[R-G] [BillTottenWeblog] Barreling into Recession

[Bill Totten]

by Michael Klare

prefaced by Tom Engelhardt

Tom Dispatch (January 31 2008)


The latest economic news is striking. The US economy has come to a
"virtual standstill". The bubble has burst and, with anxious global
markets registering the shock, other bubble economies worldwide continue
to shudder at the possibility that American consumers might be forced to
rein in their decade-long buying spree of imported goods.

Though any reader of newspaper business pages has surely noticed that
oil news, oil deals, and oil prices have been front and center, the role
of oil in our new economic moment has been underemphasized of late. It's
hard even to remember  -  now that the price of a barrel of crude oil
has hit the $100 mark and still hovers around $91  -  that, in the week
after September 11, 2001, oil was still under $20 a barrel. Think of
this as another modest accomplishment of the Bush administration, helped
along by its rash war in Iraq, which actually took oil off the market.
In a mere six years, we've gone from the era of cheap oil to the era of
pricy petroleum or "tough oil", with a new spike at the gas pump
expected as early as this spring. The results are now there for all to
see  -  in growing misery at home as well as stunning global financial
and power shifts.

Michael Klare has long been ahead of the curve. In the late 1990s, he
was already writing about "resource wars" in the coming century; as that
century dawned, his next book, Blood and Oil (2004), arrived; and now,
just in time for a new global era, his latest book, Rising Powers,
Shrinking Planet: The New Geopolitics of Energy, is ready to appear. You
could say that he saw much of this coming and here he offers us an
assessment of the missing role that energy played in the bursting of the
American bubble. Tom

Something Had to Give

How Oil Burst the American Bubble

by Michael T Klare


The economic bubble that lifted the stock market to dizzying heights was
sustained as much by cheap oil as by cheap (often fraudulent) mortgages.
Likewise, the collapse of the bubble was caused as much by costly (often
imported) oil as by record defaults on those improvident mortgages. Oil,
in fact, has played a critical, if little commented upon, role in
America's current economic enfeeblement  -  and it will continue to
drain the economy of wealth and vigor for years to come.

The great economic mega-bubble arose in the late 1990s, when oil was
cheap, times were good, and millions of middle-class families aspired to
realize the "American dream" by buying a three (or more) bedroom house
on a decent piece of property in a nice, safe suburb with good schools
and various other amenities. The hitch: Few such affordable homes were
available for sale  -  or being built  -  within easy commuting range of
major metropolitan areas or near public transportation. In the Los
Angeles metropolitan area, for example, the median sale price of
existing homes rose from $290,000 in 2002 to $446,400 in 2004; similar
increases were posted in other major cities and in their older, more
desirable suburbs.

This left home buyers with two unappealing choices: Take out larger
mortgages than they could readily afford, often borrowing from
unscrupulous lenders who overlooked their overstretched finances (that
is, their "subprime" qualifications); or buy cheaper homes far from
their places of work, which ensured long commutes, while hoping that the
price of gasoline remained relatively low. Many first-time home buyers
wound up doing both  -  signing up for crushing mortgages on homes far
from their places of work.

The result was metastasizing exurban home developments along the
beltways that surround major American cities and along the new feeder
roads that now stretched into the distant countryside beyond. In some
cases, those new homeowners found themselves thirty, forty, even fifty
miles or more from the urban centers in which their only hope of
employment lay. Data released by the US Census Bureau in 2004 showed
that virtually all of the fastest growing counties in the country  -
those with growth rates of ten percent or more  -  were located in
exurban areas like Loudoun County, Virginia (35 miles west of
Washington, DC) or Henry County, Georgia (thirty miles south of Atlanta).

At the same time, cheap oil and changing consumer tastes  -  pushed
along by relentless advertising campaigns  -  led many of the same
Americans to trade in their smaller, lighter cars for heavy SUVs or
pickup trucks, which, of course, meant only one thing  -  a significant
increase in oil consumption. According to the Department of Energy,
total petroleum use rose from an average of seventeen million barrels
per day in 1990 to 21 million barrels in 2004, an increase of 24%  -
most of it being burned up on American roads.


Let the Good Times Roll (into the Exurbs)

In 1998, when the bubble was taking shape, crude oil cost about $11 a
barrel and the United States produced half of the petroleum it consumed;
but that was the last year in which the fundamentals were so positive.
American reliance on imported petroleum crossed the fifty percent
threshold that very year and has been rising ever since, while the cost
of imported oil hit the $100 per barrel mark this January 2 for the
first time, an all-time record (though the price was once briefly
higher, as measured in older, less inflated dollars).

When that steady price climb, combined with growing dependence on
imported petroleum, was translated into the new exurban landscape the
economic bubble began to shudder. As a start, there was that
ever-increasing outflow of dollars needed just to pay for all those
barrels of crude and the resulting surge in America's foreign-trade deficit.

Consider this: In 1998, the United States paid approximately $45 billion
for its imported oil; in 2007, that bill is likely to have reached $400
billion or more. That constitutes the single largest contribution to
America's balance-of-payments deficit and a substantial transfer of
wealth from the US economy to those of oil-producing nations. This, in
turn, helped weaken the value of the dollar in relation to key foreign
currencies, especially the euro and the Japanese yen, boosting the cost
of other imported foreign goods and so threatening to fuel inflation at
home.

Meanwhile, two critical developments kept the cost of oil rising: a
dramatic increase in global demand, largely driven by the emergence of
China and India as major consuming nations; and a pronounced slowdown in
the expansion of global supply, due mainly to a dearth of new
discoveries and recurring political disorder in key oil fields already
in production. This meant that American energy consumers  -  including
all those long-distance commuters with crippling mortgages and
gas-guzzling SUVs  -  had to compete with newly-affluent Chinese and
Indian consumers for access to ever more costly supplies of imported
petroleum. Something had to give.

As the oil import bill kept rising, the value of the dollar kept
falling, and inflationary pressures kept building, the country's central
bankers responded in classic fashion by raising interest rates. This
naturally resulted in substantially higher monthly payments for
homeowners with variable-rate mortgages. For many families already
stretched to the limit, this would prove the final blow. Forced to
default on their mortgages, they then precipitated the subprime crisis
by, in effect, puncturing the bubble.

Even then, the economy might have had a chance had that crisis not come
in tandem with the $100 barrel of oil. By December, consumers were
cutting back on nonessential purchases, producing the most disappointing
holiday retail season since 2001. When questioned, many indicated that
the high cost of gasoline and home-heating fuel had forced them to
economize on Christmas gifts, winter vacations, and other indulgences.
"If gasoline prices go up, that means there's less to spend on
everything else", said David Greenlaw, chief US fixed-income analyst at
Morgan Stanley.

The high price of gasoline was bad news for another pillar of the
economy as well: the auto industry. While Japanese companies were busy
rolling out hybrid vehicles and small, fuel-efficient conventional cars,
Detroit stuck doggedly to its now-obsolete business model of producing
large SUVs and light trucks, which had, in recent years, been the source
of most of its profits. Once the price of oil went stratospheric, of
course, Americans predictably stopped buying the gas guzzlers, signing
what looked like an instant death certificate for an improvident
industry. In 1999, for example, Ford sold more than 428,000 mid-sized
Explorer SUVs; in the first eleven months of 2007, the equivalent number
was 126,930 Explorers (and even that puts a gloss on the corpse, as
November was one of the worst months in recent automotive history). An
auto industry in decline naturally means that many ancillary industries
will be facing contraction, if not disaster.


Popping the Bubble

Then came January 2. Although oil retreated from the $100 mark by the
end of that day on the New York Mercantile Exchange, the damage had been
done. Stocks on the New York Stock Exchange plummeted, suffering their
worst loss on a New Year debut since 1983. Gold, meanwhile, soared to an
all-time high  -  a sure indication of international anxiety about the
vigor of the US economy.

Since then, stock market panics have hit major financial centers around
the world. Only a dramatic last-minute decision by the Federal Reserve
to reduce overnight lending rates by three-quarters of a point before
the markets opened on January 22 averted a further, potentially
catastrophic slide in stock prices. Many analysts now believe that a
recession is inevitable  -  possibly a long and especially painful one.
A few are even mentioning the "D" word, for depression.

Whatever happens, the American economy will eventually emerge from this
crisis significantly weaker, largely because of its now-inescapable
dependence on imported oil. Over the past decade, this country has
squandered approximately one and a half trillion dollars on imported
oil, much of which has been poured down the tanks of grotesquely
fuel-inefficient vehicles that were conveying drivers on ever
lengthening commutes from the exurbs to employment in center cities.

Today, a large share of this money is deposited in so-called
sovereign-wealth funds (SWFs). Americans should get used to that phrase.
It stands for giant pools of wealth that are under the control of
government agencies like the Kuwait Investment Authority and the Abu
Dhabi Investment Authority. These SWFs now control approximately $3
trillion in assets, and, with more petrodollars pouring into the
petro-states every day, they are projected to hit the $12 trillion mark
by 2015.

What are those who control the sovereign-wealth funds doing with all
this money? For one thing, buying up choice US assets at
bargain-basement prices. In the past few months, Persian Gulf SWFs have
acquired a significant stake in a number of prominent American firms,
giving them a potential say in the future management of these companies.
The Kuwait Investment Authority, for example, recently took a $12
billion stake in Citigroup and a $6.5 billion share in Merrill Lynch;
the Abu Dhabi Investment Authority acquired a $7.5 billion stake in
Citigroup; and Mubadala Development of Abu Dhabi purchased a $1.5
billion share in the privately-held Carlyle Group.

These acquisitions are just a small indication of a massive,
irreversible shift in wealth and power from the United States to the
petro-states of the Middle East and energy-rich Russia. These countries,
notes the International Monetary Fund, are believed to have raked in
$750 billion in 2007 and are expected to do even better this year  -
and each year thereafter. What this means is not just the continuing
enfeeblement of the American economy, but an accompanying decline in
global political leverage.

Nothing better captures the debilitating nature of America's dependence
on imported oil than President Bush's humiliating recent performance in
Riyadh, Saudi Arabia. He quite literally begged Saudi King Abdullah to
increase the kingdom's output of crude oil in order to lower the
domestic price of gasoline. "My point to His Majesty is going to be,
when consumers have less purchasing power because of high prices of
gasoline  -  in other words, when it affects their families, it could
cause this economy to slow down", he told an interviewer before his
royal audience. "If the economy slows down, there will be less barrels
of [Saudi] oil purchased".

Needless to say, the Saudi leadership dismissed this implied threat for
the pathetic bathos it was. The Saudis, indicated Oil Minister Ali
al-Naimi, would raise production only "when the market justifies it".
With that, they made clear what the whole world now knows: The American
bubble has burst  -  and it was oil that popped it. Thus are those with
an "oil addiction" (as President Bush once termed it) forced to grovel
before the select few who can supply the needed fix.

_____

Michael Klare, author of Resource Wars (2001) and Blood and Oil (2004),
is a professor of peace and world security studies at Hampshire College.
His newest book, Rising Powers, Shrinking Planet: The New Geopolitics of
Energy, will be published by Metropolitan Books in April 2008.

Copyright 2008 Michael T Klare

http://www.tomdispatch.com/post/174888

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