Summer is clearly here and in full swing. The press is full of economic angst. People are discovering that $140 per barrel oil matters and a great adjustment is now underway throughout the globe. The most visible effect so far is watching the airline industry downsize. Most of the other costs have yet to push their way through the economy. So far most economic participants are eating some of the losses in order to preserve markets. This obviously cannot last, yet this slow response is likely the best response since we are going to see a sharp retreat in oil prices as the decline in consumption bites into the economy. Who wants to shrink demand for your product that you will be struggling to replace next year?
In the meantime and really in the background, the credit readjustment is also rolling through the US economy and is step by step reducing the supply of lending cash in the global economy. The bubble of excess cash has evaporated and hopefully does not slide below what the market requires. The comment has been made that this crisis is proportionally less than the savings and loan debacle brought on in the mid eighties. We survived that quite handsomely. The important thing to remember is that the sub prime disaster is rather localized and is quite open to smart intervention, even though, we are on the road to getting FEMA instead.
We have explored every energy option that we could get our hands on in this blog for a reason. The core to our global economy is a sufficient supply of usable energy. Nothing else even counts. All other commodities are quickly replaceable with only a modest price shift. In fact the commodity boom of the past three years is promoting a rapid expansion in global capacity that will soon place the entire globe into a permanent surplus position. Recall that today perhaps only a third of the global population is not yet fully participating in the Global economy and that third will finish their transition over the next generation.
In fact, we can expect a sharp expansion in food supplies over the next twelve months as farmers rush to take advantage of the current price regime. The same thing has already happened with the other commodities. The only thing that remains surprising is the apparent willingness of participants to maintain the high price structures so long. The sellers are still making so much money that they are not yet feeling the need to dump excess inventories. They may even believe that prices are going higher.
Right now everything is fully priced and suppliers are filling everyone’s boots while the credit contraction in the USA is shrinking surplus leverage out of the system. This whole situation is one headline away from price breakdown and a global retrenchment. We may have to wait for a strong decline in US demand before the shoe drops.
Returning to the energy market, my posts late last week should make it extremely clear that the first phase of the solar energy transition is now upon us. The initial price is set at $1.00 per manufactured watt. This is already cheap enough for a rapid rollout and a single machine will produce the power equivalent of a nuclear power plant each year.
Since manufacturing is now on internet time, the transition will be utterly swift and powerfully supported by frightened Americans, who never again want to be beaten up at the gas pump.
There may have been no political support two years ago for a national energy policy, but I am certain that the presidency will go to the candidate who enunciates a credible energy program, rather than a carbon tax or its like. Americans are scared and they want relief and reassurance now.