2010 October 10 Sunday
QE2 To Cause Oil Price Surge That Suffocates Economy?
Jed Graham of Investor's Business Daily's Capital Hill blog suggests the anticipated Quantitative Easing 2 (QE2) from the US Federal Reserve could cause such a large oil price spike that the economy will derive no benefit from QE2.
The voyage might have to be aborted — or at least diverted — soon after QE2 leaves the dock because the Fed may be sailing into a political hurricane.
Even before the anticipated launch of the next round of Treasury purchases — it’s expected to be made official on Nov. 3 — the Fed’s unmistakable signals have fueled commodity price gains as the dollar has sagged.
Since the Fed’s Sept. 21 policy statement, crude oil had surged more than 9% to above $83 a barrel on Wednesday, approaching its highest levels since October 2008. (Oil prices did retreat on Thursday.)
If QE2 is enough to cause a large oil price spike then a real economic recovery will cause an even larger price spike. When I look at trends in global production and Asian consumption growth I do not see where the US can get the oil needed for economic growth. US oil consumption may already have peaked several years ahead of the global oil production peak (which Charley Maxwell expects in the 2015-2020 time frame with a slowing in production growth leading up to the final peak plateau). Well, economic growth with highly expensive oil and flat or declining consumption is going to be very hard and slow at best. Quite possibly economic growth might not be possible for a couple of decades.
I find the bigger context of sustained economic stagnation very important. Tyler Cowen argues that America needs continuing economic growth in order to buy off interest groups. Take away that economic growth and the social fabric will tear apart. Just what will that look like?
Japanese politics is less competitive and Japanese rent-seeking is less competitive than in the United States. Sustained near-zero growth in the United States would mean that interest groups tear apart the social fabric and grab too lustily at the social surplus. Whether we like it or not, we are "built to grow" and we use the fruits of that growth to buy off interest groups as we go along. Japan in contrast has greater capacity to stifle these grabs for new redistributions because their politics is more of an insider's game.
Suppose economic stagnation continues. The US is already in the biggest economic downturn since the Great Depression. Buy off interest groups? Revenue collapses at local governments are so severe that many cities are in the process of un-buying off interest groups. These revenue collapses mean most of the big state spending cuts still lie in the future. After pretending to produce a balanced budget the California legislature just passed a budget with a 11% deficit. Lots of states are at risk of default with California and Illinois the biggest fiscal basket cases. With huge unfunded retirement liabilities their problems are going to grow much larger even if the economy eventually recovers for a few years.
Even without considering the effects of Peak Oil Northwestern U economist Robert Gordon is already predicting very slow growth thru 2027.
Robert J. Gordon of Northwestern University belongs to the committee of distinguished economists who officially declared on Sept. 20 that the U.S. recession ended way back in June 2009. Don't mistake that pronouncement for optimism. According to Gordon's research into the long-term determinants of growth, America's next two decades are going to be disappointing. He predicts that between 2007 and 2027, gross domestic product per capita will grow at the slowest pace of any 20-year period in U.S. history going back to George Washington's Presidency. Although the data he examined closely go back only to 1891, he says that based on his knowledge of early American economic history, he thinks it is fairly safe to predict that the period will witness the slowest growth ever in GDP per capita and, therefore, American living standards.
This battle over immigration happens against a backdrop of worse than stagnating incomes.
The inflation-adjusted income of the median household—smack in the middle of the populace—fell 4.8% between 2000 and 2009, even worse than the 1970s, when median income rose 1.9% despite high unemployment and inflation. Between 2007 and 2009, incomes fell 4.2%.
Also, take a look at the declining returns per dollar spent on a college education. Higher costs and declining incomes. For someone in their 20s this means declining living standards as compared to previous generations. This reminds me of Jim Chanos' comments about declining returns on physical resources consumed in China.
American demographic problems with declining worker skill sets will contribute to slow growth or even extended economic contraction. Peak Oil will come on top of worker skill problems and also the big unfunded old age retirement benefits.
National debt above a threshold retards economic growth. The US is on course to cross that theshold
Researchers from North Carolina State University have identified a “tipping point” for national debt – the point at which national debt levels begin to have an adverse effect on economic growth. The findings could influence economic policy discussions globally, and will be distributed at the upcoming meeting of the International Monetary Fund (IMF) and World Bank Group.
“If a country’s public debt reaches 77 percent of its gross domestic product (GDP), bad things start to happen,” says Dr. Mehmet Caner, professor of economics at NC State and co-author of the study. “There is a tipping point for national debt, and if you exceed that point the amount of debt will have a linear relationship to declines in economic growth. The more debt you have, the slower your GDP will grow.
While the US national debt trajectory is on course to hit 90% by 2020 that date is just one point on a bad trend line toward even higher debt levels. But reality is even worse. I expect Peak Oil to cause that to happen much sooner. Then both the high national debt and Peak Oil will weigh on the economy much sooner. The pressure on the Federal Reserve to inflate away the debt will become severe. Living standards will decline.
Bottom line: the financial crisis of state and local governments will continue and worsen. US federal debt will rise to a level that will impede economic growth. The aging of the population and decline in worker skill levels will prevent productivity growth. Peak Oil will stall economic recoveries. The next 20 years look like really rough sledding.
My advice: prepare for harder times.
That's why a Bronx project for electric battery research and electric cars in the order of $100 billion per year should have been initiated on October 12, 2001. It would have been $900 billion spent internally for a good cause, instead of the ridiculous war that benefited only some elites.
Errata: I meant to write September 12, 2010, not October 12, 2001.
I really wonder how many prominent economists have factored thoughtcrime variables like IQ and Conscientiousness into their models. I mean, I believe it was Sailer who blogged about some economist saying that India might surpass China at some point, a manifest absurdity. My mother told me she went to some econ lecture where the same thing was propounded. Well, we know that those two gentlemen are out of the loop and then some; how many more economists are? I'm guessing that only a minority can be quite that oblivious to the pleasures of private heresy, but my wild guess is that it's probably a large minority.
Do we even know what caused the oil price spike of 2008? Was it the Fed's reaction to the subprime meltdown of 2007? Was it the Chinese stocking up on diesel so they wouldn't fall short during the Olympics?
The CBS news show "60 Minutes" did a show blaming speculators buying and selling oil futures contracts. I wonder if some of them may have been motivated by a desire to affect the election.
Here is a link to the CBS story:
The oil price spike of 2008 came as the culmination of a general bull-run in commodity prices (a time when people were stealing live copper cabling and man-hole covers for scrap), and it was rushes before the storm (ie a few months before the subprime shit hit the fan, an evebt virtually no economist predicted).
The cause of the commodity boom was surging Chnese demand caused by a surge in Chinese money supply - simple good ol' fashioned economics, not the over complicated pseudo-physics bullshit propounded by today's charlatans.
Anyhow, I am an avid viwer of the 'Business China' program on CCTV.I well remember way back in 2007 and 2006 China experience an internal inflation surge in which the price of basic foodstuffs such as pork skyrocketed.This was plainly caused by a huge growth in the Chinese money stock, as the Chinese export economy took off, the renimibi was feverously revalued many times in that period.It is no coincidence that the global commodity surge happened at the tail end of that strange period.
QE2 itself cannot "suffocate" the economy via an oil price surge, because such a surge would show up in expected inflation numbers and the Fed would tighten policy in response. The whole point of QE2 is to raise future inflation slightly in order to escape from the current policy trap.
Yes, we might be better off if oil supply was less constrained. But once current resources are fully employed, our response to supply constraints will be more effective. Paul Volcker raised interest rates in the face of stagflation caused by an oil price spike, and that eventually got the economy back on track.
I cant figure out whether Tyler Cohen is just a fool or is mendacious. Politics is an "insiders game" in the USA, too. The only difference is that America (god help us) has many tribes, (very unlike the Japanese monoculture) all with their own group of insiders, all agitating for a bigger piece of the pie. None of the insiders in Japan OR the USA will tolerate insurrection from their racial constituents, but they will encourage insurrection against other tribes and THEIR insiders. Since Japan is mono-ethnic, there is no inter-ethnic conflict over political spoils.
In short it is not whether a country is an "insider culture" or not, but whether you live in a multiethnic country that determines whether there is massive social conflict. Amy Chua's had it right in "Worlds on Fire". I wouldn't want to be sitting in a Cohen's shoes once the money runs out and every previously bought off ethnic "insider" group gets real hungry and real desperate. At that point numbers matter.
Cohen is right in one respect: American liberals and business leaders have been importing and "buying off" tens of millions of breeder peasants for two generations now with no thought what they were going to do when there were enough of them to establish their own breeder peasant cultures in entire cities and states.
Why on earth encourage peasant colonization of California at the same time you have decided to give all the peasant-doable jobs away to China? Yup, any day now the peasant immigrants with their 3-5 kids per woman are going to start paying my social security ... in my dreams. It's like they are deliberately shifting the IQ downward at the same time they are shipping all the low IQ jobs offshore. Why? Can we at least admit that the Chicago Boys and their open borders/open market foolishness was just that? Or are they waiting until the peasants storm their gated communities?
If there is going to be a lot of inflation, it could be a good time to start removing a few million illegal immigrants. That would take the heat out of inflation in the housing market once the inflation really gets going, at least.
Are there any positive opportunities to be had in the current crisis?
That's why a Bronx project for electric battery research and electric cars in the order of $100 billion per year should have been initiated on [September] 12, 2001.
It's worse than that. The Republican-controlled Congress had, in the previous few months,
- Cancelled the Partnership for a New Generation of Vehicles [PNGV], aimed at producing full-size American cars achieving 72 MPG or better, and even worse,
- Passed a first-year complete tax writeoff for vehicles weighing more than 6000 lbs "used in a business" (since changed to $25,000 writeoff the first year), prompting doctors, real-estate agents, etc. to buy Hummers and other guzzlers which otherwise made no business sense.
It took until this year for the writeoff to be repealed, and we still don't have anything like the PNGV. IMHO, these actions gave aid and comfort to the enemy (which had declared war on us long before 2001) and should be considered treason.
Quoth Steve Sailer:
Do we even know what caused the oil price spike of 2008?
It didn't start in 2008, it started in 2005 when oil production plateaued
. Increasing demand from Chindia could only be met by reduced consumption elsewhere, so prices rose until buyers cut back or dropped out of the market entirely; prices approximately doubled year-on-year until we got to the 2008 high and the financial collapse knocked them down again. They are still roughly triple what they were in 2000.
As for QE2, Obama and Bernanke will find that their presses cannot print energy. On the other hand, they will be able to steal it (and food, and everything else) with the hidden tax of the Fed buying government debt. This will have similar effects as Chavez's thefts in Venezuela, but spread over the entire economy.
If we are looking for economic growth, we need serious medicine. Prohibiting the manufacture of guzzling vehicles would be a good first step; we should be building very few things thirstier than the new 40 MPG Chevy Aveo. Technologies like gasoline direct injection and turbocharging (Ford's Ecoboost) can achieve large gains in efficiency. Taxing motor fuel to a minimum of $5/gallon would help get consumer demand lined up with what we can actually afford fuel for (I'd argue for progressive increases to at least $8/gal by 2020).
I wonder how many people are employed in jobs that depend on the oil industry in the United States. It would appear that many millions of people whose incomes depend on oil refining, gas stations, etc, would be afraid of losing their jobs if electric cars were adopted. Maybe this is one reason the oil lobby is so successful in suppressing electric cars. In addition, pure electric cars would need a lot less repair and they would require a lot less components to manufacture, leading to a loss of jobs in the US, because although the manufacturing by GM and Ford is often in Mexico or other parts of the world, the repair garages and companies making auto parts are still deriving an income from internal combustion vehicles.
In any case, it is still not too late to start the Bronx Project for electric batteries, but I am surprised how little Obama achieved so far, given the danger of destruction the US is facing by not seeing the coming disaster.
In addition, pure electric cars would need a lot less repair and they would require a lot less components to manufacture, leading to a loss of jobs in the US
In other words, much like the transition from short-lived bias-ply tires to long-lived radial tires. Employment in tire manufacturing crashed. But we needed to spend less money on tires, so the public was better off.
I'm sure mechanics would have no problems mastering the skills required for battery-pack assembly, repair and recycling. I don't see any employment prospects for oil sheikhs after we're done with oil, though. They might starve. Not that there's anything wrong with that.
I wonder how many people are employed in jobs that depend on the oil industry in the United States. It would appear that many millions of people whose incomes depend on oil refining, gas stations, etc, would be afraid of losing their jobs if electric cars were adopted.
Depending on the technology choices, there might be more jobs in convenience stores. If fast-charging a car still takes 15 minutes, that's 15 minutes people have to hang around and can be marketed to. Better Place-style automated battery swaps would not offer such opportunities, but may have others.
I think the real resistance is from the owners of oil reserves and executives of the oil industry, and pols dependent on their profits. Electrification would slash the cash-flow for the raw energy by perhaps 75%, and the tax revenues and campaign contributions by at least that much. It would destroy drilling, refining and pipelines. All these interests profit from any delay in electric vehicles. As an example, Exxon-Mobil's quarterly profits have been more than GM's total market cap for some time; XOM has the sheer financial power to dictate what GM builds, and the sovereign wealth funds of the oil states have the same interests (back to treason there, giving aid and comfort to the enemy).
To what extent do the oil reserve owners and sovereign funds of oil states control the media and the politicians to sabotage electric cars? Of course they can do political maneuvers, but given that science is proliferating so fast, can they also suppress academic research?
For example, research on silicon nanowires seems to be very promising, as the main inventor says that within 5 years this can be commercialized and dramatically improve batteries:
Thus given the enormous amount of rival capital available in the accounts of non-oil billionaires, it is possible that there will be a happy ending to the story.
Do you think taxes will be needed in order to get gasoline to $8 per gallon?
I think it is too late for governments to accelerate battery development with research. The market pressures for better batteries are much higher now and more important.
"I think it is too late for governments to accelerate battery development with research. The market pressures for better batteries are much higher now and more important."
This is not true. Basic research is not seriously conducted by short-term profit oriented corporations. Most corporations are waiting for someone else to invent the new concept and then they would step in to develop or manufacture it. Only universities and government laboratories are doing the most fundamental research. For instance, currently the top lithium ion battery company was created by MIT professors, but the company was created AFTER the science was sufficiently developed for investors to risk their money. Without academic research Manhattan Project would not have started, and by pure chance most of the academic work was already done at that time.
Do you think taxes will be needed in order to get gasoline to $8 per gallon?
At current US levels of fuel efficiency, monetary drains give us an economic collapse before it hits $5/gallon.
Unfortunately, it takes prices of $5/gallon or more to make the typical American consider them when deciding what kind of transport to use, how often, where to live/work, and everything else. We need taxes to get people moving while the economy has enough surplus to let us do it.
I see your point. But I'm thinking that on one hand we aren't going to get to $8 per gallon overnight. But on the other hand I think we can and will get to $8. It'll come in steps with plenty of demand destruction along the way as people downsize their methods of transportation.
I see a shift in demand away the West and toward people who get more utility from each marginal gallon. A large number of scooter riders in India could displace a small number of SUV drivers in the US.
And scooter riders in the USA could be the future of many of today's SUV drivers. The question is how much else we'll sacrifice first. If we eventually have to get to 200 MPGe, we have a choice:
- Drain our economic life's blood to oil producers until 200 MPG scooters are all we can afford to buy and run, or
- Make a policy decision that fuel will cost $$$, so people will buy the 200 MPGe Chevy Volt, Prius PHEV, Leaf and whatever Ford comes up with to top the Fusion hybrid.
We know what the US public will do without some force (like $4.25/gallon gas) kicking them in the pants. If we wait too long, we wind up with #1 by default.
At the current rate of consumption and efficiency, by 2020 the US will have to import 90 % of its oil, which will be impossible given the political situation in the world.
So your fist alternative above is the end of the US. But to make the second alternative work, it is necessary to install charging pods in every street so that all electric and plug-in hybrid electric cars can be charged frequently. It is calculated that putting charging pods in every street in the US would cost only 1 year of imported oil now. What I don't understand is why Obama is not starting such a stimulus program, where within a few years we would put charging pods in every street in the US. This investment would pay off very quickly by canceling the oil component of the trade deficit, and from now on that much money would be paid internally.
At some point the idea that oil's days are numbered will become conventional wisdom and we will have to find other ways to be cutting edge.
We need another price spike to wake people up. I expect $200 per barrel oil to deliver such a shock that we'll see people moving very rapidly toward subcompacts, hybrids, bicycles, and the like.
to make the second alternative work, it is necessary to install charging pods in every street so that all electric and plug-in hybrid electric cars can be charged frequently.
No it isn't. The average commute is about 20 miles, while the Volt's AER is around 40. Charging only at home (or only at work) would suffice for most Volt drivers, and at least half of them could miss a day and still not run the engine. A test of EVs in England found that many drivers charged every 2-3 days.
Ubiquitous charging pods are a good thing, but we don't need them to get started.
It is calculated that putting charging pods in every street in the US would cost only 1 year of imported oil now.
Which is a hell of a lot of money, and we still wouldn't have the cars to use them. We should be picking some lower-hanging fruit before we make such a huge infrastructure push.
Already Renault-Nissan is aiming at pure electric cars. Even Ford is working on a 100 mile range pure electric car. Chevrolet volt will become obsolete as soon as batteries are improved a little bit. So in the long run it will be necessary to put charging pods in most streets, as Denmark and Israel are planning to do long before the end of this decade, when most of their gas stations will be closed. But maybe you are not impressed by the Better Place business model.
The Chevy Volt drive range works for a large fraction of the population. It does not work well for someone who rents who has no easy way to connect a car to power at home. But the Volt is a good start. Cut its cost with battery tech advances and it could probably eventually cut total oil consumption by a quarter or a third.
Howevere, my guess is that oil production is going to drop too soon for EVs and PHEVs to play a big role in the initial adjustment to Peak Oil. In fact, we are already suffering from the economic effects of Peak Oil and obviously the car fleet is not ready for it.
I think PBP has potential, but I'm not willing to bet the rent on it. If it pushes everything else out of the market, fine.
Vehicles like the Volt do have a major advantage over pure electrics: they can operate as generators, and can run on liquid fuel if the grid is down. If I lived in hurricane alley I'd rather have a Volt than a Leaf; I could easily keep a couple weeks' worth of emergency fuel ready to hand if a storm took the grid down and knocked out my solar panels.
It's fairly easy to hack the Prius to provide emergency power, and I doubt that the Volt would present much bigger difficulties.
Yes, but it is still a good idea to start putting charging pods in the streets in anticipation of electric cars: note that if the government does this, then battery manufacturers and automobile companies will be further encouraged to accelerate their efforts. For many years the potential electric car makers were terrorized and discouraged by the fluctuating price of oil, but once they know that there is government policy for the long term, then they will make the necessary efforts.
Agreed that having a bit of charging infrastructure almost everywhere, with capability for expansion, would encourage the transition.
Yes, this is excellent news...
And here is an article from Wall Street Journal, about other efforts to establish a charging infrastructure for electric cars (and presumably also for plugin hybrids such as Chevrolet Volt):
Note that Denmark, Japan and Israel are very serious about this kind of charging infrastructure. By 2020 Denmark and Israel will have closed most of their gas stations. The only reason this appears very difficult for the rest of the world is because Bush did not start investing in battery research in 2001 after as the 9/11 attack occurred. In fact, just the opposite happened: by wasting so much blood and treasure for nearly 8 years, Bush actually created a shortage of money for battery research.
It's worse than that. The 2001 tax bill actually encouraged purchase of guzzlers, sending even more money to the Saudis.
Prior to the previous decade, the Greek word trillion was fully understood only by astronomers and physicists, economists were not frequently using this word. But the $1 trillion that Bush wasted is so huge that less than half of that money would have saved the US had he started in October 2001 to invest only $50 billion per year on battery research.
Note that in the Roman Empire, even though as much as 25 % of the population were slaves, most of the important construction projects were actually built by the soldiers during peace time, as the construction of valuable infrastructure and buildings was considered too important to be assigned to slaves. I would say that after the troops return from Iraq, let us make them build the national charging infrastructure in every street. According to Better Place, it is calculated that putting charging pods in every street in the US would cost approximately one year of imported oil, which would be no more than $400 billion. Assuming that the construction would take 5 years, the annual cost of this infrastructure project would be less than the annual cost of the absurd guerrilla war we have lost abroad.