How oil burst the American
bubble By Michael T Klare
The economic bubble that lifted the stock
market to dizzying heights was sustained as much
by cheap oil as by cheap (often fraudulent)
mortgages. Likewise, the collapse of the bubble
was caused as much by costly (often imported) oil
as by record defaults on those improvident
mortgages. Oil, in fact, has played a critical, if
little commented on, role in America's current
economic enfeeblement - and it will continue to
drain the economy of wealth and vigor for years to
come.
The great economic mega-bubble arose
in the late 1990s, when oil was cheap, times were
good, and millions of middle-class families
aspired to realize the "American dream" by buying
a three (or more) bedroom house on a decent piece
of property in a
nice, safe suburb with good
schools and various other amenities. The hitch:
few such affordable homes were available for sale
- or being built - within easy commuting range of
major metropolitan areas or near public
transportation. In the Los Angeles metropolitan
area, for example, the median sale price of
existing homes rose from $290,000 in 2002 to
$446,400 in 2004; similar increases were posted in
other major cities and in their older, more
desirable suburbs.
This left home buyers
with two unappealing choices: take out larger
mortgages than they could readily afford, often
borrowing from unscrupulous lenders who overlooked
their overstretched finances (that is, their
"subprime" qualifications); or buy cheaper homes
far from their places of work (the "exurbs"),
which ensured long commutes, while hoping that the
price of gasoline remained relatively low. Many
first-time home buyers wound up doing both -
signing up for crushing mortgages on homes far
from their places of work.
The result was
metastasizing exurban home developments along the
beltways that surround major American cities and
along the new feeder roads that now stretched into
the distant countryside beyond. In some cases,
those new homeowners found themselves up to 80
kilometers or more from the urban centers in which
their only hope of employment lay. Data released
by the US Census Bureau in 2004 show that
virtually all of the fastest-growing counties in
the country - those with growth rates of 10% or
more - were located in exurban areas like Loudoun
County, Virginia or Henry County, Georgia.
At the same time, cheap oil and changing
consumer tastes - pushed along by relentless
advertising campaigns - led many of the same
Americans to trade in their smaller, lighter cars
for heavy SUVs or pickup trucks, which, of course,
meant only one thing - a significant increase in
oil consumption. According to the Department of
Energy, total petroleum use rose from an average
of 17 million barrels per day in 1990 to 21
million barrels in 2004, an increase of 24% - most
of it being burned up on American roads.
Let the good times roll (into the
exurbs) In 1998, when the bubble was
taking shape, crude oil cost about $11 a barrel
and the US produced half of the petroleum it
consumed; but that was the last year in which the
fundamentals were so positive. American reliance
on imported petroleum crossed the 50% threshold
that very year and has been rising ever since,
while the cost of imported oil hit the $100 per
barrel mark this January 2 for the first time, an
all-time record (though the price was once briefly
higher, as measured in older, less-inflated
dollars).
When that steady price climb,
combined with growing dependence on imported
petroleum, was translated into the new exurban
landscape the economic bubble began to shudder. As
a start, there was that ever-increasing outflow of
dollars needed just to pay for all those barrels
of crude and the resulting surge in America's
foreign-trade deficit.
Consider this: In
1998, the United States paid approximately $45
billion for its imported oil; in 2007, that bill
is likely to have reached $400 billion or more.
That constitutes the single-largest contribution
to America's balance-of-payments deficit and a
substantial transfer of wealth from the US economy
to those of oil-producing nations. This, in turn,
helped weaken the value of the dollar in relation
to key foreign currencies, especially the euro and
the Japanese yen, boosting the cost of other
imported foreign goods and so threatening to fuel
inflation at home.
Meanwhile, two critical
developments kept the cost of oil rising: a
dramatic increase in global demand, largely driven
by the emergence of China and India as major
consuming nations; and a pronounced slowdown in
the expansion of global supply, due mainly to a
dearth of new discoveries and recurring political
disorder in key oil fields already in production.
This meant that American energy consumers -
including all those long-distance commuters with
crippling mortgages and gas-guzzling SUVs - had to
compete with newly-affluent Chinese and Indian
consumers for access to ever more costly supplies
of imported petroleum. Something had to give.
As the oil import bill kept rising, the
value of the dollar kept falling, and inflationary
pressures kept building, the country's central
bankers responded in classic fashion by raising
interest rates. This naturally resulted in
substantially higher monthly payments for
homeowners with variable-rate mortgages. For many
families already stretched to the limit, this
would prove the final blow. Forced to default on
their mortgages, they then precipitated the
subprime crisis by, in effect, puncturing the
bubble.
Even then, the economy might have
had a chance had that crisis not come in tandem
with the $100 barrel of oil. By December,
consumers were cutting back on nonessential
purchases, producing the most disappointing
holiday retail season since 2001. When questioned,
many indicated that the high cost of gasoline and
home-heating fuel had forced them to economize on
Christmas gifts, winter vacations, and other
indulgences. "If gasoline prices go up, that means
there's less to spend on everything else," said
David Greenlaw, chief US fixed-income analyst at
Morgan Stanley.
The high price of gasoline
was bad news for another pillar of the economy as
well: the auto industry. While Japanese companies
were busy rolling out hybrid vehicles and small,
fuel-efficient conventional cars, Detroit stuck
doggedly to its now-obsolete business model of
producing large SUVs and light trucks, which had,
in recent years, been the source of most of its
profits. Once the price of oil went stratospheric,
of course, Americans predictably stopped buying
the gas guzzlers, signing what looked like an
instant death certificate for an improvident
industry.
In 1999, for example, Ford sold
more than 428,000 mid-sized Explorer SUVs; in the
first 11 months of 2007, the equivalent number was
126,930 Explorers (and even that puts a gloss on
the corpse, as November was one of the worst
months in recent automotive history). An auto
industry in decline naturally means that many
ancillary industries will be facing contraction,
if not disaster.
Popping the bubble
Then came January 2. Although oil
retreated from the $100 mark by the end of that
day on the New York Mercantile Exchange, the
damage had been done. Stocks on the New York Stock
Exchange plummeted, suffering their worst loss on
a New Year debut since 1983. Gold, meanwhile,
soared to an all-time high - a sure indication of
international anxiety about the vigor of the US
economy.
Since then, stock market panics
have hit major financial centers around the world.
Only a dramatic last-minute decision by the
Federal Reserve to reduce overnight lending rates
by three-quarters of a point before the markets
opened on January 22 averted a further,
potentially catastrophic slide in stock prices.
Many analysts now believe that a recession is
inevitable - possibly a long and especially
painful one. A few are even mentioning the "D"
word, for depression.
Whatever happens,
the American economy will eventually emerge from
this crisis significantly weaker, largely because
of its now-inescapable dependence on imported oil.
Over the past decade, this country has squandered
approximately one and a half trillion dollars on
imported oil, much of which has been poured down
the tanks of grotesquely fuel-inefficient vehicles
that were conveying drivers on ever lengthening
commutes from the exurbs to employment in center
cities.
Today, a large share of this money
is deposited in so-called sovereign-wealth funds
(SWFs). Americans should get used to that phrase.
It stands for giant pools of wealth that are under
the control of government agencies like the Kuwait
Investment Authority and the Abu Dhabi Investment
Authority. These SWFs now control approximately $3
trillion in assets, and, with more petrodollars
pouring into the petro-states every day, they are
projected to hit the $12 trillion mark by 2015.
What are those who control the
sovereign-wealth funds doing with all this money?
For one thing, buying up choice US assets at
bargain-basement prices. In the past few months,
Persian Gulf SWFs have acquired a significant
stake in a number of prominent American firms,
giving them a potential say in the future
management of these companies. The Kuwait
Investment Authority, for example, recently took a
$12 billion stake in Citigroup and a $6.5 billion
share in Merrill Lynch; the Abu Dhabi Investment
Authority acquired a $7.5 billion stake in
Citigroup; and Mubadala Development of Abu Dhabi
purchased a $1.5 billion share in the
privately-held Carlyle Group.
These
acquisitions are just a small indication of a
massive, irreversible shift in wealth and power
from the United States to the petro-states of the
Middle East and energy-rich Russia. These
countries, notes the International Monetary Fund,
are believed to have raked in $750 billion in 2007
and are expected to do even better this year - and
each year thereafter. What this means is not just
the continuing enfeeblement of the American
economy, but an accompanying decline in global
political leverage.
Nothing better
captures the debilitating nature of America's
dependence on imported oil than President George W
Bush's humiliating recent performance in Riyadh,
Saudi Arabia. He quite literally begged Saudi King
Abdullah to increase the kingdom's output of crude
oil in order to lower the domestic price of
gasoline. "My point to His Majesty is going to be,
when consumers have less purchasing power because
of high prices of gasoline - in other words, when
it affects their families, it could cause this
economy to slow down," he told an interviewer
before his royal audience. "If the economy slows
down, there will be less barrels of [Saudi] oil
purchased."
Needless to say, the Saudi
leadership dismissed this implied threat for the
pathetic bathos it was. The Saudis, indicated Oil
Minister Ali al-Naimi, would raise production only
"when the market justifies it". With that, they
made clear what the whole world now knows: The
American bubble has burst - and it was oil that
popped it. Thus are those with an "oil addiction"
(as Bush once termed it) forced to grovel before
the select few who can supply the needed fix.
Michael Klare, author of
Resource Wars and Blood and Oil, is a professor
of peace and world security studies at Hampshire
College. His newest book, Rising Powers,
Shrinking Planet: The New Geopolitics of Energy,
will be published by Metropolitan Books in
April 2008.
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