Oil Prices Enter the Danger Zone

The Financial Times has a scary article detailing how oil prices are entering the Danger Zone.

As the graphic shows, OECD countries are shifting from an average of around 1.4% of GDP for the US (oil import expenditure), 1.0% of GDP for the EU, and 1.8 for Japan, to 2.5 for the US, 2.1% for the EU, and 2.6% of GDP for Japan. For the US this amounts to another $72 billion in money out of the economy, sent to foreign oil producers. Barack Obama is a very stupid man. Whatever temporary economic stimulus he has constructed, out of a two year extension of the Bush Tax Cuts and a one year 2% reduction in the employee payroll tax, will be obliterated by the constant rise of oil prices. In part, due to Obama's own stupidity, in his policies and failures to act. Obama is a man stupid enough to believe in Cloward-Piven (move the system to failure to enact massive changes). As a man widely seen moving the system to failure, he's not likely to be given a free reign to remake America into his cherished ideal of a Black National Socialist Utopia (with cringing, permanently apologetic Whites and a Colors of Benetton style PC/Multicultural society). Quite likely a Reagan-esque figure offering to "take Back America" to prior greatness (and cheap gas) by "whatever means necessary" will be the person with the winning hand. No one is going to die for a Target Ad.


Charles Krauthammer is also profoundly stupid. Unable to see that ordinary people live and die by cheap energy (it was partially the energy/gas shocks that drove the 2008 sub-prime mortgage crisis as people could not make both mortgage payments on distant exurb houses and fill up their tanks to go to work). Krauthammer thinks (because he's rich and a clueless elitist) temporary measures in tax reduction will offset massive increases in costs that directly and immediately affect both businesses and consumers alike. Nor can Krauthammer see that the effect in places like China will be even worse (already the Financial Times and the Wall Street Journal have been running articles on spiraling prices of such staples as cooking oilrising 27% or more, fueling social unrest). Massive social unrest sparked by massive increases in energy and oil are likely to make China more, not less adventurous abroad (a war can drain social unrest and channel the considerable Chinese nationalism against enemies).

The Financial Times notes:

High oil prices threaten to derail the fragile economic recovery among developed nations this year, the leading energy watchdog has warned, putting pressure on the Opec oil cartel to increase production.

Over the past year the oil import costs for the 34 mostly rich countries that make up the Organisation for Economic Co-operation and Development have soared by $200bn to $790bn at the end of 2010, according to an analysis by the International Energy Agency.

The increase, due to high crude prices, is equal to a loss of income of about 0.5 per cent of OECD gross domestic product, according to the IEA.

“Oil prices are entering a dangerous zone for the global economy,” said Fatih Birol, the IEA’s chief economist. “The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.”

Oil prices have edged closer to $100 a barrel in recent weeks and Brent crude hit $95 a barrel for the first time in 27 months on Monday as the economic recovery has gathered pace.

The article goes on to note that while OPEC (and the Saudis in particular) favor a price band of $70-$80 a barrel, there will be no further meetings (to increase production) before the scheduled June 2nd meeting this year. OECD account for 65% of all global oil imports. China is not a member of the OECD, but increased demand in China as it modernizes (and hundreds of millions of Chinese switch from walking on foot, to bicycles, to mopeds, to motorcycles, to small cars, roughly in that order) is driving increased demand. OECD demand has remained relatively stable over the past twenty years, as conservation and lower population growth (or negative growth) have sharply cut straight-line increases in oil and energy uses from the early 1990's. Increased immigration however has muddled that picture. According to the IEA (International Energy Agency) in the article, the EU has seen its import bill rise by $70 billion during 2010, more than the budget deficits of Greece and Portugal combined.

Why is this crisis occurring?

First, there has been a failure by the West (and China) to secure rapidly increases in oil production to keep the world economy moving. Far too many have succumbed to naïve and stupid ideas about how the world works, and bet on toothless "development deals" instead of concrete action to increase production. Nigeria remains mired in corruption and open rebellion, in oil producing regions. Iraq's ability to pump oil is constrained by considerable Iranian influence, as is that of the Gulf region as a whole. And the interests of Russia and Iran, net oil exporters, with bankrupt and non-functional economies, are directly opposite the roughly shared interests of the US, China, Japan, and the EU (i.e. cheap oil and gas and energy).

Russia and Iran have regimes in power by means of paying off lots of gunmen and goons. It is that simple. In order to pay off the goons, the only levers the regimes of both nations have is expensive oil. Therefore, when looking at the actions of both, it is important to realize that their survival, depends on making oil as expensive as possible (they cannot increase production to Saudi levels and make a profit at $40 a barrel). This is why Russia has been aiding Iran's nuclear program, and why Iran has basically fought the US in a shadow war in Lebanon, Iraq, and Afghanistan, seeking power or actively using its own forces to kill American troops (Iraq and Afghanistan). Against a weak and toothless response from first George Bush and then Barack Obama, neither Russia nor Iran fears any meaningful reprisals in an effort to control Iraq's oil production, and intimidate the Gulf into accepting $100 a barrel oil, and even further price increases.

That the price increases could long-term, destroy the Western economies, is not something the regimes of Iran and Russia care much about. They are gangsters, they care about paying their goons and thugs, not long term prospects. Indeed if the economies collapse around the world, to their thinking, so much the better. More power for them to grab, regionally. To reconstruct fallen empires.

If George W. Bush deserves a good deal of blame for weakness facing Iran (and failure to communicate clearly to Americans why Iran is our enemy: because we need cheap oil and they need expensive oil), Barack Obama's actions are even worse. He's already seen that what Bush did has not worked, and got elected basically because oil was at $140 a barrel, briefly. The Wikileaks fiasco shows that the Saudis wanted him to bomb Iran. A deal could have been made, bomb Iran (and remove a threat to the Saudi regime) in exchange for oil at $40 a barrel (i.e. Saudis pump oil like crazy). Everyone wins (except Iran and Russia). Gas at $1.10 a gallon would immediately jump start the US economy (by making almost everything overnight much, much cheaper).

Even worse has been Obama's failure to act regionally. Venezuela's oil industry is in a mess due to Chavez's meddling and corruption. He's also planning to base Iranian missiles aimed at the US, a clear violation of the Monroe Doctrine, and akin to the Cuban Missile Crisis (except without a nuclear armed Soviet Union backing him up). Toppling Chavez through military invasion to remove any possibility of Iranian nuclear (or otherwise) tipped missiles at the US and make oil cheaper would be quite popular (except among the anti-War left). Indeed a military build up puts people to work, immediately, and puts real money in pockets to stimulate the economy (unlike Obama's failed stimulus measure which bailed out State welfare programs and put money in allies pockets).

But domestically, Obama has been even worse. Wedded to an idiot notion of "green" energy (the man is not very bright), he has delayed drilling permits already in process in the Gulf of Mexico, costing thousands of jobs and significantly slowing US domestic oil production. The permitting slowdown includes shallow as well as deep water drilling. Meanwhile Cuba is drilling off the US coast, in deep water, with Obama's administration doing nothing. Thousands of jobs have been lost, in a deep recession, while Obama sings the praises of "green" energy. In addition, the EPA has been issuing regulations to enact cap and trade by executive order, as the bills pushing sky high energy costs have died in a Democratic led Congress. The cost to the US in radically increased energy bills, as the cost of almost every energy production: coal, gas, oil, increases to the rates (about eight or ten times higher) of solar and wind (themselves not very reliable) is an economy killer all its own, without a massive increase in oil prices.

This idiocy is entirely consistent with Obama's desire, stated in the election of 2008, to see energy prices skyrocket, just "not all at once" and see coal plants put out of business. Is Obama as stupid as say, former South African President Thabo Mbeki, who believed AIDS was caused by spores? Or current President of South Africa, Jakob Zuma, who believes AIDS can be cured by sex with a virgin? Nope. By all accounts the man is even stupider. Obama's election will live or die by the answer to the question "are you better off now than you were four years ago?" Sky-high energy costs, by either failure to act to create robust domestic and international supply, or enacting hideously costly energy regulations, will kill his re-election. In a way that the South African Presidents idiot beliefs about AIDS did not threaten their Presidencies.

Obama's model of action seems to be Zimbabwean President Mugabe, who presides over a nation where more people starve to death (around 2,00o a week estimated by Catholic Charities) than are killed in Iraq each week. Held together by ethnic / racial based thugs and such, and milking international donors for payoffs and bribes. This is a model for failure in a nation as big as the US. But one Obama seems to have adopted.

What is likely to happen?

First, Obama is unlikely to back down on his attempt to ramp up energy prices domestically by sticking cap and trade on Americans through the EPA's regulations. He believes in it (not the least of which is that it "punishes" White Americans, a notion central to all his actions). Regardless of the cost, he is determined to push ahead and is likely to be able to outflank Congressional Republicans on this matter (by shifting funds from other agencies to fund this effort, likely from the Defense Budget). Secondly, Iran and Russia, sensing terminal weakness, are likely to pressure OPEC to keep oil prices sky high by further limiting production. Oil is very likely to reach $140 a barrel, or even considerably higher.

China, of course, cannot tolerate these prices. The Chinese will act, in some fashion. First they will encourage allies inside the US political system to remove Obama, and secondly they will be likely to seize oil resources for themselves. This is after all, the main reason besides Taiwan that they have engaged in a massive military build-up.

But the US political response is likely to be impeaching and convicting, President Obama. Clinton was impeached, but not convicted, because of the revulsion people felt over his actions, but the comfort they had with his economy. It is the economy, stupid. Obama does not have that margin. A caretaker President Biden, or perhaps even another figure (if he is medically certified as unfit to serve) muddling through is the likely political response oil at $140 a barrel for an extended period of time. Oil at that price level made Obama President, and it is likely to unmake him. Even the most loyal Democratic Senator would prefer to wait out racially motivated riots over the conviction of President Obama, than lose office entirely in 2012 over rage at being suddenly made poor by unsustainable energy prices, rising in a manner of months not decades.

If the Tea Party was the revolt of the White middle class over unsustainable tax burdens and government control of their lives, particularly medical care, to provide for (essentially) free medical care to illegal aliens, imagine their revolt over gas at $5, or $6 a gallon, courtesy of Barack Obama. All the spin in the world by the media, won't fix that problem.