With oil prices at $100 per barrel, equaling the all-time high price reached in the early 1980s (in inflation-adjusted dollars), I wanted to get some info and perspective on what’s going on in the energy market – and what the implications will be for the American economy. I found some interesting web sites on the topic: www.theoildrum.com, www.cera.com (Daniel Yergin’s organization), www.platts.com, and i-r-squared.blogspot.com. Here are some points and possibilities behind the current situation.

>>> It’s possible that the same speculators who caused the internet stock bubble in the late 1990s and the real estate price bubble in the 2000s are now flooding the commodities markets with “silly money”, thus pushing the price of oil above its real value based upon irrational expectations of future demand. If so, then the bubble will burst at some point; but it could take years, or a severe economic depression, or both.

>>> Why are China and India still buying oil up so rapidly if it has become so expensive? Well, in terms of American dollars, oil is currently very expensive. However, the American dollar is at a low point relative to other nations’ currencies. To other countries, oil isn’t quite as expensive.

>>> As oil prices started shooting up three years ago, energy expert Daniel Yergin predicted that prices would start coming down within 18 to 20 months, due to new sources of oil coming on line. Sources such as deepwater fields and the Canadian tar sands would become profitable to pump at such high prices. Well, we’ve gone twice that time period now, and although world oil production has increased somewhat, the dramatic increase predicted by Yergin has not occurred. Why not? Actually, Yergin’s own website gives a big clue. The real cost of finding and pumping oil from newly found oil sources has shot up in recent years; it has doubled since 2000, with rapid acceleration since 2005. If that’s true and the overall trend continues, then the speculators actually have good reason to speculate (as if the accelerating expansion of the middle class in China, India, Asia and the Middle East weren’t enough).

>>> A really important concept, albeit one that is rarely discussed in the mainstream press, is termed “EROI”, which means Energy Return on Investment. Basically, this is a measure of how much energy is returned for each unit of energy used to find and process an energy source, such as oil and coal and nuclear energy. Depending upon how you account for the side-effects of pollution and global warming and waste disposal, the EROI for most of our energy sources has been in the 10 to 100 range over the past 100 years. Thus there has been vigorous economic growth in the nations that knew how to exploit this energy cornucopia. Unfortunately, we may now be going into an era when EROIs are falling below 10.

>>> Some analysts feel that ethanol, despite its appeal of coming from a natural crop that soaks up energy from the sun and the soil, has an EROI of 1.6 at best and possibly below 1.0, depending on how you account for pollution side-effects. So, ethanol subsidies by the U.S. may well be a political porkbarrel, unless much more efficient techniques for growing corn and converting it to alcohol fuel are in the offing.

>>> Therefore, in the short-run, oil prices might be artificially high due to speculation, which will trigger a recession. That would bring some price relief. But in the long term, world demand for oil will probably keep climbing, while discovery and production costs will keep increasing. That will obviously put the squeeze on those people used to high levels of cheap oil consumption, i.e. the people of the USA. A Prius here and a mini-fluorescent lamp there may not make up for the gap; something will have to give, and that would be the USA’s high standard of living — its suburban lifestyle.

>>> Of course, technology may come to America’s rescue once more. However, over the past few decades, the American governments (federal and state) have radically reduced subsidies to scientific and technological education and research, in favor of tax cuts, homeland security expenditures, and ethanol subsidies. At the same time, the developing countries have been increasing their science, technology and education subsidies. It’s kind of like that old Popeye children’s cartoon, where Popeye throws his spinach down the river, and the spinach can says “you’ll be sorry” as it gets swept ‘round the bend.

>>> The world is tired of living in muddy or dusty poverty while the USA revels in suburban luxury. It will seek its share of the wealth either through crafty merchantalism (China), investment in human capital (India), revived nuclear armed forces (Russia), or the worst strategy of the bunch, fundamentalist religious warfare. At the same time, the USA leans back on its past accomplishments and revels in the amazing cell phones and flat screen TVs that its capitalist system currently produces (or imports). Unfortunately, that capitalist system is not supporting the basic research and development that would keep America at the technological forefront in 10 or 20 years. That requires government; remember that the Internet was originally set up by federal government research.

>>> So, unless America gets its “spinach” back, and soon, today’s kids may live to see an America in decline, an America of worsening living standards and continually rising unemployment. Oh well; at least that will take care of the Mexican border crisis.