One of the themes I have been hitting during my recent presentations concerns the oil price risk hanging over our heads. My hypothesis goes something like this. The days of huge supply excesses in the oil production world are over. Those 5 million barrel per day supply cushions of 10 years ago kept oil prices low, and fairly stable. As the excesses shrank we began to see increasing volatility and prices steadily climbing. Higher oil prices have historically caused recessions. We are currently in a recession, albeit one in which high oil prices weren’t the primary cause. (More on that at the end).
But, oil supplies were already tight prior to the recession. The recession has lowered demand, and at the moment we find that we again have a fair excess of oil production capacity. As global economies strengthen, that increases the demand for oil. One of the things I have been pointing out in my presentations is that U.S. oil demand dropped by 1.2 million bpd over the past four years, but demand in India and China increased by 1.9 million bpd over that time period.
Therefore, it won’t take long for the capacity cushion to shrink and for oil prices to spike up again, putting us back at risk for recession. This was the basis for my essay The Long Recession – and I think it helps explain why oil is back up to $80. This is going to make for a long recession, and one in which the attempts to recover will trigger the higher oil prices that tend to bring on recession in the first place. It is a merry-go-round that we need to get off of, but it won’t be easy.
CNN has a story out today that covers this theme:
Forget $100 oil. $80 oil is a problem
NEW YORK (Fortune) — Are cash-strapped American consumers on for another date with energy price misery?
The U.S. economy remains weak and one in six Americans can’t find enough work. Yet oil prices have risen steadily this year. A barrel of crude costs $79 and change, more than double its price at the end of 2008.
That could complicate recovery in an economy that, despite the tumult of the past two years, remains as consumer-driven as ever.
I think “complicate recovery” is putting it mildly. We have to recognize the economic danger posed by being so dependent upon something that has the potential to swiftly bring the economy to its knees – and that is also in high demand by countries like India and China.
The story also points to the role oil prices played in bringing on the recession:
And though it’s futile to single out any one trigger for the recession that started at the end of 2007, the downturn didn’t start in earnest until consumers’ energy budgets breached the 6% mark in November that year.
As energy prices soared and incomes came under pressure, Americans first stopped buying pickup trucks and then deserted the local car dealer altogether. Car sales plunged in the spring of 2008 before falling off a cliff with the collapse of Lehman Brothers that September.
“The price of oil played a bigger factor in the recession than people seem to be remembering,” Hamilton said.
I would argue that the U.S. would have been pushed into recession eventually even without the subprime mortgage crisis. There are also a number of people who would argue that high oil prices led directly to the recession; that it was oil prices stretching family budgets which led to people not being able to pay their mortgages. Regardless of which theory is true, it is a historical fact that spiking oil prices have caused economic slowdowns, and over the past year oil prices have doubled. It is tough to see an easy way out.
In closing, I am still traveling for a couple more days (writing this from a small library in Oklahoma), and as I mentioned in the previous post I am about to miss my wife’s birthday for the 4th year in a row. So I want to wish her a Happy Birthday tomorrow, and at least this year I will be home only one day late. Plus, I will be arriving in Hawaii with our two Miniature Schnauzers that we had to leave behind when we moved to Hawaii. She doesn’t feel too bad about me missing her birthday, because the reason is that I had to take a detour to Texas to pick up the dogs. So, she is going to be reunited with “the pups” after three months apart (this is a result of Hawaii’s tight restrictions on importing pets) – and I think she feels that’s a great birthday present. At least I hope she does, because I didn’t get her anything else. Now that I think about it, I should go shopping…
1. …the downturn didn't start in earnest until consumers' energy budgets breached the 6% mark in November that year.
2. There are also a number of people who would argue that high oil prices led directly to the recession; that it was oil prices stretching family budgets which led to people not being able to pay their mortgages.
With all due respect, RR, you seem to be emotionally attached to this hypothesis, to the point where you can't seem to add one and one to get two.
Quote #1 and #2 are mutually exclusive: how on earth does spending a mere 6% of the family budget on energy cause you to miss the mortgage payment? Only if you were going to miss the payment anyway and find yourself looking for an excuse. Wuzn't me! LOOK! It's all Big Oil's fault…
Sit down. Breathe deeply. Pour yourself a stiff one, if you're so inclined. Think this through. Oil prices were a minor factor in this recession.
and what of "NET DEPLETION"
of known reserves?
fran
How has the European consumer managed to do OK? Real estate on the whole is still more expensive over there than the states and they are paying several times more than the US consumer for gasoline. I can't believe their salaries are that much higher?
I believe it had everything to do with American spending getting out of control. People turned their home equity into credit, people buying things they could not afford, and houses they could not afford even with $20 oil, let alone $100+.
People were already strapped beyond their means when oil hit its highs, it was just icing on the cake. The crash had already started.
OD
I'm in the camp that believes the recession was kicked off by energy prices,but not just oil. Coal and natural gas rose in lockstep with oil prices. Utility bills doubled along with gas at the pump. Food prices jumped too. That left less money for the house payment. A lot of homeowners were stretched to begin with. Especially those with subprime mortgages.
It would be different if we had been used to higher energy prices all along,like in Europe. It was the sudden surge in prices which threw us for a loop. It derailed everything,including credit markets in my opinion.
"People turned their home equity into credit, people buying things they could not afford …"
No doubt that individual US citizens fell for the "house prices always go up" scam. But let's not give Big Government a free ride. The Obama Administration is currently spending about $3 for every $2 it takes in. Obama is on track to run up the budget deficit as much as every previous President combined (!). And unfortunately, the problems did not start with Obama.
As Maury points out, EUnuchs have been paying higher prices for energy for years — so it is hard to blame energy prices per se.
The road forward is surprisingly simple: enforce the US Constitution; trim the size of the Federal government; roll back excessive regulations; reduce taxes; remove the barriers that politicians have created to job formation; start building steel mills, nuclear power plants, and drilling rigs.
Chances of that happening — close to zero. Unfortunately.
Quote #1 and #2 are mutually exclusive: how on earth does spending a mere 6% of the family budget on energy cause you to miss the mortgage payment? Only if you were going to miss the payment anyway and find yourself looking for an excuse. Wuzn't me! LOOK! It's all Big Oil's fault…
If you are living paycheck to paycheck anyway – as many Americans do – and you find yourself getting hit by a triple whammy – your interest rate on your mortgage rises, your gasoline bill doubles, and you electric and natural gas bill doubles – you will suddenly not have any money to spend on other things. I don’t give consumers a free pass here; too often they put themselves in situations where they have overextended themselves. But skyrocketing oil prices would have the impact of sharply raising taxes – except they feel the effect immediately.
It is a known fact that quickly increasing oil prices have brought on recessions many times in the past. There is a multiplicative impact, where people suddenly don’t have money to spend on other things, and the economy slows down. Like I said, maybe this recession wasn’t directly caused by higher oil prices, but the economy would have eventually slowed down under the weight of higher oil prices.
RR
How has the European consumer managed to do OK? Real estate on the whole is still more expensive over there than the states and they are paying several times more than the US consumer for gasoline. I can't believe their salaries are that much higher?
Think the other way around. Their salaries aren’t higher, but their fuel/utility consumption is much lower. On average they use about half the fuel that we use, so they are less vulnerable than we are. Plus, they have more options than we have for not using gasoline because they have better public transportation systems. They are just in a better position to handle price shocks than we are. They are still vulnerable, just less so.
RR
As usual, I think RR has too gloomy a take on our energy future.
The EIA just announced the globe has double the gas reserves we thought. Oh, that.
I mean, how seriously can we take "the end of fossil fuels" when reserves double in one year?
Maybe they will double again.
CERA just said no peak until 2030. But what if recent claims about improved tar sand recovery prove true? What if Venezuela becomes a nation of rapbid capitalists? (they have trillion barrels of heavy oil in the Orinoco trench). The peak may be in 2050…or 2070.
Lithium batteries promise to permanently cripple oil demand.
I think we are on the cusp of another 20-year global boom. Technical advancements are dizzying, as R&D shops are globally placed now, and connected by Internet.
Jeez, I can remember when a few labs in the USA well well-known. Now, there are labs everywhere.
Venture capital everywhere.
I'm still waiting for that $10-$20/bbl oil you predicted, Benny.
I agree with you on the public transportation Europe has, making their transition possibly easier. Although, the US could catch up in no time, IMO.
My state put in a passenger light rail last year, it went up very fast & the success has been huge.
Just googling, Europeans actually, on the whole, have longer commutes than their US counterparts. That was pretty surprising to me.
US average commute is 24.4 mins according to the census bureau.
European commutes are as follows:
Italy: 23 minutes
Spain: 33 minutes
France: 36 minutes
EU average: 38 minutes
Netherlands: 43 minutes
Germany: 44 minutes
UK: 45 minutes
BBC News: July 2003
BBC
Japanese commutes are even longer still. During this transition I wouldn't be surprised if people who can't afford to commute end up staying at their place of work during the week & go home on the weekends.
OD
Their salaries aren’t higher, but their fuel/utility consumption is much lower. On average they use about half the fuel that we use, so they are less vulnerable than we are.
Europeans are also less driven by a need for conspicuous consumption. The Western Europeans in particular enjoy a lifestyle as high — if not higher — than ours, but they also tend to buy quality goods that last longer, and don't continually feel driven to buy things just to prove they can keep up with the Jones's. (Or the Rosseau's, or the Zimmermann's, or the van der Wald's)
For example, in Germany the richest people sometimes live in surprisingly less than ostentatious houses and apartments, and feel no need to continually flaunt their wealth through a public display of their socio-economic status.
Europeans are more defined by their traditional social class than by the goods they are able to purchase and flaunt in front of others.
If you are living paycheck to paycheck anyway – as many Americans do – and you find yourself getting hit by a triple whammy – your interest rate on your mortgage rises, your gasoline bill doubles, and you electric and natural gas bill doubles – you will suddenly not have any money to spend on other things.
I still don't see it.
Let's say for argument's sake your energy bill went from 5% to 10%. That is still only a 5% increase in total expenditure. Even if you are living paycheck to paycheck, you should be able to cut 5% from the 95% of your non-energy spending. It might be painful, but it is quite achievable.
OTOH, an ARM resetting is going to hit you with a MUCH larger bill than a 5% increase. There really is no comparison…
Hey, not ALL Europeans, Wendell. Us Irish were pretty ostentatious for the last 10 years. We bought SUVs, stoked credit card debt with property equity, paid prices for shoeboxes in Dublin that would buy you a nice pad in the Hollywood Hills, thought it was cool to spend $8 on a skinny latte, and believed it when the rest of the world told us how clever we were to have created such a miracle economy.
Now wages are falling, unemployment is soaring, huge numbers of people are in negative equity, property prices look set to fall through 1999 levels (so far), emigration is rising again.
America is positively booming compared to some parts of Europe.
Hey, not ALL Europeans, Wendell.
Pete~
You're right. I was thinking more the traditional Western Europe, and not far-West Europe. 😉
An average UK commute is 45 minutes? So they take twice as long to travel half the distance of an average US commute… because using public transportation takes much longer?
O/T, but speaking of traditional western Europe… France have just tonight screwed us out of a place in the 2010 (Soccer) World Cup with a goal from an illegal hand ball.
I WILL NEVER EAT ANOTHER CROISSANT AS LONG AS I LIVE !!
🙁
trim the size of the Federal government
Just out of curiosity, do you wish to cut the military, Social Security, or Medicare and Medicaid?
An average UK commute is 45 minutes? So they take twice as long to travel half the distance of an average US commute… because using public transportation takes much longer?
Nah, they have terrible traffic also. Did you ever see Top Gear? Car show, had a race once and people travelling by bike, subway, and even boat were able to get across London faster than someone driving, at midday.
Clee-
Well, Russia did sell a huge wad of oil at China at $22-something a barrel, but that was the low.
We came close–and, in my defense, I was honking about $10 a barrel when oil was north of $100.
People thought I was a lunatic. I mean, even more than usual.
Here is another profound thought: We know that fossil fuel consumption will grow slowly in coming years, especially oil.
Oil demand was barely growing even before the recession.
Okay, but we are not sure about fossil fuel supply–it might leap north, as in the case of natural gas.
Recent announcements of breakthroughs in tar sands extraction might spike supply. Or more huge finds off South America.
Or those guys in Texas might actually make oil from lignite. Or China actually ramping up a single field in Iraq to 3 mbd from 1 mbd, as they say they will do.
So, perhaps the "risk" is not in demand spiking, but supply rising while demand goes sideways.
Stay tuned for the next 20 years…a fascinating epic will unfold, and I think a positive one for most of mankind.
France have just tonight screwed us out of a place in the 2010 (Soccer) World Cup with a goal from an illegal hand ball.
It's OK PeteS my company recently shut down a big manufacturing facility in France due to very high taxes.
They are going with the tax the rich until they go away strategy and unfortunately for them, its working. I hope the US doesn't follow suit.
DM
Wish your wife a happy birthday from us, RR! I had to stop by and post because right after you mentioned buying her a gift, Google Reader stuck an ad for "Gold delivered to your door." So now you know what to get her…
Good show DM. I won't be satisfied until they can't afford another soccer ball.
(Like us in Ireland, come to think of it).
Yes Benny, you could very well be right. The only thing is, all of those things you mention cost a lot more. I think the fact is, cheap gas is definitely gone and is never coming back :/
That doesn't necessarily spell doom, but it does mean a hard transition, with most Americans fighting it tooth and nail.
Californian TV sets to save the planet
James Hamilton, a well known macro-economist from UC San Diego, said the following about oil prices and recession on his blog:
"I have no doubt that the problems with financial markets were a bigger factor than oil prices in the striking collapse in output in 2008:Q4 and 2009:Q1. … all of the approaches surveyed in that paper suggest that oil made a material contribution to the initial downturn, and it seems hard to deny that that the severity of the financial crisis was exacerbated by the fact that the U.S. had spent three quarters in recession prior to the failure of Lehman in September 2008.
What do these estimates imply looking forward, with oil prices now back up to $80 a barrel? The relation used to produce the figure above assumes that there is a threshold effect before the next oil price shock would begin to do its damage. According to that relation, oil has to get back above $130 before it would matter again for GDP growth. On the other hand, the original research on which that relation is based acknowledged that there's really not a very compelling basis in the data for choosing among various plausible nonlinear possibilities. The other approaches surveyed in my Brookings study assume a simple linear relation, according to which the recent resurgence in oil prices would already begin to exert a drag on spending."
“I believe it had everything to do with American spending getting out of control.”
Exactly correct! RR belongs to group of adults who have never see hard times or lived on a budget.
My first house was purchased when I was an MM2 in the navy during the energy crisis of the 70s. It was built in a factory. One car family, paid for. Car pooled and rode a bike.
The likes of CNN focus on interesting stories. The large majority of Americans who live modest lives within their income is just too boring to report.
Energy prices increasing may have resulted in lots of jobs being lost. For those who failed to have a rainy day fund before owning house they could not afford, car payment for new expensive cars, and large credit car debt; energy cost is not the problem.
“I don’t give consumers a free pass”
Consumption is not the problem, it is the order of spending. I was once reject for a loan. After paying off a car loan, I kept the deduction going to a savings account. Two years later, I wanted to buy a a nicer camping trailer to live in between duty stations (saving money in the long run). I pointed out to the loan committee that I had demonstrated the ability to afford a luxury beyond my pay grade. Then I got the loan.
So one of the things that has changed. Banks now loan and consumer buy without regard for the ability to pay.
Wendell wrote: "Europeans are also less driven by a need for conspicuous consumption."
Damn, Wendell! Now I have to agree with Pete S. 🙂
The only thing your remark shows is that it is a long time since you have been to Europe — the land of 100% mortgages, loan to salary ratio of 5, and second homes in Turkey.
But you don't have to go to Europe to see how silly your left-wing canard is. Just look at the Mercedes Benz's being driven around the US by your local granolas — bigger than any car made in the US, and much more expensive.
Too many of the dreamy left in the US forget the soul-less banlieus of Europe, the dreary housing estates where the poor are left to rot. Those places do a fine job of keeping the Euro average energy consumption down, tho.
Dv asked: "Just out of curiosity, do you wish to cut the military, Social Security, or Medicare and Medicaid?"
The answer is obvious, Dv. Enforce the US Constitution.
Social Security should be privatized — it is a Ponzi scheme, which will collapse anyway unless it is reformed. Medicare & Medicaid should be returned to the individual States, which have the authority to do whatever their citizens are prepared to pay for. And the Feds should stick to doing what they are charged with – which includes protecting the nation, through an appropriate military.
The sad thing about the timing of the real estate bubble and the oil bubble was that it wasn't quite timed for people to turn their home equity into Priuses. They bought the big SUVs, and then hit high oil prices as their credit ran out.
Our fleet is still down around 22 mpg, and we have a lot of room to slash gasoline consumption.
It just won't be convenient.
To what extent will these oil problems be offset by the increased supplies of natural gas?
A family may be spending more on gasoline: however, they will likely be spending *less* on home heating and on possibly on electricity (much of which is ng-generated)…also, surely there are some industrial processes where gas can be substitute for oil if the price differential is strong enough.
I just love the ultra-right stuff about "Enforce the US Constitution".
I guess people mean to say "Enforce what I think the US Constitution means to say and to heck with everyone else".
The writers of the constitution didn't even dream of about 99% of life as it is today let alone give explicit instructions. They provided a set of guidelines only.
I am really sad that Kit P had to live in a trailer and car pool – really a rough life. I guess now I understand why he is so sour on life in general.
Most of us in my age group (65) didn't have any more than a few bucks in our pocket when we got out of the military in the late 60's – so what?
"The writers of the constitution didn't even dream of about 99% of life as it is today let alone give explicit instructions. They provided a set of guidelines only."
One could make the same comment about the Ten Commandments. Funny how guidelines like 'don't steal' can be applied even thousands of years later, to Congressmen from Louisiana and British Members of Parliament alike.
Never underestimate the importance of first principles!
But you don't have to go to Europe to see how silly your left-wing canard is.
Left-wing canard?
Kinu-
Many of the Founding Fathers, especially Thomas Jefferson, James Madison and George Mason, wanted an explicit provision within the Constitution prohibiting the establishment of a permanent military.
That is why military funding is limited to two years in duration in the Constitution, and why we have a Second Amendment–the right to bear arms and form militias lies with the people, no one else, and it cannot be taken away, and does not lie with the federal government.
In other words, a volunteer armed forces is what our founding fathers wanted and certainly no federal armed forces, except in time of invasion (of us, not some foreign land).
Today, more than one-half of federal income taxes are eaten up by the Department of Defense, the Department of Agriculture, and the VA (the huge entitlement programs are funded by payroll taxes, such as Social Security and Medicare).
Your income taxes largely go to feed the military and ag beasts–and you are right, our founding fathers would detest both institutions.
How perverted has the right-wing become? Bush's "energy program" was largely ethanol–a rural subsidy for farmers. Given how much energy it takes to make ethanol, it might be called an anti-energy program.
Ron Paul is an interesting man, and I encourage people to vote for him, way before any D or R party hacker.
Vote for any Third Party. Read the Constitution–and the Federalist Papers. You might be surprised what you find.
Benny — That's good advice about reading the Federalist Papers, though these it is a case of read & weep.
We are getting a little off topic here. But might as well get hung for a sheep as a lamb. There is a school of thought that the Second Amendment (right to bear arms) was intended to be the final line of defence against a Federal government which grows too intrusive & over-bearing. Made sense in the days when an army was simply a bunch of citizens with their own guns.
Of course, that was back in the days when most people in the about-to-be-US were bio-fueled. Is the past prologue?
Of course, that was back in the days when most people in the about-to-be-US were bio-fueled.
Yes, back in the day when people had to keep moving in order to keep finding more trees to cut down for fuel and houses. There is actually very little virgin timber still standing east of the Mississippi. Most of what you now see has been cut down at least once and is second-, or third-, or even fourth-growth.
One of the prime motivations for Europeans to come to North America was the tremendous (and seemingly infinite) stands of trees they saw here.
Without coal and oil, we would have run smack into the bio-fuel wall many, many years ago.
RR belongs to group of adults who have never see hard times or lived on a budget.
Kit, I don’t know why I continue to tolerate your idiocy. You post more fact-free nonsense than anyone on this board, and I know I am not the only one who has had their fill of it. Just to set you straight, I grew up on a small farm in SE Okla. Ever been there? One of the poorest areas in the country. We considered school teachers “rich.” I asked my grandfather once what life was like around there during the Great Depression, and he said “Pretty much the same as it is now.”
I have been working since I was 11, Kit. I bought my first vehicle, a 64 Chevy pickup, with money that I earned. Not a dime put in by my parents. I worked a full time job in high school and a full time job through college. I put myself through college without a dime of support from my family. I worked a night shift in a Campbell Soup plant, then got off work and went to school. You think that was easy? You think getting 3 hours of sleep 3 nights a week is easy? You think I didn’t have to live on a budget? My wife and I spent many nights eating grits. Yes, we were living high on the hog.
I have lived on less than half my salary for my entire career. The mortgages I have taken have been for a fraction of what I qualified for. I have scrimped and saved my entire life.
But by all means, you tell us about hard times. For that matter, why don’t you swing by Southeastern Oklahoma on your lecture tour and tell people all about what hard times are like. I am sure they will be duly impressed by your words of wisdom.
Now please, going forward can you strive to keep your head out of your ass?
RR
I still don't see it.
Let's say for argument's sake your energy bill went from 5% to 10%. That is still only a 5% increase in total expenditure. Even if you are living paycheck to paycheck, you should be able to cut 5% from the 95% of your non-energy spending. It might be painful, but it is quite achievable.
OTOH, an ARM resetting is going to hit you with a MUCH larger bill than a 5% increase. There really is no comparison…
Let’s plug in some real numbers. We use about 140 billion gallons of gasoline a year, and there are about 100 million households in the U.S. Thus, the average household uses somewhere in the vicinity of 1,400 gallons of gasoline. But let’s be conservative and assume 1,000 gallons.
From 2005 to 2008 gasoline prices rose by more than $2/gallon. Thus, the average household had to contend with an extra $2,000 a year. Remember, the savings rate in the U.S. is zero to negative, so taking $2,000 out of the average budget is going to sting. But on top of that, utility bills also went up sharply. My electric bill in Texas doubled when natural gas prices shot up. So there could have easily been another $2,000 a year in increased utility bills. Easy to see that the average family could have been shelling out $300 more a month due to higher energy costs – and those are the direct costs only. As we know, higher energy prices ripple through the economy.
This is an amount that is going to be of the same magnitude that most people saw from interest rates resetting. Larger, maybe, but not MUCH larger as you state. On a $150,000 mortgage, rates jumping from 5% up to 8% would increase monthly payments by something like $375/month. Any way you slice it, you aren’t going to get a number that is grossly larger than what people were paying out in higher energy costs.
Of course what happened is that many people had to contend with both: Interest rates resetting and higher energy prices. I think that put us into recession faster than energy prices alone could have, but given time the latter is all that it would have taken. History has borne this out again and again.
RR
Too many of the dreamy left in the US forget the soul-less banlieus of Europe, the dreary housing estates where the poor are left to rot. Those places do a fine job of keeping the Euro average energy consumption down, tho.
Kinua, have you ever been to Europe? I have lived there 3 times, and your comments don't bear any resemblance to what I experienced.
They use less energy because it is expensive. When something is expensive, you use less of it. They compensate for the higher price by getting more fuel efficient cars, living closer to their jobs, and using public transport.
The United States built a country based on cheap gas, and now that gas prices are spiking, it puts as at great risk. I would rather see us try to manage those spikes than sit by and watch them crush the economy at regular intervals. I think there needs to be a frank discussion with the American public, and the message needs to be: Energy is going to be more expensive than it has been. Plan for that.
RR
Let’s plug in some real numbers.
Good stuff. But I'm thinking this depends a lot on where you live. Some differences:
1. You paid $166/mo more for electricity than before the energy price spike? I guess it depends on the size of the house, and you need/comfort level w.r.t. AC. I get excited when my electric bill approach $60. I guess the difference is that my AC is seldom in a working condition, and that it is cool enough in SoCal to get away with that.
I might not have paid attention (Benny?) but I doubt my electric rate jumped more than $30/mo during 2008.
2. SoCal being SoCal you'd have to leave civilization behing to get a place for $150,000. Double that might get you something. Small. Now. Before the bubble bursted I had an agent telling me I qualify for a $600,000 home (those clever 1% loans). Thankfully I declined the offer. But at the time, $500,000 didn't buy you much. By your estimate, a 3% reset would add $1,250/mo.
So over here $1,250/mo is MUCH higher than $230/mo. Maybe that's why I still see all those SUVs…
RR
Previous Post:
Okay, great to hear that you are part Cherokee on both sides of your family.
What was said was not personal.
It seems to me that the Amer-Indians who control upwards of 30% of our fossil resources (especially in the four corners area) just might be "fixing to get the shaft one more time"
That's all…..
As it stands about 10% of our electricity is generated on plants within Indian Reservations. (mostly coal fired in the Four Corners area) as well as some hydro.
The potential exists for Indian Reservation reserves providing as musch as 30% of our electricity.
Combined with bio-mass reserves on timbered lands, a signifivant portion of our energy may end up coming from Indian Lands.
I just hate to see the aboriginals screwed one more time.
As it stands, many of the Indian peoples who allowed the big coal plants into the Four Corners area are without electricity while those same plants send power to Albuquerque and Tucson.
Also, no running water in many reservation areas……..
God only knows how much Uranium or Thorium lies under Indian Lands which we swore to them:
"As long as the Sun shall shine and the Rivers shall flow and Spring shall follow Winter.
John
Optimist said: But at the time, $500,000 didn't buy you much.
Depends what you define as "much". It's all relative.
Before OUR bubble burst, almost twice that amount would buy you an 850 sq.foot shoe-box of a house in a down-market part of my town.
You might get the same for $500,000 at post-crash prices.
Maybe like SoCal it's because of our beautiful climate (not!), being at the same latitude as Northern Canada and only the gulf stream keeping it too warm for polar bears.
Quite amazing what humans can be fooled into valuing.
I wish Texas would start thinking like Portland when it comes to Public Transit.
Optimist makes some great points. Many many mortgages that were reset were much higher than $150,000. Using $150,000 is way too conservative.
Our NG bill did go up. We heat our water and home with NG and have about 5 months when the heat is needed. It did not double, but I'd say it went up $50-60 per month. Our electric bill went up as well, about the same range and we have the air conditioning on at least 4 months. This doesn't come anywhere near the amount people were paying for mortgage resets.
If you look at the states with the highest number of ARM's, most of them are states with the highest home prices. The $150,000 you used just doesn't fly. Most people wouldn't have needed an ARM or creative financing if their mortgage was only $150K!
The crisis started from the mortgage resets and was topped off by rising energy costs, IMO.
O.D.
I feel for you guys in southern California. I remember paying $750 a month for an efficiency apartment on the "wrong" side of Long Beach back in the 80's. A sister-in-law out there qualified for a $500,000 home a few years back and couldn't find one with 3 bedrooms that wasn't falling down.
The average price around here is about $125,000. Outside of New Orleans,maybe $100,000. And the yards are much bigger. My buddy bought a fixer-upper in Mississippi last year for $25,000. He put about $10,000 into it and has a nice 3 bedroom now. And it came with 5 acres. 5 acres in LA would probably run into the millions.
RR wrote: "They (Euros] use less energy because it is expensive."
And what are the consequences of energy being more expensive? For the middle classes, smaller houses, smaller cars, less frequent showers, etc. For the poor, the consequence is simply less.
A lot of the discussion on this thread misses the point because it talks about hypothetical "averages". It ignores the bimodal nature of some of the distributions.
Let's return to those lumbering Euro Mercedes-Benzes — did you not notice them when you were in Europe? Rest assured that it was not the plentiful European poor who were driving them.
RR, we all see the world through a keyhole. It's a big world, and we each can only be in one place at a time. You lived in Aberdeen — historically a wealthy area by Scottish standards, and one which became wealthy by world standards when it became the center of the North Sea oil industry. Even in Aberdeen, you might have noticed some of the housing projects on the outskirts of the old city. Did you spend much time in them? Did you see how those people lived?
One of the reasons your blog is so interesting, RR, is your insistence (in most cases) in starting with the facts. You have a few blind spots — just like the rest of us. Maybe the belief that all Euros in the "Upstairs Downstairs" drama live happily Upstairs is one of them.
One the issue of energy, please open your mind to an alternative, Robert. Why should power supplies become more expensive? Shouldn't our goal be to make power cheaper — for everybody in the whole world. We have the technology, we have the resources. If we can just stop chasing dead ends ….
“idiocy “
RR is working awfully hard at talking everything as an insult. RR is part of a group that has not seen hard times as an adult. Not that I consider this recession that bad. My company thought the difference in demographics were so important that they has all hands training. Again these are generalities to help explain why a an older person is more likely to define themselves by their job and work late to get the job done.
“I grew up on a small farm in SE Okla. Ever been there?”
Yes, lived in our camping trailer for 4 months. Two of kids went to school there. Whatever the teacher got paid it was too much. I see why you got out. My company would have paid for a hotel but some places camping is better than room service. Any day with the family is better than a day in a hotel
“You think getting 3 hours of sleep 3 nights a week is easy?”
Somehow, I do not think RR would have survived the navy.
Sleep deprivation was not why I got out of the navy. When I got out the navy my income doubled . With double digit inflation, Jimmy Carter thought military families should do more with less.
“My electric bill in Texas doubled when natural gas prices shot up. So there could have easily been another $2,000 a year in increased utility bills.”
“Using $150,000 is way too conservative.”
Just for the record that is not how poor people live. The cost of food and energy has never been a smaller fraction of an American budget for those who live a modest lifestyle. If you have a $2,000 a year in utility bills, you are not living a modest lifestyle.
I have the American dream. A nice 3brm all electric house with a $150,000 mortgage (moved 3 years ago) and use an average of 1000 kwh/month. This is in a very upscale neighborhood. I drive a 89' ford ranger to work and use 15 gallons of gas a month.
It is fine with me if people want big houses, fancy cars, coffee from Starbucks, and fine red wine. Please stop tell me the unit cost energy and food is a burden on the American family.
"Please stop tell me the unit cost energy and food is a burden on the American family."
Weren't stats just release showing that one in seven American families were struggling with food security?
If you have a $2,000 a year in utility bills, you are not living a modest lifestyle.
I think that really depends. I like to think we live pretty modest and our utilities are close to $2,000 (if you include water/sewer/garbage). I feel this is mostly because of the huge swings in temperatures in our state. We pay next to nothing for gas/elecgric in the fall & spring(under $60 for both) but we literally pay 3-4x more during the summer & winter. If we lived in California, I bet we could easily pay 1/2 of what we do now. Global warming/change/whatever is supposed to give our state a more temperate climate, hmmm.
Granted, we could lower our bills if we really set out to do so, but i'm going to enjoy it while it's cheap.
O.D.
Weren't stats just release showing that one in seven American families were struggling with food security?
Stats like that don't say much without knowing past trends.
O.D.
US food insecurity past trends at
http://www.ers.usda.gov/Briefing/FoodSecurity/Stats_Graphs.htm#trends
shows a noticeable increase in 2008 to the highest rate in at least a decade.
“food security?”
That is a new one, what will the nanny state come up with next? Of course this has nothing to do with my statement about the relative cost of food.
I think one of the basic problems with utility bills is that the bill comes once a month. It is popular to blame the supply for the cost and not the consumer of the energy. Nobody ever calls the Miller Brewing Company evil when they can not afford beer.
People who hate oil and/or the oil companies will always tend to blame it or them for any current convenient malady, but it's hard to believe that financing / housing weren't hugely more important for this recent dive. Clearly oil prices affect the overall economy, but I tend to think there is as much or more of a psychological. Gasoline is about the only thing that folks buy constantly where its price is proudly and conspicuously displayed to the tenth of a penny! It establishes a pretty powerful and basic economic frame of reference for all those who drive and fill-up every week or a couple of times a week. It will of course tend to have the greatest effect on those who have to spend the highest % of their income on energy, but I think the psychological effect is greater than the actual financial.
Kit P wrote: “food security?”
That is a new one, what will the nanny state come up with next?
Ronald Reagan signed the Food Security Act of 1985 (otherwise known as the 1985 Farm Bill). I guess that makes Reagan an architect of the nanny state.
Happy birthday wife of RR. Forgive him, he's just a man.
Rate of change is the key to most economic disruption. Policies that create shock absorbers are all important:
http://home.comcast.net/~russ676/desiremore/grainreservves.jpg
Given time, corn prices will fall as more people plant corn:
http://home.comcast.net/~russ676/Graphics/img30.gif
In the interim, people starve.
Given time, energy prices would have less impact as more people switched to high mileage vehicles. Some people are just too dumb to take a hint. The higher frequency and amplitude of oil price swings is a precursor to a big change.
There is no such thing as a free lunch:
http://home.comcast.net/~russ676/Graphics/img29.gif
Clee, I am a liberal Republican which is why voted for Bush not Reagan in the primaries. I have no problems with government getting to the root cause of a problem and taking action when government is better equipped to fix the problem.
I do have a problem with government making victims out of people.
So Clee if you have a problem with the cost of food and budgeting; next time I am in California I can stop by your million dollar house and show you how to do a budget. I will show you how to make Chile and mac and cheese. Spaghetti too. We have taught our children, I sure you can learn too.
Regulating energy is a proper government function. The simple truth is that no one has high electric bills unless you waste a lot of energy.
While it may be true that Clee's electricity rates may be twice where I live but they are still a bargain. Places that get their base load power from coal and nuclear, have lower rates.
"RR is part of a group that has not seen hard times as an adult."
I guess if that is the metric, Kit is a part of a group who sometimes has to have their diapers changed.
"Regulating energy is a proper government function. The simple truth is that no one has high electric bills unless you waste a lot of energy."
So, if you are wasting a lot of energy, it is a proper function of the government to walk around the house behind you switching off the lights and turning down the heating?
"If you have a $2,000 a year in utility bills, you are not living a modest lifestyle.
I have the American dream…..and use an average of 1000 kwh/month."
Kit,someone using 1000 kwh/month in my neck of the woods pays $2400 plus per year. Figure another $500 per year average for natural gas,and another $500 for the water bill,which includes taxes of various sorts. That's for someone living modestly,mind you.
"Many many mortgages that were reset were much higher than $150,000. Using $150,000 is way too conservative."
In most of the country, and for the group of people targeted by subprime loans, $150,000 is probably plenty good. It is well-documented that the predatory lenders preyed on minorities, and most of those were not high dollar homes.
"The simple truth is that no one has high electric bills unless you waste a lot of energy."
You really must get out more. The world is much bigger than you think, and there are many areas where even basic electricity is expensive. No need to waste energy to have a high electric bill.
In most of the country, and for the group of people targeted by subprime loans, $150,000 is probably plenty good. It is well-documented that the predatory lenders preyed on minorities, and most of those were not high dollar homes.
Not true. The average 1st subprime mortgage was over $200K and most subprime mortgages had a 2nd mortgage as well, usually $30k or more. So, we are looking at over $230K as an average. The top 2 states of the subprime meltdown are Calirofnia & Florida, hardly cheap real estate there.
Just one link of many..
subprime
O.D.
Maury
My house does not have natural gas. It is all electric. Furthermore, we live an affluent lifestyle. Maybe not an extravagant lifestyle like Al Gore.
Keep in mind the context of the discussion. Were families living a frugal lifestyle pushed over the edge by increasing energy costs? Or were people over extended because their spending was out of control. If enough families go over the edge we are in a recession.
How many people are commuting 100 miles a day to get to an 'affordable' $400,000 mortgage in a 4wd that gets 15 mpg?
I have no idea. Every time I visit big cities ringed with beltways I am amazed that people live that way. Of course they, have do desire to live in a rural area.
In any case, if you spending too much money on energy; it because you are using too much. Choices, choices!
"Not true. The average 1st subprime mortgage was over $200K and most subprime mortgages had a 2nd mortgage as well, usually $30k or more. So, we are looking at over $230K as an average. The top 2 states of the subprime meltdown are Calirofnia & Florida, hardly cheap real estate there."
Multiple problems with your argument here. First, the article does not say that those who had a $200K subprime mortgage also had a $30K subprime mortgage. It said 2nd mortgages averaged $35K, but that wasn't a subset of the first.
The second problem is that if that is indeed CA and FL, then those were indeed low priced homes that were targeted.
Finally, you were arguing that $150K was not in the ballpark. $200K is certainly in the ballpark of $150K, and a good distance from where you seemed to think all the action was. So I think the $150K used initially wasn't too far off the mark. It certainly wasn't "way too conservative" as you suggested. And the result is that mortgages in that region are going to have resets that are going to cost about as much as their increase in energy bills.
I can say with 99% certainty that almost all of the subprime mortgages had 2nd mortgages as well. Apparently you are not aware of creative financing to avoid PMI amongst other things. The median price is for the whole country, of course those in California and Florida would have been higher. I do not think $230K is in the ballpark of $150, but whatever.
It's also offensive that it was implied minorities can't afford housing higher than $150K.
I still stand by my original comment. This crisis was started by the mortgage meltdown. People were put in homes they could not afford, not with $40 oil and certainly not with $140 oil & increased energy costs.
"Furthermore, we live an affluent lifestyle."
Kit,I hate to be the one to tell you,but driving an '89 Ford Ranger isn't like lighting cigars with hundred dollar bills. Earlier,you said you have a $150,000 3 bedroom in a very upscale neighborhood. I can't tell if you're being fecetious or have a dark sense of humour. As long as you aren't serious…..LOL.
I hate to be the one to tell you,but driving an '89 Ford Ranger isn't like lighting cigars with hundred dollar bills.
Maury,
But owning any kind of car would be a tremendous luxury to about 80% of the world's population.
Most of the people in the world would consider your lifestyle to be affluent, even if you do drive a 20-year old compact pickup. By the way: That must mean I rank higher on the world affluency scale ~ my compact pickup trick is only 12-years old. 😉
And what are the consequences of energy being more expensive? For the middle classes, smaller houses, smaller cars, less frequent showers, etc. For the poor, the consequence is simply less.
Quality of life isn't about big cars and big houses. I have lived in Europe long enough to have known people of all income distributions. People can have a very nice quality of life without being energy hogs.
Maybe the belief that all Euros in the "Upstairs Downstairs" drama live happily Upstairs is one of them.
Again, I was in Europe for several years. My acquaintances spanned the range of incomes, from the unemployed through billionaires. I know how people over there live, and not just the stereotypes of how they live.
One the issue of energy, please open your mind to an alternative, Robert. Why should power supplies become more expensive? Shouldn't our goal be to make power cheaper — for everybody in the whole world.
This is the crux of the matter, and the heart of our disagreement here. The power I want to make expensive is finite, and we are using up we have in often wasteful manners. I would love for everyone to enjoy cheap, plentiful power that has no significant impacts on the environment or on future generations. Can you direct me to it? If we don't start to ration our fossil fuel supplies by increasing the price, we are going to put future generations at a distinct disadvantage – all the time hoping for a technological miracle that can continue to provide that cheap, plentiful power we all desire.
RR
Maury
No joke.
Where I live housing prices are capped by what new construction costs. If I was willing to drive a little 10 miles a day farther, I could have bought a new house on a few acres if that is what I wanted. To be sure, it is easier to find a new huge house to $300K. This is what a coworker did. Better yet, my house has maintained its value. Houses do not stay on the market long unless they are over priced. I could have bought a house for $90k in town in a but property taxes would have doubele.
My 150k house is nicer than my sister the house in the SF bay area. Okay neighborhood, sold for $900K recently. Some friends in San Jose bought a 1br, 1ba (with rotting floor) for $500k with $5000/yr property taxes.
I was wondering if reasonable housing was still available in California. No bad neighborhoods here.
http://www.coldwellbanker-amador.com/content/listdetail.html/95192427?proppos=73&br_id=723456&pageclicked=8&RowCount=272&VirtualTourCount=22&startpos=71&endpos=80&ids=96547764,82563581,95192427,96243336,98211238,90153216,98728019,98562240,86462112,92695464&propertyCount=272
RR wrote: "I would love for everyone to enjoy cheap, plentiful power that has no significant impacts on the environment or on future generations. Can you direct me to it?"
I would love that too — an my definition of 'everyone' includes the whole human race.
With today's technology, we could start with lots of nuclear fission power plants. Reprocess nuclear "waste" as the fuel it really is. Extract uranium from the oceans if we have to — the cost of fuel is insignficant in a nuclear plant.
Use the energy from the nuclear fission plants to back out coal, and start converting coal into liquid hydrocarbon fuels. That caps the oil price. Since alleged Anthropogenic Global Warming is unscientific nonsense, the environmental impact will be bearable.
And meantime expand research into all forms of energy — through means like X-prizes rather than through political favoritism.
It could be done. There is no reason to throw in the towel already. It is simple defeatism to assert that energy has to become more expensive as conventional oil sources get used up.
Kinu is right that nukes can be used to provide the human race with reasonably priced electricity.
The reason making energy expensive will not work to reduce demand is that energy is not expensive relative to the benefit. A few years ago when gasoline was expensive, rather than not going to see the older kits, we ate fewer meals out while traveling. The point being that doubling energy costs would only reduce one trip to a restaurant.
The reason making energy expensive will not work to reduce demand is that energy is not expensive relative to the benefit.
That's a nice theory, but directly contradicted by observation. When gasoline got so expensive last year, demand dropped sharply. People started to drive less, they started to fly less, and they started buying more fuel efficient cars. I recently posted a graph here showing that the drop in demand correlates nicely with the rise in price. That would appear to be a "no duh" kind of graph, but one you apparently dispute.
Further, countries that impose high gas taxes have a lower per capita energy usage. These are facts, not idle musings: Higher prices do reduce demand.
RR
I would love that too — an my definition of 'everyone' includes the whole human race.
As does mine. Energy can definitely improve the quality of life. The problem is that there just isn't enough for everyone to consume energy at the rate of the U.S. or even Europe.
With today's technology, we could start with lots of nuclear fission power plants.
I am all for expanding nuclear power.
Use the energy from the nuclear fission plants to back out coal, and start converting coal into liquid hydrocarbon fuels. That caps the oil price.
Caps it at what? It isn't cheap to turn coal into liquid fuel. If it was, we would already be doing it on a large scale here in the U.S.
It is simple defeatism to assert that energy has to become more expensive as conventional oil sources get used up.
Actually, if you noticed what happened to oil prices over the past 10 years, that is more of an observation than an assertion. I believe this trend will continue, and that is my assertion. As a result of that belief, I think we have to be proactive by slowing the rate of consumption.
RR
Remember, Kit, you are on a short leash here. You want to be cute again, I will just start deleting all of your posts.
Your friendly moderator,
RR
Kit, I have no problem with the cost of food, energy, housing or budgeting. I didn't even imply it. I was just pointing to the stats that O.D. seemed to think was needed, and pondering your definition of a nanny state. Bush Sr. was the one who signed the executive order creating the National Nutritional Monitoring Advisory Council which created those food insecurity statistics. Personally I don't think that tracking data is a sign of a nanny state, and I think it's odd that the mere words "food security" seem to make you jump to the conclusion that it was dreamt up by a nanny state.
I wish my house were worth a million dollars, but it's just fine that it is not. So I don't need your advice on how to make that mac and cheese food which is more expensive than the grains I eat. Though if you were planning to show me the fine art of hand-pulling noodles from a lump of raw pasta dough, that could save money, at the cost of time.
I agree with Russ Finley that it is the rate of change that is the key to most economic disruption. In this case, I blame mostly the rate of exploding ARMs which may have hurt only a few percent of homeowners, but which caused the banking industry to freeze credit to just about everyone, including small businesses with excellent credit history and signed customers. Or maybe I should just blame the bankers for at first being too lax with credit and then over-reacting by being too tight with credit, and the speed at which they clamped down. I don't blame the not-much-faster-than-usual increase in the average household expenditures for housing, food or energy as measured by the CPI. Businesses having less access to credit lay off workers. Laid-off workers spend less (even if things don't cost more), deepening the recession.
“more expensive than the grains I eat”
“fine art of hand-pulling noodles from a lump of raw pasta dough”
Who writes your stuff? You have to love folks in California, they are so funny and do not know it. So after pulling a 12 hour all night shift at minimum wage, you go home and practice fine art cooking?
“I blame mostly the rate of exploding ARMs “
So then you agree with me that it is the cost of food or energy that so many into trouble? There are several thing I am certain about, personal responsibility and root cause analysis.
A good standard of living does not require large amounts of energy. If you do not use a large amount of energy, then changes in the cost of energy are not significant. If buy a house you can not afford if the interests rates go up, then you should not get an ARM.
Clee, analysis of the 'blame' for the recession sounds reasonable. Here is the problems. If not enough credit to buy things we do not need, means those who sell things to people who do not need them will lose their jobs.
So when farmers and construction workers have a couple of good years they go and buy a new pick up because they need it. When I built my house in California, I noticed that all of the contractors I hired haws old 2wd PU. When I would drive into San Jose where Clee lives and it does not snow, there were a large number of 2wd PU with fancy wheels and paint jobs. Definitely not work trucks that were needed to be productive or economical transportation to the job .
Much of the wealth was based on the 'paper' value of real estate.
In a convoluted way, my POS PU is a luxury. It is the luxury of not having a car payment, of not having higher insurance premiums. It is the luxury of not having to worry about a dent or having it stolen.
Kit, I don't know why you make things personal and tell me you'll come to my house to show me how to make allegedly-cheap mac and cheese and spaghetti, and yet when I indicate that I am neither so rich as to own a million dollar home, nor so poor that everyone in my household has to work 12-hour shifts, you take my personal answers as if they were my recommendations for anyone else. Sorry, I'm not interested in telling other people what they should do, like I'm some nanny or brother's-keeper or know-it-all. That appears to be your department.
Here where it almost never snows, I see an amazing number of ancient vehicles that never rusted out from winter road salt. I've never seen fancy wheels on a housing contractor's vehicle.
“I don't know why you make things personal ….”
Maybe it because you eat 'grains', who says things like that?
“Sorry, I'm not interested in telling other people what they should do, …”
That fine Clee, could you work harder to vote out of office those who do? For example regulating energy use my TVs.
Here is a real example of a subprime reset and how it impacted a families finances. In my previous examples, I assumed an average mortgage that was lower than the one in this story, but I assumed an interest rate reset that was much higher:
Judge blasts bad bank
Yano-Horoski, a college professor of English and cognitive reason, and Horoski, who sells collectible dolls online, bought their 3,400-square-foot, one-level house 15 years ago for less than $200,000.
In 2004, court records show, they refinanced, paying off their original mortgage with part of a $292,500 sub-prime loan from Deutsche Bank. They used what was left for health care and for his business.
The loan carried an initial adjustable interest rate of 10.375 percent, which soared to 12.375 percent.
The impact of their interest rate "soaring" upwards by 2% would be to increase their mortgage payments by almost $500/month. Meanwhile, energy bills were increasing by $300/month. As I have said, the numbers are of the same order of magnitude.
In any case, the increase in mortgage payments was not MUCH greater than the increase in energy costs. Greater in most cases, yes. But not everyone had a subprime mortgage. Pretty much everyone got hit with the higher energy prices.
RR