Essay

Roger Howard, the author of "The Oil Hunters: Exploration and Espionage in the Middle East," wrote an essay in the Sat/Sun WSJ. It is entitled "An Ode to Oil." It displays some fascinating reasoning. The essence is quite simple.

We, in America, are addicted to oil. But we also hold the technology to find more oil in these difficult times. Difficult because all the "easy" oil is gone and most of the existing fields are past their peak. Also difficult because the countries where those fields are,  those countries that lived of oil revenues have prospered for a long time and their populations have surged and now they need more dollars and more oil to keep feeding their own habits. 

That is one thing about oil, the suppliers are addicts too. Actually everyone is an addict including the pushers, who are the executives and investors of the big oil companies. These guys are mostly American. They hold the key to the technology. But I digress.

Let's go back to the argument. Howard says we are addicted and the suppliers need our technology to keep supplying us. They need to keep supplying us because otherwise they will starve. And that will be worse now than a few decades ago, because all this time they have benefited and now they have many more mouths to feed. Ergo, oil can be a stabilizing, peace-bringing force. Did you get that last part?

What Howard really means is we own the technology and we are the buyers so we are in the driver's seat. Our dependency is our strength. And since we are, by definition, the only and all that is good in the world, our strength means oil is the great pacifier of the 21st century. Everybody will have to listen to us -and by definition again, that is good, so he really says, everybody will have to be peaceful and happy.

Nil nove sub sole.

setback or progress?

It is now quite common to read stories about how the recession will roll back environmental rules and regulations. How the need to create jobs and keep the economy going will put environmental incentives on the back burner. How we will lose years of gains in a matter of months. How efficiency will suffer.

These stories are often found in publications such as the WSJ, Forbes, the Economist, and others that otherwise show little or no concern for environmental regulation. Not to be totally cynical and say that these publications often oppose pro-environment rules or promote rollbacks of such rules and regulations. How come these anti-environmental publications are suddenly so worried about green?

I think what these people are trying to tell us is that a thriving economy is good for the environment. That success lifts all boats. That we should work hard to keep the economy going so we can protect the environment. Remember, the more you buy the more you save. You can drink the kool-aid too.

I have previously remarked on how easy it is to attach a label of environmentalist to oneself. However, true environmentalism means less consumption. No new houses, no new cars, hybrid or otherwise, no thrashing perfectly good items to replace them with newer gadgets, no shopping at WalMart or anywhere else for that matter.

True environmentalism means going on a walk in nature on Black Friday. Turning off you TV instead of buying a flat screen. No driving to the mall and no bargain hunting. It has nothing to do with CFL's, hybrids, or efficiency. Efficiency does not matter to the environment. Absolute values are the only ones that matter.

Every item you buy to replace an older but functional item is a vote for environmental destruction.

Remember that none of the so-called environmental regulations has had much effect. Efficiency gains in gas and oil have been more than offset by increased travel, more driving, and larger homes. I could go on forever. The upshot is that these measures don't matter and their roll back or abolition does not matter either.

Reality is that economic slow downs are good for the environment because they reduce consumption. People spend less. They drive less. They stay home. They eat at home. Those are the only things that matter. Less consumption, less waste.

the P word

There is one word that is probably more upsetting to US policy makers than the trio, recession, depression and deflation. That is the P-word, or Ponzi-scheme. The reason why is that while recessions, depressions, and deflation are serious to very serious, these conditions are not seen as criminal. Ponzi schemes are. In a Ponzi scheme money is taken from the masses and funneled into the pockets of a few. Ponzi schemes grow quickly based on deception, and when they inevitably collapse, they leave many victims in their wake.

When George W. went out repeatedly to tell the world that US style capitalism and the free markets are basically wonderful and should not be discarded, he is in essence saying our economy is legitimate. Our financial systems are legitimate. They are not there to make some people rich by deceiving everyone else. They actually do create wealth. It is not a Ponzi scheme. 

Unfortunately, our current financial system is a Ponzi scheme. It does not create wealth as much as shifting it from the poor to the very rich. While most of the victims are in other countries, ordinary Americans were not ignored in this latest crisis. 

Our financial system did deceive people and it did so on a grand scale. During the 90's it valued companies with no revenues higher than some of the world's most profitable and solid corporations. In the 21st century it valued essentially worthless housing in the remote desert areas at top location rates.

Additionally, the system introduced leverage at every level. Worthless houses were overvalued by 10 fold, and these mortgages were then wrapped in securities with another 10 fold markup. Securities that were then repackaged in derivatives with yet another order of magnitude markup, and bought with borrowed money to introduce yet another order of magnitude of leverage. In the end, less than 1/100th of 1% of what was sold was backed up by reality. 

All along the way people were deceived. Deceived into believing that their house was worth more than it was. That they could pay for it with money they did not have, because it was only going to up in value and they would flip it and cash out big. Investors were told these securities were solid, backed up by ever-more valuable real estate. It goes on and on.

It was a Ponzi scheme of the vilest kind.

And while you may think this is an extremist view, I am glad to see that the most recent Nobel Laureate in Economics thinks so too. He is a man who knows.

Here is Paul Krugman, commenting on the tech bubble and the housing bubble that followed:

"Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?" 

Needless to say our financial system needs a major overhaul. It is not a legitimate system in any sense of the word. Not in its current implementation.

thanksgiving

It is that time of year again. Time for the harvest festival of plenty. Only this time around there isn't as much plenty as there once was. Although the dramatic reduction everyone talks about is rather minor. Numbers like a 0.5% contraction in GDP or a 2% drop in spending may worry economists and politicians but it is not the end of the world (yet). I am afraid we will have to be prepared for a lot more if we want to create a sustainable environment.

There is some good news. Holiday travel will be less than last year. Probably by some minuscule number, but a small percentage here is huge in absolute carbon terms. Unfortunately gas prices cratered right before the holiday. The drug pushers at Exxon-Mobil, Chevron, and Conoco-Phillips probably realized that it was now or never. Better make sure the "stuff" is cheap when a big consumption blob is expected.

Furthermore, many predict that retail sales will be dismal. Likely another reduction by a percentage point or two, but all little bits help. The less we consume, the less we damage the environment. The end-of-year shopping season is a hugely wasteful activity. It is a time when people buy useless trinkets that they give to family and friends, who are then left with having to throw these items in the trash when nobody watches. But it doesn't stop there. The useless trinkets are packaged in tons of paper and accompanied by well-wishing cards, ribbons, and other solid waste. 

If you want to be an environmentalist this holiday season, give nothing and ask for nothing except hugs and kisses. Don't replace your TV, turn it off instead. Don't buy the latest PDA or cellphone gadget, and vow to keep your car for a couple more years. Forget the bargains. Much, much better bargains are on the way if the depression keeps unfolding the way it currently is.

The sad news is that holiday activity supports people's lifestyle. Many in the country are employed directly or indirectly by consumer retail. Our economy depends on it for almost 3/4's of its value. A huge knickknack-to-trash churning machine it is and we need to turn if off. That means that there will be plenty of pain to go around.

This thanksgiving, let's give thanks for the things that really matter. Friends, family, and the reduction of wasteful consumption.

we're going to six

The Dow went down in the 7,000 range today. Just as I predicted a while ago. And we are not done yet. I am sure we will go into the 6,000's before long. I also think the threat of deflation is now very real. The administration keeps on saying the chances are low, but they also said the American economy was fundamentally sound. I think it is fundamentally flawed.

They also said a lot of other things that make no sense, like housing prices always go up, and any housing market is local, and we may go into a recession -we already are-, and we should invade Iraq, and they have WMD's. Fortunately the administration is on its way out. The new one promised change and we will give it the benefit of the doubt, at least for now. Don't hold your breath though, you might suffocate.

Believe it or not, but what is happening in the market is good news. I say that even though my savings and retirement accounts are losing money like leaky sieves. I am somewhat worried too, but ultimately I see it as a sacrifice for the common good.

We are going to become more frugal and any sane environmentalist needs to applaud such a move. Unfortunately, in an economy that relies on consumer spending, that means great and widespread pain is inevitable. But the end result can be a good thing. It's a bit like giving birth. It hurts but in the end it is worth it. 

What we need now is for someone to step in and raise gas prices. I know many of you think I am crazy for saying this, but it is necessary. Like a cigarette tax, we need to get people away from gas and energy waste. The sooner we do so the better. I hope -but doubt- that Obama has the guts.

solar misconception

Today's WSJ has a special section on Energy. It starts with an article on our addiction to oil and what, if anything we should do about it. Then some about better batteries, and so on. Not much new there. However, what caught my eye was an article entitled:"Consumers as Producers." It discusses solar energy and whether people who install solar cells and supply power to the grid should be paid, and if so, at what rate.

Various arguments can be made in favor of, or against reimbursing customers. The article goes through all of them, highlighting the various pros and cons. It has no conclusion, other than to say, it is too early to tell. Because, in true WSJ fashion, the free market has to decide what works best. What "works best" means who gets to install the most solar cells. I.e. who consumes the most.

I am sorry but the article totally misses the point. The point being that people should use less energy. They should conserve energy. That should be the primary motivation: to use less of whatever energy it is they use. Instead we are once again seeing the opposite knee jerk reaction. Homeowners who want to produce energy to get paid, others who want solar so they can use more energy without having to pay, still others who go on use more to spite the utility that won't pay them for the extra juice they produce, etc. etc.

Earlier I told a story of a neighbor who installed solar panels so he could run the AC and the heater simultaneously. He wanted to use more power but did not want to pay the high rates. On top of it, he sincerely believed he was doing something good for the planet and even wrote an essay in a Segway contest on how he was environmentally aware. Guess what, he won the Segway too. So now he can use solar energy to drive his Segway instead of walking!

What we need to realize is that we use too much energy. We Americans use twice as much energy as rich Europeans -and they use too much to begin with. We need to use less. All energy use is polluting and there is no such thing as clean energy.

Unfortunately, the only remedy appears to be high prices. It is a solution nobody likes but it is the only one that works. We will need to tax ourselves heavily lest we pollute ourselves out of existence.

what change?

It is easy to talk about change. Much easier than making it happen. There is an old Roman proverb that reads, nil nove sub sole. Although 2,000 years old, it is as relevant today as it was when first written. The truth is that over those 2,000 years very little has changed. So little in fact that if we were to magically resurrect the Romans -like the dinosaurs in Jurassic Park- they would not find it very hard to comprehend or adapt to our society.

Sure, they might be in awe when they first see airplanes, cars, cell phones and TV's. But that would not last too long. The Roman elite would quickly grasp how to use these modern tools to further their ancient goals of domination and control. Despite the new toys the basic concepts are unchanged. 

The Romans knew a highway infrastructure was important in ruling the empire. So they built one, and a rather high quality one too. Many of the Roman roads are functional today. How is that for infrastructure? Roman roads can rival American bridges. It is not a big step to go from wagons to semi's. I am sure the Roman architects fantasized about these in any case. It would be no shock to them to see their fantasies become reality.

When it comes to change, take a closer look to see history in action. The people overseeing and administering the financial bail-out and rescue plans are the same people that got us in the mess in the first place. The CEOs of failed companies are now heading the government panels overseeing the rescue operations. The politicians, lobbyists and pundits of yesterday are staffing the new administration. The same very rich are financing it all. Every cycle these guys put in more money and every cycle the elected officials become more beholden to the powers that be. It would not be surprising if we, like Rome, suddenly changed our system to a dictatorship with emperors.

Sure, there are slight shifts every few years. One cycle the more conservative and hawkish members hold sway and then the more moderate and liberal ones take over. But they are all part of the same club. The same families and dynasties that ruled our country in the past century are still at the helm today. Only a few of the old guard have fallen by the wayside due to unfortunate events, and a few new ones have joined. In essence the rulers are the same. So are the rules.

We will inaugurate a black president, but the color of money stays as green as ever. Only the face on the stamps changes. We have a new actor for an entrenched role. A fresh face to sell the same old message.

the dreaded R-word

It is always ironic to see how nobody wants to admit that we are in a recession. Everyone stubbornly keeps on repeating: less consumer spending may lead to a recession, the economy may be entering a recession, these events raise the probability of a recession, etc. etc. All the while hoping that by the time it is all confirmed the recession will be over. That way one never has to say the dreaded R-word. 

This time around though there is "help" from another source. It is not the type of "help" we all hope for but it is there nonetheless. We will never have to admit that we are in a recession because by the time we finally capitulate, we will be in a deep depression. That is right folks, we are entering a depression. Take it from George Soros for confirmation. He said as much in testimony to Congress today.

Since most of us are not old enough to remember a real depression, we can all be a little aloof or smug about it. It sounds bad, but it is hard to imagine that things will really get that bad now. Surely things will get better soon. Maybe Obama will save us?

I suspect "reported" unemployment may go as high as 12-15%. The real unemployment will be more like 20-25%. I also think the risk of deflation is now very high. An informal sort of deflation is already happening and luxury goods are routinely sold for 20-30% less than "manufacturer's suggested retail prices," or MSRP. 

The WSJ had an article today highlighting this phenomenon. It had an upbeat title announcing bargains to be had. But pretty soon those $80 designer jeans (down from $200+ MSRP) will remain on racks.

The poor can't afford them, pretty soon the middle class won't want to spend this much either, and the rich will have to "hide" lest they become victims of jean-jacking.

On another note, George W. went on record defending free trade. There, now you know free trade is in trouble. Once George W. has to take up its cause, the end is near. The free market is now on par with success in Iraq. We're turning the corner folks. Just hold on for a while longer.

abundance

You could ask, why are we so wasteful? Why do we use so much energy? The straightforward answer is because we can. We have found cheap energy sources such as coal, natural gas, and oil and we know how to use these quickly and efficiently. We are victims of our success.

When we say cheap, we mean it is cheap to exploit these sources. We conveniently ignore the (huge) hidden costs of mining, transporting, and burning those fuels. These hidden costs include habitat destruction, resource depletion, pollution, and global warming. 

The overconsumption is somewhat of a vicious circle. Because we have all this cheap energy, we managed to industrialize food production which in turn led to more people wasting more. In 1940, one farmer could feed only 19 people. Today, one farmer can feed 129 people. The difference is due to extra vehicles, more mechanized equipment, energy consuming irrigation systems, and petroleum derived fertilizers and pesticides. We have also developed ways to transport food over long distances. That includes extra energy consumption caused by necessary refrigeration.

The large efficiency gain has resulted in an extra 110 individuals (per food producer) that don't need to bother growing food. These individuals can engage in other activities. Other activities that are wasting more energy. An elaborate services economy was created that recently surpassed food production and other basic necessities in number of participants.

Unfortunately it will only go on like this until the bubble bursts. And burst it will because our current economy is unsustainable. Ever more people are born and need to be fed with ever fewer resources. The hidden costs are also catching up with us, both indirectly by making less land and water available, and directly by making us sick.

A logical solution would be voluntary cutbacks and rationing. Despite our great "intelligence," it appears we'd rather go bust.

ticking time bombs

You may wonder why do people not spend? Why are American consumers capitulating? 

Let me first say that this may be bad news in the short to medium term, especially given the fact that our economy depends on consumer spending, but in the long run this is exactly what we need: less spending, less consumption, more savings.

Right now though, it is painful, and believe me, it will get much more painful soon enough.

The word on the street is that the American consumer has stopped spending because of the uncertain economic outlook and the uncertain labor market.  But we have been through recessions before and we have dealt with job losses and high unemployment before. But that did not stop consumers from spending. In some instances, we appear -appear is the right word- to have spent our way out of a recession. So what is different now?

What is happening is that there are a whole group of people who seem to be doing fine and who are making payments on their loans, but who can see foreclosure coming. Like deer in the headlights of an oncoming truck, these consumers are paralyzed. And as surely as the deer, they are about to get run over. The only difference is that they are not only paralyzed, they can't move even if they wanted to. They are sitting on a ticking time bomb.

We are talking about the households with interest-only, and pay-as-you-go ARMs. The folks whose mortgages are negatively amortized. The people who are in for a whopping reset. A reset that will start happening soon.

The vast majority of these folks live in Arizona, California, Florida, Nevada, and other states already hard hit by the current crisis. So far, they are still making payments because their loans haven't reset yet. They are the invisible problem. As time goes by, they are also increasingly underwater, meaning they owe more than their house is worth. 

There are two forces at work here. As prices drop, more of them go under, and as time goes by their principal grows -because they pay less than is needed. These folks are terrified and they stopped buying. They are hoping for a bail-out. They are holding on for as long as they can. They are selling assets to survive. They are further depressing prices.

We are entering a vicious circle. Actually we are already in, but there is still time for a fix. That time however is running out. Another time-bomb is waiting in the wings. It is called the Christmas shopping season. It is what retailers depend on for 25%-50% of their annual income. It promises to be a major disaster. Given how many people's livelihoods depend on retail that means a big jump in unemployment around New Year. More unpaid mortgages will result. Even people who have fixed rate loans and are able to make payments and who have good credit will now be affected.

The result is a third time-bomb to start ticking. It is the investor time bomb. At some point investors will capitulate too. They will panic, or they will need the money in their meager savings and 401k's to survive. That will cause the market to fall further. Previously I mentioned a Dow at 7000. Now I am projecting 6000. It seems all but inevitable.

energy

A great quote from Vaclav Smil in a NYT blog: 

The new president needs to "Explain to the nation that the Americans, who consume twice as much energy per capita as rich Europeans (and have nothing to show for it, as they are not richer, do not live longer, are not better educated and do not work less) should embark on a long road of trying to live within some sensible limits, which means less and not more."

A great truth that does not just apply to energy and the environment, but also to our financial crisis. We are living without limits and it is not a happy life. It is an isolated life where our well being is constantly threatened by outside forces. We may lose our job, our health care, our status. Our neighbors may outdo us and make us feel inadequate by having a bigger house, a wider TV screen, a greener lawn, a bulkier car, or what have you. They unsettle us by going on longer and more expensive trips, making us feel small and irrelevant.

It is a life-style driven by inane consumerism that does nobody any good. Endlessly churning through stuff, we need more oil, more water, more materials than any other country in the world. 

Our endless pursuit for more stuff leaves us constantly in need of more. As soon as we get something we quickly trash it (up to 90% of the items bought end up in the trash within 6 months) and go look for other -even better- stuff. We want to be movers-and-shakers, having access to the latest must-have gadget, only to replace it by another must-have gadget within 6 months, like rats endlessly pressing levers to get more drug.

We isolate ourselves in ever bigger houses, with our own bedrooms, bathrooms, living spaces,TV sets, stereos, etc. Constantly putting up barriers and removing ourselves from others. We are addicted to cell phones, iPods, and other devices that interrupt our social lives, isolate us acoustically, and attention-wise from the world around us. Nothing like going to lunch with someone who spends the entire time talking to others on their cell phone. And why? To show us how indispensable they really are? Is that the idea? To invite us so they can show us how important they are?

Wake up America, ditch your car, your TV, your iPod, your cell phone, and all that other isolating, energy wasting junk that clutters up your lives. Go on a walk and talk to your friends.

america turns blue

It is a historic election. The first African American president in US history. Everyone is elated, both here and abroad. Maybe the people outside the US even more so than we are. They finally see an opening after eight years of bullying, non-cooperation, pre-emptive strikes, and other destabilizing mayhem. They hope the US will take a leadership role once again, instead of being a stick-in-the-mud aggressor.

At home though, the euphoria will quickly die out. I doubt that there will be a honey moon period. America may have turned blue, but it is also singing the blues. Already the stock market brushed off the good news and turned to the sagging economy. There was more bad news from China too. Car makers who had hoped China would rescue them are bracing themselves for more bad news.

Good morning America! Maybe we are sexist but at least we seem to have dispelled the notion of racism. One tiny step for (a) man...

scenario number one

On January 9th, 2008, I went on record predicting one of three possible outcomes to the "Chinese miracle." It appears scenario #1, a Chinese implosion is starting to materialize. Today's Washington Post article, "As China's Losses Mount, Confidence Turns to Fear," implies as much. Somewhat ironically, and just to show you that predicting the future is problematic for all, China's implosion is not just due to it choking on growth, although that growth played a key role. It turns out the Western depression -recession is too mild a word- is the proximate cause.

Although I wrote that "if we somehow started consuming less," and called it "unlikely to the point of being ridiculous," it did in fact happen. We are consuming less. Not by choice mind you, but because we overspent so wildly for so long that we could no longer pretend business as usual. We can no longer pay our bills, let alone buy stuff from China.

Now China, having grown so crazily to supply us and the rest of the world with goodies, finds itself suffering from a very nasty hang-over. It has built factories, supply chains, infrastructure, etc. to produce useless junk that people suddenly no longer want to buy.

Add in the many scandals of tainted toys, tainted toothpaste, and tainted food and you can see that a long downhill slide is very likely. That too, won't be pretty.

a billion dollars later

We are in the home stretch. After raising over a billion dollars -who said there is a financial crisis?- voters will finally cast their ballots. Actually, many already have, so really what November 4 means is that we will finally know who they voted for. But that too we already know, so where is the news? There are more news-men (and women) than news.

It appears Obama will win this "historic" election. What makes it historic is surely the amount of money spent on it. That is $1 billion change you can believe in. Not small change either. As for the other change, we'll wait and see but don't hold your breath. What seems most likely is a lot of quiet backtracking and a ton of well worded and aptly delivered excuses. Why?

Because fundamentally people don't change. What we Americans really want is to keep living it up forever and then some. We want to spend more, burn more gas, buy more items, consume more. What we really want is (much) more of the same. The change has been all around us. The world has changed. The excesses of the past have come back to haunt us. The houses, trucks, boats, vacations, etc. that we could not afford. Now we want to change it all back.

Unfortunately, it is time to pay the piper. Not because of eight years of lack of oversight or trickle down, or anything like it. It is a quarter century or more of living beyond our means that is coming to get us. Twenty five plus years of the "American dream." Consumption that is about to consume us.

Let us go back to $1 gas, back to V8 trucks with leather seats and cup holders,  back to McMansions, back to cruises and other wild vacations. Back to the times of plenty. If only George Bush hadn't destroyed all our fun. But did he? For all the blame and and the low poll numbers, George W. did very little. Even his pal Cheney did very little other than make his friends tons of money, shoot his hunting buddies, drink too much, and fuel his ambitions of Stalin-like world domination. But we knew Stalin, and you Mr. Cheney are no Stalin!

The magic has not ended. Now, Mr. Obama will levy a carbon tax without raising gas prices, get universal health care without raising taxes, fix education so everyone can go to Harvard, give the middle class a break paid for by the very rich -who will probably abscond to the tax havens in the Caribbean or Bermuda- all while fighting what is probably a decade long depression, a quagmire in the Middle East, and  a  few many-trillion-dollar deficits. 

Not that McCain would do any better. He might have been more fun to watch, though. Sadly, what we really should have done is save that billion dollars for the many rainy days ahead.