Cracking Up

So demand for crude is down so much that we’re actually closing refineries in this country, but the price of crude is up 150% since the beginning of the year. Makes sense, right?

Commodities Casino Keeps Rolling
Matt Taibbi

I’ve followed Matt Taibbi’s political reporting since Spanking the Donkey (2004), but he simply gets this wrong. Falling demand and rising prices are congruent. My interpretation of his statement is that falling demand should result in falling prices, and since this is not the case something fishy is going on in the commodities market. Well, the behavior is as expected, though there is probably some mucking around in the commodities markets.
There is this from the Guardian,

the "peak oil" theory is gaining support at the heart of the global energy establishment. "The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year," said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. "The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.

"Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources,"

The IEA whistleblowers are saying that the age of cheap, plentiful energy is already over, done, gone, finished. If this reality is pressing enough that it is leaking out like this, then you can bet the US government has already factored this into its equations. I wouldn’t bet on any timelines for complete withdrawal from Iraq or Afghanistan any shorter than 50 years, so long as we can afford it. Our government probably hopes to have a draw down from ongoing combat operations, but troop presence is to last indefinitely.

Coming back to Taibbi’s post, what has become obvious over the past 3-4 years is just how inelastic energy prices are. Double the price, lose 1% of demand. Double it again, shed another 5%. (You can do the math to see how profitable that is.) In economic terms, the demand curve for energy is almost horizontal with respect to price.

The reality of oil supply is trumping the American fantasy of ‘recovery’. Going forward, every time the global economy begins to regain its footing, the reality of limited energy is going to shake the ground underfoot. As I occasionally point out, the past couple of centuries may well be looked back upon as an aberration in human history, powered almost entirely by non-renewable energy resources. That era in human history is winding down. I would not be surprised if in 20 years there are more bicycles, rickshaws and horse drawn carriages than the occasional wealthy person’s car on American city streets, which is, in fact, how most of the world has looked even during the flush energy era. This brings me to my next point.

The comedown underway is felt most acutely by those societies of privilege and disproportionate wealth, such as ours. One of the most interesting aspects of Studs Terkel’s, Hard Times is how some people barely noticed the Great Depression, either because they were always living in hard times, or because they were sufficiently insulated from the economy as dilettantes. The working poor who lost what little they had generally relayed an ethic of self-sufficiency and stoicism. The hardest psychological blows landed on the wealthy and near wealthy who lost everything. What we are witnessing now from our political, media and economic elites is a form of mass denial. Cash for clunkers, home buyers tax credits, and loose talk of recovery – as though we can ‘recover’ to credit fueled bubbles and haphazard development of bridges to nowhere and housing projects with no walkable space, 60+ miles from economic centers of activity, in other words places that make no sense in a world of scarce energy supplies.

The U.S. is in an interesting position in this global realignment, the esteem its holds itself in is ripe for deflating. It has found out just how meaningless the exercise of military power can be, giving lie to the fantasy of acting as a world’s policeman, saber rattling, or maintaining ‘security’ with force. (And I have to maintain that on this point about maintaining liberty and the 2nd amendment, the domestic gun nuts have a point – if a bunch of homemade devices operated on garage door openers can bog down the US military in Iraqi sand, then if it things went down to the wire in the States all those rifle waving nuts could probably have a chance of winning a war while losing a series of WACO like battles.) The lone superpower is also in the throes of a series of domestic institutional crises brought on by a recurring struggle of reality overcoming myth.

The first institution is capitalism and the Horatio Alger up by the boot straps story that resonates in the American conscious. The reality is that the economy is hallowed out; people have experienced a several decades long declines in real wages, increasingly stultifying class structure (people are less likely to move up from where they are born) that is now the most rigid in the industrialized world and widening gaps between the rich and poor as measured by the GINI coefficient. The American auto industry, once a large source of pride, is in its death throes. The rapid expansion of the financial industry in our economy, from 18% in the 1980s to over 40% this decade, is something that is seen with distrust, a rigged game that continues sucking wealth out of the economy to the benefit of the priveledged few, whose bets are hedged. Heads, they win. Tails, the taxpayers lose.

A second institutional crisis is the American democracy and nature of our government. Having long maintained the myth of democracy, the reality is that the government is owned and controlled by wealth. People have no faith in the government to provide basic services; many express this with a weary cynicism. (This is not new, many politicians have played on this weariness by fronting as outsiders, at least as far back as Reagan who famously said the scariest words to hear were “I’m from the government and I’m here to help.”) Years of business propaganda have altered how people even conceive of government, who now see the government through the lens of a poorly run and inefficient business. Compounding the problem is the ongoing crack-up of one of the two major political parties.

Every mature political institution has a shared culture and hierarchy. In the middle and bottom is where the most devout true believers are found. At the top is where the most cynical and clear eyed thinkers sit, they need intelligence and some relationship to reality to make decisions and broker power. This is true of the old Soviet system, the modern Catholic Church or the modern corporation. When trouble comes, the true believers find openings to propel themselves into the real seats of power at the top, displacing the clear eyed rational thinkers. The Republicans are rapidly becoming a party of fanatics and purity, the wall between cynical manipulation of the electorate via rhetorical tricks and true believers has been breached. The crackpots have begun taking over, most of their statements are a set of disconnected clichés, already disproven myths and barely coherent expressions of anger.

A third institutional crisis is the news media. The newspaper and television media are cratering. The US once had a vibrant news media, with papers that covered working class issues along with financial press. The working class press died in the middle of the century, leaving the financial press as an institution of business and commerce. The troubles in the business world have bled over to the news media while the internet is a direct assault on their authority and power over information. The media has been left fighting a rear guard action against the internet and defending its front from declining advertising budgets. To offset declining revenues, the media has cannibalized its business, which only tightens the spiral. The effect for many people who follow the news is a declining faith in what news media have to say about the world, their lack of faith exacerbated by the mindless adherence to balanced (as opposed to informed) coverage, the disconnect from what is seen and felt in the real world. For example, the DOW is at 10,000 so the talking heads are abuzz on recovery, meanwhile unemployment is over 10%, and real unemployment that counts the under employed and those who have quit looking is probably closer to 20%. There is no shared outlook of the world; the narratives we all carry in our heads are more uneven and disparate than in previous eras; No one knows anything, which heightens anxiety.

This has left many Americans unmoored from the political process, atomized within a society and culture that is violent, superstitious, divided, and all too often confuses avarice for self-sufficiency, their lives squeezed on all sides by raging economic forces and resource pools that are drying out and in an age of information, ironically, we appear to know very little. Absent any reliable outlet for rage, change, or narrative, who knows what kind of wacky, violent bubbles are going to begin surfacing in this great melting pot we call the USA.