Thursday, September 11, 2008

Pulling Out of the Death Spiral

The United States spent more than ever on imported crude oil in July. The total tab was $51.4 billion, 13.7 percent more than in June. The result was a near-record trade deficit that month, $62.2 billion, beaten out only by March 2007 and the 13 months from September 2005 to September 2006. But that was a time when exports were a third less than they are now.

Oh, I know, we’re trying to cut back on oil consumption. In truth, we are cutting back, ever so slightly, but the record high oil prices more than wiped out our half-hearted efforts at energy conservation. If oil prices ever go up like that again, we’re sunk.

So much for the theory that the falling U.S. dollar would stabilize the U.S. economy by boosting exports. Exports are going up, to be sure, hitting a whopping $168.1 billion in July, but energy imports (which are more than half of all U.S. imports) are going up just as fast. It is only by cutting back on other imports, such as food and clothing, that we have been keeping the balance of trade close to level.

The falling U.S. dollar drives up the price of everything we import, including crude oil. In principle, a falling U.S. dollar should lead us to import less, and we are importing less. However, this does not help stabilize the situation until the amount of money we spend on imports goes down. And the way things are going now, it is hard to see how that could happen. Instead of approaching a point of equilibrium, the United States is in a death spiral of:

  • High oil prices, leading to
  • A trade deficit, leading to
  • A decline in value of the U.S. dollar, leading to
  • Higher oil prices

Each of these factors feeds the others, but the key to escaping this vicious circle is cutting back on imports to reduce and eliminate the trade deficit. And since most of our import spending goes to energy, the only way out is to somehow limit ourselves to using the energy we create ourselves. That is, we need energy independence, or at least an approximation of it. I know it sounds preposterous, even impossible, if you look at the way the United States has done business in the last 40 years. But it is not impossible. We have done it before, and we can do it again.

And we need to do it soon. Oil prices are going up on their own, mainly because of the increased cost of finding and extracting oil. It has gotten so bad that the White House is talking about drilling for oil in the deeper water off the East Coast. We are not likely to find much oil there for $100 or $125 a barrel. Most of it will cost more just because of where it is. Oil prices fluctuate with the seasons, so they are falling now, but there is no reason to hope that next summer, prices will stop at $125. Rather, it is likely that oil prices every year will be higher than the year before.

Some people are saying the free market will sort this out. That is not really true. In the long run, we would eventually arrive at a point of equilibrium, but what would that point look like? Just to give you an idea, if we could somehow slash oil imports by 50 percent today, that by itself would not be enough. The United States would still have a trade deficit. The U.S. dollar would still be declining. If we talk about letting market forces take us wherever they want to take us, we are talking about letting oil prices continue to rise at least until Americans voluntarily cut back on oil consumption by more than half.

What would it take to get you to drive your car less than half as much? To heat your home to 52 degrees Fahrenheit instead of 72? To take the bus instead of the airplane for half of your long-distance trips? How bad does it have to get to produce changes in behavior of that magnitude?

No one knows precisely what the answers are in aggregate, but we know oil is a hard habit to break. A good guess at a market equilibrium, if we keep going the way we’re going, looks something like this:

  • Crude oil prices between $300 and $350 a barrel.
  • Gasoline prices between $14 and $17 a gallon.
  • Milk prices around $7 a gallon. Beef as a luxury item. No more pears flown in from Chile.
  • Between 30 and 50 million Americans sleeping in shelters for the winter because they cannot heat their homes.
  • More than 80 million Americans working at home because they cannot afford to get to work (or sleeping at work because they cannot afford to go home).
  • Foreign interests owning more than half of the U.S. banking system, and quite possibly more than half of commercial real estate too.
  • Almost half of retail space in the country vacant. Most restaurants closed.

I could go on, but you get the idea. Just letting things go is not a solution. The economy as we know it would collapse long before we would reach an equilibrium. The kind of tinkering we have been doing so far is not nearly enough. To make things worse, this crisis is upon us at the same time as a slow-motion collapse of the banking system, a crisis of historic proportions in itself, and the climate crisis, which already calls for the largest re-engineering of the world economy ever imagined. In this moment, we cannot afford to be hesitant or half-hearted about rescuing the real economy. So far, the United States is acting like a dieter who, discovering that he is still gaining one pound per week and is now 180 pounds overweight, resolves to stop putting the candy sprinkles on the ice cream. That is not enough! It is time for drastic action, action on a massive scale, a scale that could include cutting oil consumption by half. Bold, even desperate action. I’m talking about changes like these:

  • A ban on new oil furnaces for heating (perhaps exempting the Arctic Circle).
  • A stiff tax on the heaviest gasoline-burning passenger vehicles (those that weigh more than about 800 pounds per passenger, perhaps).
  • Phasing out the use of oil for paving roads and parking lots.
  • A ban on the manufacture of gasoline engines (for cars, boats, trucks, lawn mowers, etc.) that cannot also run on E85 (a fuel mixture that includes only 15 percent oil).
  • Taxes on energy-intensive foods, such as beef, chicken, eggs, and milk.
  • Increasing the federal gasoline tax by 10 cents a gallon every year until the trade deficit goes away. Extending this tax to fossil heating oil.
  • Legislation that wipes out all zoning rules that currently prevent people from installing windmills at home.
  • A massive investment in other sources of energy and in energy efficiencies, such as having federal buildings generate the electricity they use.

At the same time, it is imperative to address the other destination of money that flows out of the United States by the billions every day. That is the U.S. military installations in other countries, especially Iraq. Most of that money stays in those countries. We will surely need to cut that back by more than half as well.

Yes, this is drastic stuff. It hurts. I am not sure these are quite the right answers. On the other hand, everything I have suggested is not nearly enough. Cutting oil use by half, in a country run by oil men, does not come easily. But if we wait until gasoline costs $10 a gallon, we will still need to do all the same things, and more, to solve this problem. It will hurt less if we start now.