I’m just as perplexed as everyone else about the huge run-up in oil and gasoline prices over the past two or three years. Some say it’s the Chinese, some say it’s the speculators, some say it’s politics that’s to blame. To get some perspective on the issue, I decided to download some data from the federal EIA web site and make a chart that analyzes changes in world oil production, usage, and prices over the past quarter century (with reasonable projections for 2008 and 2009). My chart doesn’t show actual prices and barrels of oil produced and used. Instead, it plots the ratio of usage, production and price statistics for each year relative to the same statistic for the past year. So, if prices went up 10% over the previous year, the chart will show 1.1 for prices. If production went up 2% from the previous year, the chart will show 1.02 for production. If usage went down by 4%, it will show 0.96 for usage.

So here’s the chart; the price line is green (the color of money), the production line is blue, and the usage line is pinkish-purple.

What gets me about this chart is that over the past three years, nothing really extraordinary has happened (and is not expected to happen into 2009). In the 1970’s and 1980’s, the lines on the chart swing all over the place, reflecting the price shocks from the OPEC oil boycott of 1973 and the Iran hostage situation in 1979. But after 1984 or so, things seemed to settle down within a certain range of yearly change. And it’s hard to see any big changes from that trend, even over the past three years. The biggest movement, which you have to look really hard to see, is that yearly oil demand increases haven’t gone significantly below 1% since 1994. Between 1983 and 1997, yearly demand increased between 0% and 1% in five years. After ’97, it only went below 1% once. So yes, increasing oil demand in the developing world (India and China, mostly) is being felt. But it’s not any really huge change relative to the past. Demand increases are generally staying under 3%, as they have since 1977.

With that increase in demand, prices are rising more often than falling. In the same ’83 to ’97 period, average prices went down from one year to the next in nine instances. After that, average yearly price declines have only happened twice. Oil production, by contrast, seems to fluctuate between -1% and plus 4% per year, as it has since 1983.

What I take from this analysis is that we are severely pushing this planet’s ability to yield petroleum at a reasonable price. Supply does not seem to be keeping up with potential demand, so increased prices help manage demand by reducing it back to sustainable levels (in the short-run, anyway). The marginal costs of bring forth new sources of oil are thus seen to be going up, significantly. Unless we get really lucky and find an unanticipated cheap supply of oil or gas, or devise some technology that makes oil and gas recovery much cheaper, the days of easy energy are over. Speculators will make the pain a bit worse, and quick fixes like drilling for oil along the US coastal shelves might provide a temporary palliative. But until America and the rest of the world learns to wean itself off of petroleum, which could take many decades, our economies and our standards of living are in for some ups and downs; and the downs may outnumber the ups.

I got a little shock the other morning when I went into the bagel store for a half-dozen cinnamon-raisins. Until about 6 months ago, the price was 50 cents per bagel. It had been fifty cents for about two or three years. But then it went up to sixty cents; well, no big deal. And then, last month, it was seventy cents. So I figured six bagels times seventy, $4.20. But no, the lady at the counter told me $5.40. In other words, ninety cents a bagel. GEEZ, what the hell is going on? Is the world coming to an end?

There was an article in the NY Times today that explains what happened. The price of wheat has skyrocketed lately, just like oil. Flour prices have gone way up. So the bagel shop owner had to raise his or her prices to stay in business. I can understand that. I only eat two bagels per week, so it’s only another two dollars a month out of my pocket. But what just happened with bagels is happening for a lot of other important things today, like gasoline and food. I haven’t seen economic stuff like this since the 1970s, i.e. prices going up every time you blink. Our economy is definitely entering troubled waters once again.

The Times article makes an important point, however. We here in the USA are hurting in the wallet and pocketbook because of all the recent price inflation. Our standards of living are going down somewhat. BUT, the effects of all this on the developing world, especially Africa, are of an entirely different magnitude. The average American may have to defer his or her next purchase of a high-def TV or a new cell phone; the average Nigerian or Congolian may have to cut back on his or her daily caloric intake. People who are now productive may not remain so after a few months of low-level starvation. As such, poverty in Africa might only get worse.

One of the big problems is that a lot of people in the world want to live like Americans, and are now imitating us by eating a lot more meat. Perhaps not in western Africa, but in other nations that have done somewhat better, e.g. Mexico and Indonesia, meat consumption is on the rise. And growing cattle and pigs and chickens uses a lot of grain; it’s a much less efficient way of getting calories to human beings, as compared to just consuming the grain (even if you first have to boil or bake or mill it). So, the demand for grain has climbed greatly, and since farmers can only increase production gradually, prices have skyrocketed. Although grain production can go up, there is only so much arable land; some economists think that food costs are going up on a permanent basis.

Of course, this could all change if the demand for meat starts to fall. Since the price of meat is very sensitive to the cost of the grain required to fatten up all those cows and pigs and birds for slaughter, consumers will soon be in for some sticker shock at the meat counter. At some point, meat eaters may re-think their diets. However, it will probably take a while; gasoline prices have been going up for three years now, but only now is the American public starting to think twice about those big guzzler SUVs that were so popular.

There are some people, however, who have already taken the plunge for food / energy efficiency and thus for a better-fed world. They are called vegetarians. And I’m glad to be one of them. If you have thought about becoming one, there couldn’t be a better time. And if you are already one, there couldn’t be a better reason for resisting the social pressures that all veggies face to “be like everyone else” and chomp down a burger. Sticking with our salads and tofu is just a drop in the bucket; it won’t allow any particular Somalian to properly feed his children (nor allow me to buy cinnamon-raisin bagels at a reasonable price again). But someone has to take on the role of the prophet; someone has to light the path when it’s still unpopular. So keep the lentils and rice coming, all you veg heads, and be proud of what you’re eating!

For the past week, the economy has been in the spotlight. Looks as though it’s coming down with something. The federal government is going to be sending most of us some money in a few months, as a remedy. Borrowed money. Unfortunately, borrowing is a big part of what caused the illness in the first place. In the long run, more borrowing is probably going to make things worse.

Unfortunately, the American economy has become more and more like a Ponzi scheme over the past 20 or 30 years. Under the right conditions, the technology and managerial genius of American enterprise causes our economy to grow quite impressively. Unfortunately, we’ve decided to borrow and consume based on the assumption that those right conditions will go on forever. Borrowing and consuming have caused even more growth, which causes more borrowing and consuming, on and on like a snake eating its tail. No one has left any margin for error; not the federal government, not the mortgage market, not Social Security, not the stock market, not the average family . . . no one. No one thought to save for a rainy day, even though we’ve had rain before. It’s not just the real estate sector that has gone through a “bubble”; the whole American economy seems to have taken a bubble bath.

It looks as though the rain is starting to fall now; oil prices have gone up and don’t show any signs of coming down (although if our economy goes sour, they will). Real estate prices finally got so far beyond the underlying fundamentals of supply and demand that prices have stopped rising. Too many families signed big mortgages betting that real estate prices would continue their steady climb. They also bought big cars and lots of consumer goods on credit, thinking that the good times would never end. Now, it looks as if unemployment will start rising again, after remaining at historically low levels for over a decade. Hardly anyone is ready for that.

And then there’s China. China has been in the middle of this. China seems like our friend, selling us all kinds of consumer goods and electronic stuff at prices that are very low, and maintaining our ability to do that by loaning us back our dollars at low interest rates. But are they our friends? I think not. Personally, I think that the Chinese know our bad habits and have been shrewdly exploiting the USA’s frivolous ways to jump-start their own economy. Their population is about 4 times ours, and most of it is quite poor (our GNP is around 9 times theirs). However, if they could capture a big chunk of America’s demand for manufactured products for a few decades (as they are doing), they arguably could convert a large portion of their own population from isolated peasants into middle-class consumers.

If China can convert 1/3 or so of their population to middle-class levels, they will no longer need the USA as a market for their goods; their own internal economy can take over, as it will have gained similar purchasing power. At that point, the Chinese can leave us at the side of the road. Thanks, sucker; oh, and its time to repay all those debts that you owe us, no more new loans from us. Interest rates in the US will soar, and . . . well, things won’t be the same again. Our standards of living will start going down. And that’s going to cause a lot of political angst. It ain’t gonna be pretty.

Well, this isn’t going to happen right away. China isn’t ready to dump us just yet. They will probably act to help us get through the latest crisis, by not messing with our trade balance and continuing to purchase US Treasury notes (thus financing the rebate checks we will soon be receiving). For now, it’s in their interest to give their favorite junkie another fix. It buys them more time to do just what our economy did between the Civil War and the Korean War – convert from rural / agriculture to suburban / manufacturing and trade. This will happen faster for them; we were using canal boats and steam-powered railroads, whereby they are working with airlines and broadband Internet.

But the Chinese still need another 10 or 15 years to get a significant chunk of their nation out of rural poverty and up to western standards. And after that, they probably won’t immediately forget the lessons of frugality and savings and sacrifice, as we have done by now. Because of that, I think that American living standards will not get much higher and will then start to decline. The days of big houses and big SUVs and big spending sprees for the masses will fade. And at that point, the big gap between the rich and poor may finally become a political issue in America. Again, it ain’t gonna be pretty.

For now, though, the immediate crisis will probably come and go, although the impending recession may last a bit longer and go a bit deeper than the last two (1991 and 2001). Things will seem OK again in a few years, but will it last? I think that the intervals between future economic crises will get smaller, and the severity of those crises will get bigger. By 2025, I think it will be clear that the USA is not going back to the economic might that it enjoyed throughout the 1990s and again briefly in the mid-2000’s (and which it may yet taste again in the early 2010s). People then will look back with nostalgia on the Bush-Clinton-Bush-Clinton era, although the scholars will be busy then writing tomes about what went wrong.

But you don’t have to wait until 2025 to read about it. Here are some resources. James Fallows has a good, fact-driven article on the China situation in the January-February 2008 Atlantic Magazine. And for those of you without subscriptions to the Atlantic or who don’t want to schlep on down to the library to study a policy question (another sign of American decline!), here are some other articles available through the magic of the Internet:

1.) George Soros’ view of the current economic crisis, including the China situation;

2.) a reflection on how lack of old-fashioned virtues such as common sense and humility are involved in the current economic mess, by classical historian Victor Hanson; and

3.) a journalist’s report on the Davos conference and the sense of unease there about “America’s ability to right its own ship”.

4.) also, the New York Times has weighed in with a Sunday Magazine article entitled “Goodbye to American Hegemony”.

OK, but before I go, let me get specific and say what I think we’ve done wrong. I blame it on our leaders, but more so on the population in general and especially the college educated population, which should have known better (but are probably the worst offenders). Unfortunately, we get the leaders we deserve, and they’ve done our bidding quite diligently, by:

1.) Letting the gap between rich and poor get so wide; and making it worse by cutting taxes for the rich more so than for the middle class and poor.
2.) Doing away with all economic regulation schemes back in the 1980s and 1990s, instead of being selective about eliminating the anachronisms and extending regulation into new economic realms, while maintaining its flexibility as to minimize impact on growth
3.) Allowing our dependence on foreign oil to go on unchecked, after two clear warning signs in the mid 70s and early 80s; we clearly should have had an energy independence program on the scale of the space program of the 1960s.
4.) Allowing so many fuel-hungry SUVs and McMansions; and even worse, allowing so many sprawling housing developments and offices and shopping centers to be built that are entirely dependent upon auto transport; we’ve locked our nation into high oil consumption.
5.) Allowing our governments to operate at such huge deficits; yes, I am saying that taxes should have been higher, as we can’t slash most government programs; despite some inefficiencies and waste, most government programs have awfully good reasons for their being.
6.) Allowing our public education system to be weakened, and making college level education prohibitively expensive for more and more families (instead of less and less, which would stimulate the economy in the long run).
7.) Allowing our manufacturing sector to be swept away so thoroughly, causing the USA to become so terribly dependent upon the rest of the world for the basic stuff that we need, as well as the goodies that we enjoy. I agree that international trade causes everyone to become richer, when it works correctly; but our world frequently doesn’t work right, so I can’t help but wonder if we should have kept some of those factories and mills going, even though they are more expensive to run than the ones in Brazil and Korea.
[SIDEPOINT: American military and diplomatic policy have become very nationalistic; and at the same time, we have let our economy become extremely internationalized. To me, that sounds like an exposed left flank. Common sense would dictate that we find an equivalent balance between nationalist and internationalist approaches in all three realms.]
8.) Allowing federal subsidy for basic scientific research to continually decline.
9.) Labor unions got too greedy and were responsible for much of America’s decline in the 1970s; but our leaders should have let them learn their lesson and allowed them to become responsible partners with industry, instead of breaking them.
10.) Too much buying on credit and too little saving for rainy days (and maybe retirement)!!
11.) Homeland security costs are a significant drag on our economy, along with the wars in Iraq and Afghanistan. On first blush, the Afghanistan operations and the homeland security efforts seem quite necessary; a foreign enemy attacked us, and they will attack us again if we don’t do something. True. But see point 3 above; energy independence would go a long way towards lowering our vulnerability to radical Islamic jihad. Looking the other way while Israel continued to take the best lands away from the Palestinians didn’t help either. But the Iraq operation was truly self-inflicted injury.
12.) Overall, taking such a short-term, me-first, enjoy-now / pay-later, consumption-based view of life; the nation I would have preferred wouldn’t have been as rich as we are now, living standards would be somewhat lower (although still way above most of our neighbors); but it would have been fairer, more dependable, and more sustainable over the long haul.

(Obviously I couldn’t even be elected as the class hall monitor in a high school).