woods pegged the value of national currencies relative to one another (plus or minus one percent) in terms of gold and created the International Monetary Fund (IMF) among other institutions.
The main point of Bretton Woods was to avoid floating currencies economists attributed to further worsening the global depression of the 1930s. Pegging currency to the precious metal followed previous practice of settling international accounts by transferring gold. Bretton Woods also hoped to avoid certain other problems inherent in the previous gold system of monetary exchange.
The critical flaw in Bretton Woods is the problem with fundamental imbalances called the Triffin dilemma, named after the economist, Robert Triffin, who first identified it in 1960.
Once the number of dollars in circulation exceeds the amount of gold backing them, the only remedy is to cut the balance of trade deficits and raise interest rates to attract dollars back into the United States.
Unfortunately, the cure for the reserve currency effectively kills the system itself because the system requires the U.S. maintain liquidity by running a balance of payments deficit. The cure would also put the U.S. economy into a recession.
While the dollar was pegged to gold at $35 per ounce, by the late 1960s, gold on the open market had risen to $40 per ounce and was still rising, effectively making the dollar overvalued.
The U.S. Treasury spent much of the 1960s artificially trying to keep the dollar pegged to gold at $35 per ounce. However, U.S. spending on the Cold War, Vietnam War, and the Space Program, not to mention the War on Poverty, forced the U.S. Treasury into ever increasing deficit spending, and the dollar to be overvalued compared to gold.
This overvaluation gave the U.S. considerable advantage in foreign trade. In a sense, anyone holding dollars did so at a loss. Holding dollars could only be justified within the context of “purchasing” global stability via U.S. military might.
However, those nations unhappy with U.S. interventions, such as the war in Vietnam, or providing support for Israel, could only see their reserve of dollars as financing policies that were either counter to their national interests, or were otherwise repugnant on principle.
During the late 1960’s the French were not content to take overvalued dollars and hold them at a loss and so demanded gold in exchange for paper dollars. Accordingly, U.S. gold reserves were drawn down to the point that coverage of the dollar was reduced to only 22%.
In 1971, President Nixon, realizing the situation had become untenable, took the dollar off the gold standard, and pulled the U.S. out of the Bretton Woods system. It was an embarrassing admission that the United States dollar was artificially maintained and an ill omen for the troubles America would have to bear in the decade ahead.
Nixon reportedly undertook this action without consulting the International Monetary Fund or even the State Department, and so his action is often termed the “Nixon Shock.” By 1976 all major world currencies were again floating.
Owing to the U.S. self-defeat in Vietnam, and the effects of the twin oil shocks over the intervening eight years, the price of gold surged first to $381 per ounce by late 1979, then to $850 per ounce in January 1980. Adjusted for inflation, that is the equivalent of $1,178.51 and $2,629.23 respectively in today’s money. The global monetary system was literally on the verge of collapse by virtue that most key currencies, though floating, were still valued somehow against the dollar.
Then U.S. President Jimmy Carter appointed Paul Volker to head the Federal Reserve. To attract investors away from gold and back into dollars, he changed policies from regulating interest rates to regulating the supply of money. By restricting the supply of dollars, the prime lending rate rose to 20% averting an international monetary crisis, but bankrupted many businesses and sent the domestic economy into such a deep recession, many analysts debated whether or not the U.S. would enter a full blown depression.
(Photo Left: U.S. Treasury)
Volker eventually relented once the dollar showed signs of recovery but the damage had been done, including to gold investors. Gold prices had crashed and instead of putting their money back into gold as interest rates came down, they put their money into stocks, thus fueling the securities investment boom of the 1980s and 90s.
Unfortunately, because problems with the U.S. financial fundamentals have never been resolved, another dollar valuation crisis is again upon us.
Impending Monetary Crisis
Just as in 1979, the American dollar is no longer tied to gold or silver, but is instead supported by global public confidence in its financial and political stability and military strength. However, what makes the U.S. dollar function as the world’s de facto reserve currency without Bretton Woods has been its special acceptance by OPEC as the exclusive currency of exchange in all oil sales.
As much as 80 % of foreign exchange and 50 % of exports are transacted in dollars. The fact that such a vast number of dollars are not spent within the United States means foreign investors must provide goods and services to the U.S. in order to acquire dollars necessary for foreign trade.
Since currency costs comparatively little to produce, the United States is able to run massive foreign trade deficits in excess of 45 % without exhibiting any visible ill effects. This would not be possible to any other nation on earth.
Hence, there has been considerable international jealousy and resentment that American hegemony and projection of military power is only possible because of the dollar’s special status.
It has also made possible the myth of a “post industrial service economy” where prosperity is achieved without having actually produced anything. In reality, something was produced; dollars. In fact, the dollar is the United State’s single largest export with approximately 67% of all dollars being in circulation outside the U.S.
The dream for America’s enemies would be end this hegemony by creating an alternative currency while at the same time shaking the world’s confidence in the dollar. Interestingly enough, a confluence of factors, stemming all the way back to FDR’s New Deal of the 1930s, is causing much of the world to lose confidence the U.S. As a result, the dollar has been losing value:
The currency possibly poised to replace the U.S. dollar as the world’s reserve currency is the Euro, first introduced in 1999 as an accounting currency and later minted into coins and printed as banknotes in 2002. The sum global cash value of Euros surpassed the U.S. dollar in 2006.
As a bit of spite, in 2000, Saddam Hussein, then President of Iraq, announced that Iraq would depart from the agreed OPEC practice of only accepting payment for oil in dollars. Instead, Iraq would henceforth only accept Euros.
Saddam’s Euro-only policy at least partly explains why some of the Euro currency nations resisted supporting the U.S. invasion of Iraq.
In 2001, the Venezuelan ambassador to Russia revealed that the Euro was being considered as the currency of exchange for all oil sales. This plan was eventually implemented and Iran followed in 2003 demanding Euros so toward the end of 2006, the dollar’s value was down against the Euro by 9.5 %.
As of this writing, the rate of exchange is $1.43 to a single Euro. This declining trend extends back to 2001 and shows no sign of abating. Valuation differentials like this encourage nations and businesses to diversify their monetary holdings away from the dollar and into other currencies .
Should the core Middle East countries of OPEC switch to the Euro, the value of the dollar would collapse crashing not just the U.S. but the world economy in the process.
However, as the Asian Tiger economies strengthen, and the dollar is no longer the world’s sole reserve currency, the health of the U.S. economy will have less and less relevance and other factors may outweigh propping up the dollar.
Mitigating Inflation with Illegal Immigration
As measured in constant dollars, crude oil prices have been increasing steadily since 9-11 although the upward trend began as far back as 1998. While there are no reliable numbers for illegal immigration, it should be no surprise that over the same period a massive number of illegals have spilled out in places far removed from the border.
Prior to the 2006 elections, both the Pew Hispanic Center and the U.S. Government Accounting Office (GAO) estimated the number of illegal immigrants at between 11.5 and 12 million individuals.
This number was laughably low as Hispanic illegals could be seen in considerable density in both urban and rural settings far removed from the Mexican border. A later study by Californians for Population Stabilization raised the estimate to between 20 and 38 million- numbers that were not met with howls of protest from the pro-Hispanic left.
To put that in perspective, the entire population of New York State is only 19 million.
The Federal Government has then allowed an entire state worth of illegal aliens to invade the United States.
One might answer. to prop up the failing Social Security System with FICA tax paying workers who theoretically will never be eligible for a payout. Unless some form of amnesty is approved.
One might also answer, to lower the costs of business that already has to deal with the twin evils of depreciating currency and rising energy costs.
Consider the stock market. Since 9-11, adjusted for inflation, the Dow-Jones Industrial Average hasn’t earned any money at all. The profits many corporations are said to be earning are phantom ones that disappear when currency exchanges, inflation, or other factors are taken out of the calculation.
If the above is kept in mind, then the rush to outsource jobs off shore, but more importantly, the insistence to import illegal labor into a service economy, makes sense.
Corporations are pressured by investors to show ever growing levels of profitability. But once the factories are closed, the assets are sold, and the more costly skilled jobs have been moved off shore, there is nothing left to do but bring in cheaper, foreign labor and deny even the lesser paid service workers what they are worth.
China Can Outbid America for Oil
"The Capitalists will sell us the rope with which we will hang them."- Vladimir Ilyich Lenin
China’s balance of trade is so great that it has now amassed a one trillion dollar surplus. Conversely, the United States runs a balance of payments deficit of over $800 billion.
External debt for the United States is in the order of $10 trillion but if one considers national debt in excess of $9 trillion, corporate debt also in excess of $9 trillion, and mortgage debt that is already showing cracks at $10 trillion; then couple that with the unfunded mandates of Social Security and Medicare that together are over $59 trillion, leaves a staggering future liability of $97 trillion. Without swift action, there is a high probability that the United States will be reduced to a pauper nation by this debt load alone.
As Peak Oil passes and the world output of crude oil begins to decrease- and the emerging economies demand for oil exceeds the available global crude oil supply- the price of oil will be bided up by those who have the cold cash to afford it.
China has been busy signing long term contracts for oil- $70 billion with Iran, and exploration agreements with both Venezuela and Cuba to develop off shore oil fields in the Western hemisphere- with Cuba in the Gulf of Mexico.
China is also developing diplomatic and economic relations to project its power to secure distant supplies of oil.
As the scarcity and the expense of oil mounts, the United States will find itself without sufficient cash, strength of currency, or even credit to outbid China for oil. Furthermore, the same financial constraints will prevent the U.S. from waging war to fend off China from even America’s own back yard; the Gulf of Mexico.
As the new Asian Tiger economies continue to develop, the necessity of a healthy United States economy becomes less and less relevant. In other words, the world will be able to afford to do without the American economy because it will have many new burgeoning economies ready to absorb goods and services and offer up goods and services of their own.
Additionally, the global coverage afforded by the U.S. military umbrella could be replaced by the combined muscle of Russian and China.
Starved for oil, Balkanized by ethnic diversity, impoverished by a mountain of debt, and shackled by a near worthless currency, America could well enter a decades long period of economic depression. The United States would struggle to retain any semblance of sovereignty as the UN uses oil as a weapon to force Washington to sign and ratify treaty after treaty harmful to its national and economic interests.
Alternative Soft Landing
However, this scenario does not have to be if Washington acts now to head off disaster. While the problem is too complex for GCN to have all the answers, from the above text, many possible courses of action are plainly evident. The actions needed have huge ramifications on many publicly traded international corporations..
In GCN’s view, the president should lay out the problem facing the United States and make a clarion call to action to meet the challenge that is now looming before the nation:
While no single source of energy is currently known to be capable of replacing oil, diversifying energy sources- particularly diversifying sources based on availability by location could dramatically lower the demand for oil.
Mandating greatly improved energy efficiency would also dramatically lower oil consumption. However, this will require rethinking and even changing priorities such as modifying automotive safety and even emission laws to favor greater fuel efficiency.
Attaining energy independence might also require rethinking how we work; for example, increasingly work through telecommuting. Cities and communities may need to be reconfigured to accommodate more short distance travel to meet most of an individual’s needs and less high speed, long distance, travel to stretch each gallon of gasoline.
This initiative will be a difficult one because modern agriculture’s dense crop yields are due in large part to petroleum derived fertilizer and chemical pesticide products. However, there should be a sufficient knowledge base to permit a shift to other technologies that will grow in a sustained and reliable fashion sufficient for domestic consumption and export.
The purpose of this action to prevent a future crash devaluation caused by an oversupply of dollars no longer needed on the world market. Doing so now will prevent having to implement a crash program like Volker did in 1979.
The Federal Government simply must get its own financial house in order and to do that it will have to stop pandering to the public’s sense of greed and exhibit fiscal responsibility.
This will mean an end to Federal ponzi schemes such as Social Security, which will likely have to be sunsetted for a generation young enough to be able to handle a privatized retirement plan.
This will also mean an end to the fantasy of universal health care. As is evident from the Federal debt load, funding such massive social programs is impossible while expecting self governance to continue.
Ironically, having lost old, inefficient factories might actually be a positive in this case. Without the advantage of being able to print the world’s de facto reserve currency, prosperity cannot be attained without actually producing something of value. America desperately needs to get back to producing more products America uses everyday.
Reconstructing an industrial base will require removing many of the barriers to profitability that had been erected by both organized labor and government.
This does not mean big business should be given free reign to rape, pillage and pollute, but both labor and government have greedily seized upon stockholder profits as if they were entitled to them. Business will not stay; much less invest in America, if they cannot turn a profit.
Washington can only make so many demands of Mexico City so long as the U.S. is dependent on Mexico for oil. This is why energy independence is listed at No. 1.
Illegal immigration exposes the Unites States to third world diseases, lawlessness due to the absence of screening. It also depresses real wages for all workers and burdens tax payers by forcing them to pay for services for individuals not entitled to reside in the United States. Most of all, allowing illegals to cross the border with impunity breeds contempt for the law.
The reason the United States has fought protracted wars they have ended in stalemates is that the American public has somehow bought in to a philosophy dating back to the Christian Theologian, St. Augustine, called “Just War.”
Hence, the Department of War was renamed the Department of Defense; America sallies forth into battle using minimum force instead of crushing its opponents; and as a consequence, exhausts itself in protracted wars that extracts from the public an enormous amount of lives and treasure.
The only reason the U.S. has such massive negative balance of payments is a tolerance for unfair trade practices. While such protectionism might have been understandable immediately after World War II, when most of the World’s industrial base outside the United States had been destroyed, there is no excuse 62 years later. America can no longer afford this kind of largesse when its own industrial base has been reduced to less than a quarter of its GDP.
The problem with most publicly made tax critiques is that they come from individuals unversed in tax law, much less taxation theory. With any tax scheme, the devil is in the details, so the best tax system would be one with the least room for exemptions and loopholes.
Perhaps the most equitable tax system would be a national sales tax, but even then, one must ask, just exactly what will be taxed- or more appropriately- what won’t.
A sales tax, by the way, is the easiest and cheapest to collect and requires little or no paperwork on the part of the general public. Transaction and use taxes are extensions of sales tax.
If Washington abandons the delusion that the United States is as powerful as it was immediately following World War II, it will be forced to admit it can no longer afford to finance an ever increasing array of social programs with national debt; a debt load that is now threatening the sovereignty and security of the nation itself.
Washington must adopt a patriotic spirit were the national interests of the United States is placed first and foremost, and seek ways to correct the fiscal mistakes of the past. In particular, the number of dollars circulating outside the United States must be reduced to manageable levels, and the balance of trade brought into parity. The watchword must be fair trade or no trade at all.
Finally, the United States must, above all, seek energy independence. Because there is currently no single viable substitute, the solution will require adopting multiple sources- sun, wind, wave, geothermal, nuclear, bio, as well as oil and gas- and adopting new ways of living that conserve without sacrificing a good quality of life. Compromises will have to be made; but in the end GCN believes the objectives can be met.
All it will take is a National Will- and the leadership to bring it out.
So, is the end of everything nigh? No, but certainly the end of an age has come, and a new age has begun.
About the Authors.....
Perry Hicks is a former Mississippi Coast resident and was a correspondent for the old Gulfport Star Journal. He has appeared on Fox News Channel. Perry has also hosted his own radio talk show on the auto industry with a mix of politics. Perry is a former college professor and is a senior writer for GCN on stories of national importance with local interests. His articles can be found in the GCN Archive Contact Perry at: email@example.com