Viewpoint: The new year holds some unpromising events

We are midway through the first month of 2006, and already momentous developments project what seems to be a really scary movie. Because we seemingly can’t walk out of this theater or turn off the set, what may lie ahead?

James H. Kunstler, author of The Longest Emergency, looking back over 2005, noted that the period between 2001 and 2005 saw consumer spending and residential construction make up 90 percent of the total growth in our gross domestic product. More than two-fifths of all private sector jobs developed since 2001 were in housing or housing-related activities, such as construction, real estate and mortgage brokering.

The financing of much of this he terms “hallucinated liquidity” because there was no real money, just credit, based on the expectation that housing values would continue to climb at 10 to 20 percent annually. This false credit was aimed at propping up an economy that had largely lost its other means of creating wealth, such as making things besides suburban housing.

So the housing bubble grew, based on the belief we could keep on building a living arrangement based on cheap oil and natural gas, and that all the subdivisions and strip malls would hold their value for many years to come.

Kunstler says this is the central delusion of what he calls “the suburban sprawl economy.” It is obvious, he said, that cheap oil and gas are what we are least likely to have in coming years. Americans are beginning to become aware of this fact, and many are opting not to buy a new house. They realize the cost of heating a 4,000-square-foot or larger McMansion, occupied by only a few people, fails the heart-healthy test for value. As the new house inventory begins climbing, the value of all housing will slide downward.

How fast that happens will, of course, be affected by oil and gas prices. The global economy is consuming about 82 million barrels of oil per day, at last report, and new production is not replacing what was being depleted. Kunstler said the world’s major oil producers—Russia, Iran, Mexico, Venezuela, the North Sea and the United States all are past peak output. Saudi Arabia’s major fields are also showing signs of decline.

Things seem normal enough, right? Still plenty of traffic whizzing around all the big cities and elsewhere; Chinese factories are running full-bore, and consumers still are spending substantial amounts. But don’t be fooled. Oil supplies soon will drop at the rate of 3 percent per year. That choking off of the oil flow will bring turmoil among the great nations that thirst for the available petroleum.

Oil production has tightened to the point where any disruption in one producing area can cause major shocks globally. A swing producer doesn’t exist, no excess capacity. But, you think, we’re getting along OK, there’s been no shortages this winter. The winter is not over, and we survived the sharp drop in domestic oil production stemming from the Gulf hurricanes by taking oil from our own strategic reserves and also from Europe’s. That kept oil at around $50 plus per barrel during the holidays. But those relief valves are now closed, and global demand for oil continues to rise. Those reserves must be refilled. Jan. 2, the price per barrel of crude jumped past $61 per barrel.

Kunstler sees energy prices climbing again. He foresees turbulent markets in the oil industry and expects oil to hit $100 per barrel sometime this year. Oil prices finished 2005 some 40 percent higher than in 2004.

New laws are designed to regulate gasoline mixtures and may boost the cost of gasoline by 40 cents per gallon. Kunstler predicts $4 a gallon gasoline at some point this year.

The story with natural gas is not looking very bright, either. For a time last year, prices soared above $17 per million BTUs [British thermal units], the energy equal of $100-a-barrel oil. So far, we have had a mild winter, and prices have slid back to the $11 range, but a good deal higher than the $7 it was in 2004. Kunstler said if the weather turns much colder, there will be no bailout from Europe. Also, we lack an adequate number of special terminals to handle liquid natural gas, and they are not cheap nor quick to build. Because of the damage to energy infrastructure in the Gulf, natural gas prices may reach $20 per million BTUs before May.

Also, the Chicago Tribune reported, we can thank a good deal of the spike in our recent natural gas bills “to some of the wildest commodity trading ever.” Basically, speculators (traders), considering all the bad news listed above, have driven prices that had hovered around $2 per million BTUs for years shot up to $15.78 as of Dec. 13. Then, the warm spell hit, and “futures for delivery in February at the New York Mercantile Exchange closed Friday [Jan. 13] at $8.79 per million BTUs, the lowest closing price since Aug. 9,” according to the Tribune.

Look out, because the cold is coming again, and the traders will do us no favors. Will the feds look into this market recklessness? Ha!

High energy costs, Kunstler says, will completely flatten the housing boom. He sees idle home builders, holding large inventories in subdivisions that never should have been created. Worse than that, many Americans holding so-called “creative” mortgages—no money down, interest only, adjustable rate and others—will be squashed under the financial weight of these instruments. Many will go bankrupt under the new laws that leave little chance of escaping partial repayments.

After that, the real estate market will be flooded with distress sales. Some who leap without looking will grab up some of these seeming bargains, only to discover the liabilities remain. At some time, Kunstler said, the public will realize these huge houses, miles away from cities and necessary services, will be seen as the mistakes they are, and values will crash.

Beyond that, Kunstler concludes that with the collapse of the housing market, the U.S. economy will follow suit because a goodly portion of it depends on Americans taking out loans to buy houses many cannot really afford. He sees jobs disappearing in construction, remodeling, real estate sales and mortgage financing.

If that takes place, government-sponsored loan operations, such as Fannie Mae and Freddie Mac, are likely to go under as consumers default on loan after loan. That may help to trigger a rapid (30 percent) decline in the value of the dollar, and a corresponding decline on Wall Street. We also may see some large banks fold up.

When the value of the dollar goes, so does our standard of living. Jobs and incomes will vanish just as food and energy costs climb, and Americans try to unload those big houses while consumer products remain on the shelves at the big box stores like Wal-Mart, Best Buy and Target. They are prime targets to become retail dinosaurs.

What other disasters can happen? Kunstler sees a few more. He expects the airline industry to largely disappear this year, creating other problems. Another thing he expects is the failure of General Motors and Ford to survive their debt load and lagging sales.

Kunstler also predicts that while this country is writhing in severe economic pain, workers in Chinese factories will lose their jobs. If their concerns are not addressed by Beijing, they will create political turmoil in their country. He said that might prompt Chinese leaders to create a distraction by making a military move on oil supplies held by some of the neighbors in central Asia.

Energy-motivated tensions between China and the U.S. already are growing. Dec. 15, the China National Petroleum Corp. launched an oil pipeline from Kazakhstan to northwest China. That, according to the Asia Times, will undermine the political significance of the Baku-Tbilisi-Ceyhan pipeline, opened last summer amid much fanfare from Washington.

The bottom line is that the United States stands to lose its leverage over the entire Eurasian region by these latest developments. The Times said they also have a good deal to do with Washington’s war drum chorus against Iran.

The new pipeline runs 598 miles and will carry the oil a third of the way to Kashagan in the Caspian Sea, the Times said. In the next 10 years, Kazakhstan intends to nearly triple its oil production to 3.6 million barrels a day from all its fields. Current public estimates of Kazakhstan’s reserves are at 35 billion barrels, but the amount could be greater.

Last October, China took over PetroKazakhstan, Inc., for $4.18 billion. To an extent, it was revenge against Washington for blocking its attempt to buy out Unocal. ExxonMobil was charged with bribing Kazakh officials to get a presence in the Kazakh oil industry. A senior Mobil executive was jailed for tax evasion in New York in a case tied to the Kazakh bribery.

That’s just a tiny bit of the rumblings from the Chinese giant. If their energy demands get squeezed more, they will grow into a roar.

Questions about Iran, Saudi Arabia, Iraq and Europe remain unanswered. Kunstler predicts more friction with Europe’s large Muslim population. There may be more bombings and riots. England has frittered away its North Sea energy store and now is dependent on Russian natural gas. Its industrial base also has been lost.

Russia is yet a powerful presence on the world stage, solely because it has a store of nuclear arms large enough to decimate the world several times over. That, plus its oil and gas deposits, mean it must be taken seriously.

Then there is Japan, which imports 95 percent of the fossil fuels it needs. It could become very aggressive if its oil supplies become threatened. It is in immediate conflict with China over some offshore waters.

That’s still not all that turned up in Kunstler’s crystal ball, and almost none of his predictions is morale-boosting. There yet is some hope, provided we act to convert to a more sustainable lifestyle and curb the car culture, putting our ravenous oil consumption on a diet.

A Manhattan Project for renewable energy sources can happen, but it is unlikely that this oil-owned government has the creativity or will to really help us. We must face the ogre staring at us, and realize this Shrek is not a lovable cartoon.

Editor & Publisher Frank Schier contributed to this editorial.

From the Jan. 18-24, 2006, issue

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