Energy prices are continuing to increase as the global demand for fossil fuels increases, the US Dollar falls in value, and our limited refining capacity is regularly disrupted by hurricanes and flooding.
A major part of America's current predicament is that America has not taken energy conservation seriously and has not planned well for the future. For example, part of the problem with high gasoline prices in the US is the lack of refining capacity. It has been many years since a new refining facility has opened in America.
I believe that alternative fuels will only give a partial answer to high energy prices. Energy prices are rising fast all over the world. Even with such a strong incentive to move towards alternative energy there are important uses for oil that are difficult if not impossible to substitute. For example, no one has yet been able to find a substitute for jet fuel. Perhaps one will be created in time but with peak oil already here in at least a few important oil producing fields, like the North Sea field in the UK and Mexico's Cantarell field, we don't have much time.
Energy conservation offers the best short term solution to our energy crisis but no matter how effective energy conservation measures may be we can not completely conserve our way out of an oil shortfall. The obvious conclusion is that living standards will fall in America and other oil deficit nations as oil demand continues to grow globally and supplies remain tight. This will force prices even higher and drain off more precious resources just to pay for imported oil.
The kind of thinking that got us into this mess is not the kind of thinking we need to create our future. A weak dollar, unofficially pursued by the American government as a way of making it easier to service America's huge foreign debt, only serves to push oil prices higher. The spot price of oil rises as the dollar falls in value.
This is followed in a few weeks, even a few days, by the pump price of gasoline. There will be a lot more whining by American government congressmen and people about OPEC and other "bad guys" in the oil picture, like big oil companies, but the injury to the economy is largely self inflicted and is a failure of US government policies over many years.
Increased costs are always a challenge for businesses. Increasingly, as we are experiencing an energy crisis, the weight of international diplomacy is moving towards the global warming advocate's camp. More and more legislation is being passed at the global, regional, national, state and local level to drive compliance with carbon emission reduction standards. The tightening up of emission standards does increase production costs.
While this action is needed in order to attempt to slow down the effects of climate change, these actions tend to increase the cost of energy inputs, especially with coal. Mankind has created a catch 22 energy and climate change trap and there may be no good escape.
Refiners were once relatively free to use heavy crude to make transportation fuel. Today, environmental regulations make it difficult and costly. Refinery capacity is just too tight, and some argue that Saudi Arabian oil production has peaked. If the this is true, this will put incredible pressure on crude oil prices because growing demand is going to run head on into falling supply.
Even with the tremendous economic growth achieved by India and China over the past decade the amount of oil used by those nations citizens is only a fraction per capita of that used by US citizens. There is room for huge increases in oil consumption by those countries. There is a frightening possibility that it will take much higher prices for crude oil than $135 a barrel to cut into this demand.
Higher energy prices act like a tax. They reduce the disposable income people have available for other things after they've paid their energy bills. In America many families are now feeling the belt tightening effects of this "tax".
Renewables are not developed enough to replace barrel for barrel our current US energy demand. Relying solely on renewables would mean that the US would have to severely restrict our current energy use. Renewable sources of energy are a growing part of the energy mix, and will become increasingly important in the years to come.
Although the amount of energy generated by renewable sources is presently small, investment in renewable technologies is increasing. Unfortunately, it is unlikely that renewable energy sources can be developed fast enough to prevent a considerable amount of pain as people are forced to reduce their standard of living. This is going to be a political minefield for the next US president, whether its Obama or McCain.
Consumers should feel outraged by the purposeful federal failure when they pay spiraling charges. The federal government's inaction in promoting energy conservation and in putting forth a massive effort in developing alternative energy is inexplicable, inexcusable, and anti-consumer. Consumption is fundamental to underpinning a favorable business cycle in the U.S. With consumers now hurting from high energy prices, by being deep in debt, and by falling housing prices, a deep recession, even a depression, is all but inevitable.
Ben Bernanke and his partners in crime at the Fed are making a heroic effort to prevent a severe contraction of the US economy. The problem is that mismanagement of the American economy has taken place for many years. The US manufacturing base has been all but destroyed. If it weren't for Boeing and a few other high tech manufacturers and American farmers there would be few products made or produced in America that foreigners want.
American energy policy is a complete failure. We now import over 65% of our energy needs and that high percentage is increasing. With a shortage of high value products to export and with extreme bills to pay for imported oil America is on a path to third world nation status. It will be a total disaster for the American middle class.
With billions flowing overseas daily to pay for energy imports, with 12 billion a month being spent on wars in Iraq and Afghanistan, with the US relying upon China, Japan, and other nations for funds to keep on going the future of the American Empire looks increasingly grim. By running up such a trade balance with China, they now hold some 1.4 trillion dollars in foreign exchange, most of it in Dollars, we have given the Chinese the power to bring down the American economy any time they chose.
All the Chinese would have to do is to start aggressively selling US Dollars on foreign exchange markets. The panic that would follow would quickly take the US Dollar down to levels that would create hyperinflation in the US as oil and all imported goods prices soared in Dollar terms. Yet, our government seems to not at all understand this. Our elected officials visit China and lecture the Chinese on how to run their own government. It is not wise to insult those that you depend upon for living money.
High energy prices and all of the complications that they bring are a disaster for oil deficit nations like the United States. For one thing we continue to borrow huge amounts of money from the Chinese and our financial institutions accept billions in investments from sovereign wealth funds and the like just to stay afloat. Giving so much leverage to foreigners over America's affairs and assets can not possibly be good long term foreign policy for the US.
As long as America remains hooked upon oil and in spending more than we take in it will likely take more than an Obama or McCain to save us from a long downward spiral off the top dog heap.
Gerald "Taipan" Greene is a retired forex trader and portfolio manager who worked in Asia for over 20 years. The nickname was acquired in Hong Kong and is now used for a number of financial, political, and Internet business related blogs. One of them is at Learn to Invest