Oil Shock

A.K Gupta Jul 19, 2008

Even as the Economy Reels, a Golden Opportunity is at Hand
For more than a year the U.S. economy has been reeling from the housing and credit crises, but now it’s staggering from the blow of rising energy and food prices. The impact of $4-a-gallon gasoline is rippling outward as Americans cut spending of all sorts. Every month it seems as if another major economic sector hits the skids: first it was housing and construction, then automobiles and airlines, then tourism and, finally, back to housing with the implosion of Fannie Mae and Freddie Mac.

What ties all these crises together is cheap energy, which drove years of suburban sprawl, SUV sales and big-box consumption. That’s all in the past, however. The United States consumes 12.4 million barrels of imported oil products a day. At $140 a barrel, that comes to $633 billion a year — a huge transfer of wealth to oil companies and oil-producing countries and four times the annual cost of the Iraq War.

Oil prices have surged six-fold since the 2003 invasion of Iraq. But with the housing sector on fire and profits robust, consumers and businesses were able to absorb the costs. Not anymore. In June, consumer prices rose 1.1 percent nationally and 1.2 percent in the New York region. Also in June, the producer price index, the inflation rate for businesses, rose an astonishing 1.8 percent. The inflationary effects are being passed through the commodity chain in price increases and job losses.

High-profile victims include Starbucks, which announced in June it was shuttering 600 stores, apparently because many Americans are thinking twice about hopping in a 6,000- pound SUV to grab a $5 Frappuccino, and General Motors, which has laid off more than 40,000 hourly workers since 2006.In this crisis lies a great opportunity. This shockwave could radically restructure our economy and lifestyles. But how this transformation occurs depends on whether choices are made individually through “the market” or collectively through the political process.There is a stark choice: a shrinking economy, declining social services and an ever-growing underclass. A future where those with the means flee to city centers to escape high energy costs, while many suburbs become home to poverty and crime. Or, if specific legislative and policy actions are enacted, high energy prices are maintained through taxes that are used to retool the economy away from fossil fuels and toward sustainable — and local — manufacturing, agriculture and living.There is another golden opportunity at hand — curbing fossil fuel use to aid the economy could aid the environment by putting the brakes on global warming. Carbon emissions have to be rapidly reduced by 90 percent from today’s levels to slow climate change, which means phasing out oil, coal and natural gas. We can’t drill our way out of this oil shock, so kicking the imported oil habit is a necessary first step to mitigating climate change.

Market-based solutions won’t work, however. Even though energy prices have been rising for five years, the market was unable to prevent the crisis. Similarly, carbon trading has failed because it’s easy both to keep emissions off the books and to fabricate offsets. The better solution, a mandatory carbon tax, is the one most opposed by industry because it actually reduces energy use (and profits).There is also the issue of externalities, that is, capitalism’s ability to socialize potential costs such as pollution, product safety and unemployment. For instance, New York City has plenty of open land that could be turned into bountiful organic farms, even without sci-fi concepts like 30-story vertical farms. But, ask critics, “Would a tomato in lower Manhattan be able to outbid an investment banker for space?” This is not an issue of “the invisible hand” of the market at work, however. Capitalists game the political process for profit so markets don’t reward energy not used, waste not produced, environments not despoiled.Energy companies are experts at gaming the system, especially during this energy crisis. Direct government handouts to oil, coal and gas companies amount to tens of billions of dollars a year, and indirect aid runs to the hundreds of billions if you count the costs of energy wars from Colombia to Iraq. Public Citizen estimates the 2005 energy bill alone doled out $15 billion in subsidies to these sectors.

Peak Oil Panics

This is not the first energy crisis. Since the oil age began in the late 19th century, there have been at least five “peak oil” panics, most recently in the 1970s. Then, the U.S. government enacted higher fuel-efficiency standards, lowered speed limits, subsidized home insulation and encouraged conservation and car pooling. Along with the Reagan recession, this led to a drop in domestic demand of more than 5 million barrels a day. This left OPEC with a huge over-capacity, which led to cheating on production quotas (stemming from the Iran-Iraq War) and an oil market crash by the mid-1980s.

During the Carter administration, oil and gas interests killed any real government funding for solar and renewable energy, so the crash in oil prices and Reagan-era hostility to conservation left the United States without a plan to shift away from fossil fuels.The 1970s oil shock was due to geopolitics — rising nationalism, the 1973 Arab-Israeli War and the overthrow of the Shah in 1979. The causes of this energy crisis are similar. The U.S. invasion of Iraq, saber-rattling and sanctions against Iran, attempts to topple Venezuela’s Hugo Chavez and energy nationalization from Bolivia to Russia has crimped supplies. So if there is another significant recession, demand will eventually drop, surplus capacity will rise and prices will tumble, ending any market-based incentive to move away from fossil fuels.

In the meantime, the oil shock is causing a rapid economic transition. A poll conducted earlier this year in the Sacramento, California, area found that gasoline prices were the top concern and “12% of respondents had changed jobs or moved in the past year to shorten their commute to work.”A lack of rational planning, however, has left the nation ill-equipped to handle the shift. Take public transit, which has been starved by the government. Ridership has leaped 20 percent or more in many urban areas, but many systems are in a Catch-22. Because of rising fuel costs, notes one report, “Almost half of bus operators and more than two-thirds of rail operators have increased fares. About a fifth are cutting service. ”A recent report, “Driven to the Brink: How the Gas Price Spike Popped the Housing Bubble and Devalued the Suburbs,” by CEOs for Cities argues that gas prices are more of a factor in the housing meltdown than the subprime debacle. While this analysis is questionable, it is true that during the 1990s, with gas under a dollar a gallon at times, many Americans traded 100-mile commutes for life in remote locales because of low home prices and open spaces.

Now, notes the report, “Housing in cities and neighborhoods that require lengthy commutes and provide few transportation alternatives to the private vehicle are falling in value more precipitously than in more central, compact and accessible places.”This is how the market works: to save money, you need money, whether to move closer to a job or buy a fuel-efficient vehicle. Home prices have dropped for 20 of 21 months in U.S. cities and have fallen by more than 20 percent in the epicenters of sprawl — Las Vegas, Phoenix, Miami and Los Angeles. As for SUVs, their prices are also in a free-fall as car makers struggle with 100-day inventories for full-sized trucks and dealers can’t unload the new and used road hogs on their lots. Thus, many Americans find themselves with cars and homes they can’t afford to keep and can’t afford to sell. And declining sales mean huge job losses in the auto and housing sectors, intensifying the downturn. This threatens to impoverish lots of suburbs, particularly those already becoming ghost towns because of foreclosures. And as municipal and state revenues fall with the economy, there are fewer funds for upkeep and services, creating a vicious circle. The Atlantic Monthly recently outlined a scenario where the “low-density suburbs and McMansion subdivisions” of today become “slums characterized by poverty, crime, and decay” of tomorrow.

New York Not An Island

With low rates of car ownership, high numbers of renters, a strong local economy and the best public transportation system in the country, New Yorkers might think they’re sheltered from the storm. Not so. High energy prices have hit our shores in the form of Con Ed’s planned electricity rate hike of nearly 25 percent, rent increases of 8.5 percent, overtaxed subways and buses and more expensive consumer goods. New York City has long had a distinct version of a geographically stratified economy, but the Bloomberg administration has accelerated this phenomenon. Manhattan is a playground of the rich, the upper-middle class has staked a claim to parts of Queens and Brooklyn closest to Manhattan, and huge numbers of working-class and poor New Yorkers are being pushed into overcrowded dwellings or remote neighborhoods lacking commerce, transportation and green space.For the rest of the country, lifestyles are being downsized. As home values boomed, Americans cashed out $800 billion a year in equity, but the refinancing party is over, draining this reservoir of easy money. Household spending on energy has increased from 4 percent in 2002 to 6.5 percent today, snatching another $250 billion a year directly from consumers’ pockets. Businesses are forcing workers to absorb more medical costs, which amounted to $2.1 trillion in 2006. Real average weekly earnings have fallen by 2.4 percent during the last year. The final insult is the pop in food prices, which reached a historic low of 9.4 percent of the average household budget in 2003 and has been creeping up since.

The debate over whether or not the U.S. economy is contracting ignores the slump in disposable income. This is the worst downturn since the early 1980s recession that signaled the death of U.S. manufacturing (and organized labor). But it’s not that spending has vanished — American consumers account for nearly $10 trillion a year, nearly 20 percent of the entire global economy — it’s that consumers are trading down.There are far more ambitious ideas on the table. Last December, Scientific American published a “Solar Grand Plan” to use photovoltaic arrays, solar collectors and compressed air storage to “provide 69 percent of the U.S.’s electricity and 35 percent of its total energy (which includes transportation) with solar power by 2050.” The authors of the plan estimate it would take some modest technological advances and $400 billion in government subsidies over 40 years — a paltry amount. A broader renewable portfolio could generate “more than 90 percent of total U.S. energy” by 2100 and “energy-related carbon dioxide emissions would be reduced 92 percent below 2005 levels.”As doable as this is in terms of technology and investment, it’s highly unlikely given corporations’ control of the political process and the economy. These plans are inadequate, too, because they would only retro-fit an economy still based on individual cars, sprawling homes and endless consumption. There needs to be a total restructuring of the global economy toward the self-sufficient and small scale. The simplest way to slash energy usage is to have local economies where communities are able to reproduce most of their daily means of survival: food, housing, transport, healthcare and entertainment. It would mean packing people into denser areas, whether cities or towns.

It doesn’t necessarily mean an end to capitalism or global commerce — there will still be a need for hi-tech goods, heavy machinery and the like — but it would probably mean an end to the transnational corporation, something few people, or the planet, would ever miss.


• Make collective changes through the political process, not the “invisible hand” of the market.• Clamp down on oil speculation.• Institute a permanent carbon tax and increase gasoline taxes to create the funds and incentives for transforming our fossil fuel economy, whether or not oil prices drop.• Ramp up public funding for mass transit.• Invest big time in wind and solar energy.• Pack people into denser areas, whether it be cities or towns.• Create local economies where communities are able to reproduce most of their daily means of survival: food, housing, transport, healthcare and entertainment.• Say goodbye to the transnational corporation.

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