The Long Emergency Begins... Now?

I'm a gambling man so today I'm going to go out on a limb and predict that the this is the Big One, that the next global recession will begin now and is being triggered by petroleum price and supply issues.

Lets begin in the global economy's keystone market, the United States. We are totally dependent on cheap gas to make our economy work; for travel to work; production of goods and transport of same. Our rail system is a global joke and expensive gas will choke off our economy. Today gas prices are flirting with all time, inflation adjusted highs. See chart below, click on image for larger view. Source; Chart of the Day.


"But hang on, Cman," you will say, "surely prices will drop back down again." Not this time me buckos. This post from Econobrowser is a good brief on the current state of supply pressures on the price of crude. As the next chart (Source The Oil Drum) shows, global production has yet to recover back to pre-Katrina peaks. Short version: continuing decline in US production, the continuing tensions with Iran, which will not be resolved soon and the long-term problems in Nigeria which have shut in nearly half a million bbl/day of production are all dragging down supply in a market where demand continues to grow and indeed periodically exceeds supply.

Basic macroeconomics states that in a situation where demand exceed supply the price will go up and stay up until what? Demand falls. As should be obvious to anyone living in the US, demand for oil is what economists call inelastic. That is it cannot readily grow or shrink in response to price. Example: Red bell peppers. These are a big hit at our house. During the winter months they are available as imports from New Zealand and God knows where else at about $3/pound. Result, we don't consume as many as in the summer when domestic red bell peppers are on the shelves for about a buck-fifty. Can't do that with gasoline. What's Joe Commuter, who lives 30 miles away from work to do?

Well, the long term solution to the supply demand tightness -- which is only going to get worse due to peak oil production declines (see this post -- growth is to permanently reduce demand through structural changes in our economy. This includes, permanently increasing fuel efficiency in our automotive and trucking fleet, reevaluating our dependence on autos for most transport and reinvesting in our rail system, and largely abandoning or completely restructuring the sprawling auto-centric suburbs around our cities. Like most global crises it will sneak up on most of the population slowly and almost imperceptibly thanks to a lazy and complaisant media.

This is the call of our generation and the next. To ring out the Oil Age and usher in something else. No one is sure yet what that will be, but we need to get there. I'll say it again, we are stuck between two futures, the unimaginable and the unthinkable. Time to get imaginin' because like it or not, the Long Emergency begins... now.