Monday, May 12, 2008

A blast from the past.

Here's an interesting report that was published back in 2006, written therefore about the same time I was doing some of my preliminary investigations into the housing bubble and peak oil. The report is in PDF format.

What Would $120 Oil Mean for the Global Economy?
Robert F. Wescott, Ph.D.
Washington, D.C.
April 2006

...The median U.S. family income is about
$40,000 a year. In 2003, the median family spent
about $1,900 (or about 4.8% of its income) on
gasoline and natural gas/heating oil.2 In the
winter of 2006, with oil prices averaging $60 a
barrel, these expenditures will increase by
roughly 50% to nearly $3,000 a year (or about
6-7% of median family income). Given that the
average household saving rate in the U.S. is
negative, even middle income families have
remarkably little capacity to “dig into savings”
to sustain their consumer spending. With oil
jumping to $120 a barrel, household energy
bills will roughly double to about $6,000 a
year, or about 15% of total annual income for
the median family. Most families will have little
choice but to sharply curtail other spending...


This writer wrote his report believing (back in 2006, mind you, when oil was $50-$60 a barrel, up from $20 a year or so previously in what was though then to be an outrageous jump in oil prices) that the only thing that could drive market prices this high (ie in the $120 range, double the 2006 prices) was some sort of terrorist attack or terrible breakdown in production or delivery. Yet we have hit this price without any of these things happening (so far). Indeed, most analysts shudder to think of what prices will do when such a disaster happened now that prices are already at $120.oo a barrel under ordinary market operations. And prices under ordinary market conditions are predicted to rise to at least $150 if not $200 with in a year's time.

I don't think the reality of this situation has sunk in to observant households. Things cannot and will not go on as they have been. The question is, have we thought about what will happen and what steps we can have in place before to prevent gasoline prices from bankrupting us further. Very few of us have thought about this, and even fewer have acted on those thoughts. We are in a precarious position - and most people are simply refusing to look at it, hoping it will go away on its own.

Well, class, it's not going away. What will we do next winter when prices are even worse than they were this winter? What will we do this summer when prices are even worse than they were last summer? And what will we do the summer following? The winter following? A radical change of priorities has to take place - and it will take place. But what we do now will make a difference on whether that paradigm shift is easy or hard.

From what I've seen so far, I'd have to say it's going to be hard.

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