Breathing a Little Sigh of Relief

My apologies for the month hiatus. I was moving, and dealing with some personal crises. Fortunately, the situation seems to have stabilized. Things still aren't really where I would like them to be, but things have eased from red alert to a slightly orangish yellow.

You could say the same about the U.S. economy the past few weeks...not out of the woods, but breathing a little sigh of relief. The prime mover of the economy, oil, has eased from an economy-throttling $143 a barrel down to a merely painful $113. The spike in interest rates that was threatening to send the housing market into another death-spiral reversed a bit and then plateaued. The dollar has even regained a little ground. In short, things aren't back to what we want to call "normal," but we're no longer--for now at least--in acute crisis.

So how big a sigh of relief can we breathe? I would say, not very. Unfortunately, none of the underlying forces that made oil more expensive, the dollar lower, and interest rates higher have been dealt with. The fundamental imbalances between supply and demand of oil still exist in the long run, even if a reduction of demand in the short run has caused what I believe to be a temporary retreat in oil prices.

The problem is that we are entering an era of permanent decline for oil production. Thus, in order for price to keep declining, demand has to keep declining...as it has in the U.S. for the past several months. The only way demand can decline, other than a reduction in the population, is through conservation. (In the long run, hopefully we'll develop substitutes for oil, but for the next decade at least, we're pretty much stuck with petroleum as the prime mover for our economy.)

Energy conservation is a noble idea, and almost everybody seems to want to practice it...at least in the beginning. We've been doing a decent job of it for the past year or so, which is one of the reasons oil prices have declined. But the problem is that each subsequent reduction in energy usage gets progressively more inconvenient and difficult. Think about your own use of energy. Unless you're already an energy-conscious person, you could probably reduce your total consumption by 10% without significant changes to your lifestyle. Inflate tires properly, be careful to turn out lights, maybe bump the air-conditioner thermostat up a degree or so, avoid jackrabbit starts, and so on. That's pretty much what we did as a nation to shave oil consumption in the first half of this year.

However, energy conservation gets progressively more difficult and painful the more one is called upon to conserve. That first 10% or so of reduction was easy, but the second 10% requires more conscious effort. And the third 10% reduction...now we're talking some real lifestyle changes, like trading in the SUV for a Hyundai or even a hybrid, moving so you're fifteen minutes from work instead of an hour and a half. To sustain and further the reduction in oil usage, we're talking about changes as a society. We're talking bosses giving up control-freakery and letting office workers work from home offices a couple days a week. We're talking about car lots not seeking to be seen from space a la the Luxor in Las Vegas every night, and shutting off or dimming their lights. We're talking fewer nights out on the town, and more nights at home.

Is it possible? Yes. Is it going to be easy? No. Reducing our use of oil to the level necessary in the next decade to make oil a viable energy source is going to challenge some of our core beliefs about what the "American Way of Life" (which is actually a fairly recent cheap-oil invention) ought to be. There'll be push-back from companies and groups who stand to lose if change occurs.

But if you think that's bad, console yourself (if you want to) with the fact other societies around the world are going to be facing even more wrenching changes and hard choices: most notably China. While China is making some progress in becoming more energy-efficient, it still has a long ways to go. The Chinese practice of subsidizing fuel will also work against it, as those subsidies will grow more expensive as oil appreciates. Check out this map...the nations in yellow are going to be in for a rough ride, and those red nations that do not produce at least most of the oil they consume will have a worse time of it.

So my advice to Americans is to make the most of the economic uptick we seem to be experiencing (or will be experiencing once the fall in oil prices percolates through the economy and helps tamp down price pressures). Use this time to begin adjusting to a lower-energy future. Pay down your debts, sell that SUV in a couple months once the gullible begin to become convinced gasoline prices have returned to "normal," try to get closer to your job, and so on.

Breathe a sigh of relief, but don't be fooled. We're not out of this one yet.