Oil Prices Are Dropping - Phew, we survived that...let's go back to normal now

So oil prices hit a record $135 a week ago, then they dropped back down to $127. No big deal. It went up a lot, but the markets just got excited.

Umm...just to be clear, we're talking about some topsy turvy behaviour that is still north of $120, and for that matter, $110. If this rollercoaster ride says anything, it is that the markets are now VERY volatile. By the way, just before they went down to $127, they went back up to $133 (from $130). This means there is a lot of tension pushing and pulling at that price.

Oil prices fall below $127 a barrel

A friend was also saying that since 65% of the UK oil price is comprised from taxes, the actual price of oil isn't even expensive. Exactly. Oil is still very very cheap. The prices producers are paid is still very little. So, you say, why can't we just remove these government taxes? 2 reasons:
1) because that would increase demand, which is exactly what we don't want to do.
2) because these fuel taxes are a primary source of income for government. Without them, most departsments would be crippled. What is happening in any event is while those taxes remain in place, economies are increasingly tipping towards recession as disposable incomes increasingly fail to achieve parity with these higher price levels. Thus higher fuel prices also begin to erode the income of entire governments.

Kunstler: Anxious Hiatus

In the U.S., data released on Friday showed that highway miles driven in March fell 4.3 percent from a year earlier, the first time this has happened in March since the last major oil shock in 1979.

Loveliness was everywhere this holiday weekend in upstate New York, and it was probably hard for many to believe that the wayward nation would return to the dread uncertainty of life in the crash lane when the barbeques were over. There was even a wan overtone to the late-night sports news about the Indy 500 race -- as though the spectacle of cars droning round and round a speed oval symbolized the futility of American life in this moment of our history.

I had a discussion with one guy at Sunday night party about the prospects for hydrogen-powered cars. We rehearsed the usual reasons why such a system was unlikely to get up-and-running -- and then he said, "...but what if we took all the money from the war and put it into something like the space program and... they came up with some way to make it happen...!"

This is certainly the golden heart of the great wish out there, as the empire of Happy Motoring begins to run down on $4 gasoline. It seems inconceivable that a society so bold as to put men on the moon (fer crissake) can't overcome such a prosaic problem as finding something other than oil byproducts to run our cars on.
From this holy font all cognitive dissonance flows.

It seems inconceivable, but it begins to look like that's the way it really is, and we just can't accept it.
Of course, one of the reasons that Americans are so anxious to get away on a holiday weekend from the places where they live is because we did such a perfect job the past fifty years turning our home-places into utterly unrewarding, graceless nowheres, where the private realm of the beige houses is saturated in monotony, and the public realm has been reduced to the berm between the WalMart and the strip mall. Now, we barely have the gasoline to run all this stuff, let alone escape from it for a weekend.

We're at a dead end with all this and a lot of Americans are paralyzed with fear about what's next. This may actually be a deeper fear than the anxiety about money and banking in 1933, when Franklin Roosevelt was sworn in and tried to reassure the nation. Back then, despite the grave problems of capital, we still had plenty of everything: plenty of good productive land, plenty of manpower earnestly eager for hard work, plenty of ore in the ground, shining cities equipped with excellent streetcar systems, a railroad network that was the envy of the world, sturdy small towns and small cities fully equipped with locally-owned business, and a vast number of small family farms that could re-absorb family members unable to get wages in the cities. Most of all, we had plenty of oil in the ground, and the world's biggest industry for getting it out and selling it. What we didn't have in 1933 was cash money.

The crisis at hand now goes way beyond a crisis of capital -- though that is certainly part of it. Notice how many of the things we had in 1933 are gone now. Our cities, with a few exceptions, are imploded husks. Our small towns and small cities (Schenectady, home of G.E.!) are gutted, especially in terms of locally-owned business. Our passenger rail system is worse than anything a Soviet ministry might produce (while the airline industry that replaced it is dying of a kind of financial hemorrhagic fever). Our local transit hardly exists anymore. Family farms have all but disappeared. We have plenty of manpower earnestly eager to become American Idols (but certainly not for heavy labor). Our oil industry now supplies only a fraction of the world's daily supply (and not even enough for half of our own needs).

What happens now? We face not just change but convulsive change. The public senses the rapid unraveling of our car-centric arrangements. In the week before the holiday, gasoline prices went up several cents each day -- in upstate New York, it crossed the $4 mark and kept going up. The trucking system faces collapse as diesel fuel price-rises exceed even the rise in gasoline, and the vast number of independent truckers who make up the system confront the individual calamity of a personal business failure. American Airlines last week announced severe measures to keep operating through the fall of 2008. But none of the airlines can feasibly carry on as usual with oil prices above $120-a-barrel -- and the ominous message is of a business model that has no conceivable way to adapt to the new reality. Most likely, in a very few years air travel will no longer be a "consumer" enterprise.

In the background of these practical problems -- "off screen" during the holiday of car races and ball games -- is a crisis of capital orders of magnitude worse than the one faced by Franklin Roosevelt in 1933. For, behind the "liquidity" (i.e. insolvency) issues faced by the big institutions lurks the Godzilla of the derivatives trade, which has evolved into a black hole capable of sucking all notional "money" into oblivion. That "money," which represents the aggregate value of our society, also amounts to the emperor's new clothes of an empire in serious trouble. As the black hole of derivatives sucks away these "new clothes," America will stand naked against the elements of fate.

NVDL: Whether it's summer or winter, we're heading for winter, one of the grimmest in history.

Kunstler: The Risk Economy

As the West's industrial regime sputters toward a cheap-energy-crackup conclusion, there have been attempts to recast what our economy is actually about, how to account for whatever wealth we manage to produce, and project what our society will actually be organized to do in the years ahead.

For a while in the 1990s, the idea was a "service economy," kind of like the old fable of the town whose inhabitants made a living by taking in each other's laundry -- only in our case it was selling hamburgers to tourists on vacation from their jobs making hamburgers elsewhere, or something like that.

Then came the idea of the "information economy" in which making things of value would no longer matter, only the processing and deployment of information (sometimes misidentified as "knowledge"). This model seemed to suggest a yin-yang of software engineers who made up games like "Grand Theft Auto" serving the opposite cohort of people who bought and played the game. If nothing else, it certainly explained how lifetimes could be frittered away on stupid activities.

That illusion yielded to the housing bubble economy, which actually did produce a lot of things, but not necessarily of value -- for instance, houses made of particle board and vinyl 38 miles outside of Sacramento. It was a tragic and manifold waste of resources, as well as an insult to the landscape. But the darker side of the housing bubble lay in the world of finance, where a vast empire of swindles was constructed to support the Potemkin facade of production homebuilding.
Now we are in a strange period when those swindles are unwinding. The people who run the finance sector -- the Wall Street investment banks, hedge funds and ratings agencies, the Federal Reserve, and the US Dept of the Treasury -- in desperately trying to prevent the unwind, have rapidly ramped up another new economy based entirely on the buying and selling of risk. Risk, as a pure abstraction unconnected to any real capital activity, is all that's left to buy and sell after all other plausibly practical vehicles for finance have failed.

While a lack of transparency in the individual risk vehicles has been an object of complaint over the past year, the system as whole is transparently absurd. The system is also abstruse enough to prevent most mortals (including many employed in the system) from understanding its operations. But the general public and the news media are virtually helpless to intervene in this last gasp racket, so the probability increases that it will do tremendous damage to whatever remains of the US economy.

One feature of the risk economy is the Federal Reserve's new willingness to absorb any sort of crap collateral in exchange for massive cheap loans to insolvent companies and institutions. The Fed has, in effect, made itself the world's largest financial shit-magnet. It has already taken in a few hundred billion in securities based on non-performing real estate loans, and has now opened the window to securities based on non-performing credit card debt, car loans, and other miscellaneous IOUs still drifting un-hedged in the banking ether.

It's a mark of our collective desperation to avoid the consequences of so much reckless behavior that no credible authorities have stepped up to denounce this racket -- no Fed governor, no politician of standing (including the candidates for president), no newspaper-of-record. The Attorney-general of New York, Andrew Cuomo, may be quietly cooking up some cases in the deep background, but the SEC and the federal banking regulators hung up their "out-to-lunch" signs on this long ago.

Meanwhile, the basic situation is this: the world is awash with bad investment paper. The standard of living in the US can't be supported on debt anymore. The people of the US don't produce enough real value to service their debts. Institutions can no longer be supported on debt gone bad. Something's got to give -- meaning something has to bring the US standard of living down to a level consistent with our declining actual wealth.

Everything else going on right now is a dodge. The Fed maneuvers, the "coordinated actions" of the western central banks, the postponements of default, the non-disclosure of contents in bank portfolios, the pretense that risk alone is a kind of fungible resource that can be endlessly traded to generate fees -- all this fucking nonsense will only make the eventual unwinding much worse.
Personally, I doubt that it can go on more than a few more months. The velocity of everything is going up past the "red line" where things really fly apart. The increased velocity of non-performing mortgages and deadbeat credit card accounts is one thing that can't be hidden or escaped. America will feel and see very vividly when the repossession teams rush families from their homes, when the pickup truck is taken away, and when the pink slip appears in the pay envelope. Meanwhile all the higher-end banking shenanigans will only debase the dollar and make it more difficult for people already in distress to buy gasoline and food.

If the bankers and treasury officials collude to prop up one more failing big bank a la Bear Stearns, the political fallout for Wall Street could be lethal. In any case, I think we will have a way different sense of ourselves as a society by the time the election comes.

NVDL: This Business Day article is interesting:

Standard Bank said the recent trends in South African house price growth, when compared to trends in the US, could at first glance seem ominous for the outlook for South African residential property.

"Increasingly, there are comparisons being made between the subprime-induced housing recession in the US housing market and the current challenging conditions facing the South African housing market.

"Given the dismal house price growth currently being experienced in SA, the question of whether or not the South African housing market will experience a deep recession similar to that being experienced in the US housing market is being asked with increasing frequency.

"However, our analysis of the sources of the recession in the US housing market and its subsequent transmission mechanism to the rest of the US economy suggests that South African residential property will experience a relatively mild cyclical downturn rather than a full blown recession," Standard Bank said.

No, this ain't no mild cyclical downturn, but expect to hear a lot of 'experts' kidding themselves and us that this is the case. Peak Oil means that the conditions we experience now will gradually and intractably worsen, meaning we are by and far heading for a full blown recession along with all that entails: unemployment, crime, shortages, and general austerity. What makes this scenario bleak is we will see it from Johannesburg to Georgia, from Peru to Paris, and everywhere in between. We will see petrol prices going up by another 50 cents in two days, and our petrol pumps are not even geared to deal with so many digits. Neither, apparently, are our hearts and minds.

I predict that for the next few seasons communities are increasingly going to play catch-up to the actual state of affairs, turning to experts and pundits, presidents and hopefuls, in the skewed hope that good news has anything to do with what will actually happen. The people to turn to now are those with a new lease on life, those who are doing something different - it might be farming, or acquiring or building alternative energy systems or otherwise investing in new forms of technology, those who have started to radically change their lifestyles (what they eat), even their jobs.

In the end, reality speaks better than any man.

Understanding The Oil Conundrum

Global economic expansion has resulted in a world demand for oil that has been rising steadily – and has proved remarkably resilient in the face of high prices.

According to Cambridge Energy Research Associates, world oil demand will increase a further 1.3 million barrels per day in 2008, with Asia and the Middle East accounting for 800,000 barrels per day of that growth.

To put that figure in context, the US consumes about 20.6 million barrels per day, or roughly 25 percent [one quarter] of global demand. China is the second-largest consumer, at 7.2 million barrels per day. Japan, with 5.2 million barrels per day, is third.

High gas prices have dampened demand somewhat, but not as much as might be expected, according to Jeroen van der Veer, chief executive officer of Royal Dutch Shell.

The demand reaction to continued high prices might be a delayed one, said Mr. van der Veer at a recent symposium at the Council on Foreign Relations.

"We think it may happen that people won't drive less, but that next time they buy a car they will buy a more fuel-efficient car," he said.

NVDL: What no one talks about is population growth, and how this pushes up the tide of demand. Even if demand contracts, the latest slew of university graduates in the US and other wealthy countries demand what they feel entitled to have (based on their parents consumption patterns). While consumption might decrease, demand in the basic sense of equipping additional users to operate (cars, suburban homes and gadgets like phones, Tvs and computers) basically provides for a fundamental level of demand that isn't easily eroded. Thus we face a future where there are holes in the supply chain, a future where thereare shortages, have nots, economics losers. We are seeing the poor taking a big hit now. The Middle Classes around the world are next.

After the Oil Crisis, a Food Crisis? (TIME)

"Worldwide food reserves are at their lowest in 35 years right now. One in six already don't have enough to eat. Nearly every region of the world has experienced drastic food price inflation this year. "

Is the world headed for a food crisis? India, Mexico and Yemen have seen food riots this year. Argentines boycotted tomatoes during the country's recent presidential elections when the vegetable became more expensive than meat; and in Italy, shoppers organized a one-day boycott of pasta to protest rising prices. In late October, the Russian government, hoping to ease tensions ahead of parliamentary elections early next year, announced a price freeze for milk, bread and other foods through the end of January.

What's the cause for these shortages and price hikes?
Expensive oil, for the most part.

The United Nations Food and Agricultural Organization (FAO) reported last week that, at nearly $100 a barrel, the price of oil has sent the cost of food imports skyrocketing this year. Add in escalating crop prices, the FAO warned, and a direct consequence could soon be an increase in global hunger — and, as a consequence, increased social unrest. Faced with internal rumblings, "politicians tend to act to protect their own nationals rather than for the good of all," says Ali Ghurkan, a Rome-based FAO analyst who co-authored the report. Because of the lack of international cooperation, he adds, "Worldwide markets get tighter and the pain only lasts longer."

What's more, worldwide food reserves are at their lowest in 35 years, so prices are likely to stay high for the foreseeable future. "Past shocks have quickly dissipated, but that's not likely to be the case this time," says Ghurkan. "Supply and demand have become unbalanced, and... can't be fixed quickly."

The world's food import bill will rise in 2007 to $745 billion, up 21% from last year, the FAO estimated in its biannual Food Outlook. In developing countries, costs will go up by a quarter to nearly $233 billion. The FAO says the price increases are a result of record oil prices, farmers switching out of cereals to grow biofuel crops, extreme weather and growing demand from countries like India and China. The year 2008 will likely offer no relief. "The situation could deteriorate further in the coming months," the FAO report cautioned, "leading to a reduction in imports and consumption in many low-income food-deficit countries."

Hardest hit will likely be sub-Saharan Africa, where many of the world's poorest nations depend on both high-cost energy as well as food imports. Cash-poor governments will be forced to choose between the two, the FAO says, and the former has almost always won out in the past. That means more people will go malnourished. Further exacerbating the problem are the current record prices for freight shipping brought on by record fuel prices. An estimated 854 million people, or one in six in the world, already don't have enough to eat, according to the World Food Programme.

For more, go here.

NVDL: The article is posed as a question. It is not a question because there is no question about it. The effects are present, and obvious. The question to ask is when will we see changes in local agriculture. Hypermarkets have destroyed local production capacity. That needs to be regenerated. The chilling thing is, as growing and buying food becomes more expensive, the last thing we're going to be able to afford is writing off crop after crop because of climate change associated weather (droughts, floods, storms). Yet if we are sensible, we will factor this into the entire equation. The result is a singular prospect for a large proportion of humanity: Austerity

$100: Welcome to a New World

Sleep well tonight because you may well wake up tomorrow, and find yourself in a different world; a world where everyone - including yourself - finds the world to be an entirely different place. A place of reality, consequence and purpose. A place where you can no longer get something for nothing. A place where reality TV somehow has a very ironic, black humor ring to it. A place where attrition is the order of the day. A place where oil prices of $100 will seem benign tomorrow, a place of rapid change, a place of chaos and uncertainty, of unrest and contraction, and the beginning of our collective plunge, our descent, into austerity.

This being the case, what can we do?

Control what you can. What you eat, exercise, and your consumption. Learn to be a good neighbour, you're going to need each other. It may longer be a choice to change, but the choice that does remain is HOW MUCH. Our inner decency will answer this question on each individual level. Let's hope that will be enough.