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February 6th, 2008

The Second Great Depression

Yesterday, I was pumped up to vote in the California primary. When I moved to California to enjoy my grandchildren, I filled out a voter registration form. They must have tossed the forms in the wastebasket, because I was not registered to vote here yesterday.

Here's my revenge on the system: We are now entering the Second Great Depression. The name isn't original with me – I picked it up off the Internet – but it seems to fit the situation. My interpretation is that world oil production will diminish faster than we can bring on alternatives.

I was ready to vote for Senator Obama, but out of desperation. For the last two years, I have been saying that we need a charismatic leader; another Franklin Roosevelt, another Winston Churchill, or another John Kennedy. (I decided that those WC signs in England were public memorials for Winston Churchill.) Of course, I am not sure that Barack Obama is destined to be a great leader, but I have the feeling that none of the other presidential candidates could make us feel better while we suffer.

In the oil news, the peak has happened.

• The US Energy Information Agency www.eia.doe.gov/ipm/t11d.xls (MS Excel spreadsheet) has May 2005 as the peak. My estimate for December 2005 was a casualty of Hurricane Katrina, but notice that the winning month moved back in time, not forward.
• Oil & Gas Journal reports that world oil production in 2007 was lower than 2006. Somehow, O&GJ scratched together enough 2006 oil to avoid placing the peak in 2005. Even now, the O&GJ web site reports the 2007 oil production drop in a single sentence, without explanation.

In addition, the EIA lists the production for Saudi Arabia as dropping by a million barrels per day over the last two years. www.eia.doe.gov/ipm/t11c.xls

We have all noticed that oil price increases are rippling through the economy. In addition to direct costs for gasoline and heating fuel, food prices are increasing steadily. No surprise, agricultural production is heavily dependent on energy. And now our beloved US government is reporting a "core inflation rate" that ignores the cost of energy and food.

Three years ago, I moved most of my limited investment money into stocks of companies with substantial oil reserves in the ground. If oil prices are going to strangle the economy, I'd rather be a strangler than a victim. However, there is a huge choice being made, and I could be absolutely wrong. Oil prices have gone up dramatically because supply does not meet demand. Shorter term news items have caused sharp drops in oil (and stock) prices. However, if there is a global depression, the long-term market for oil could collapse. I'm watching this enormously volatile market with some fear. I'm not cut out to be a stock trader.

The latest market drop, February 5, was attributed to a report from the Institute for Supply Management indicating lower sales in the service economy. I think "service economy" is a euphemism for the "Swiss village fallacy." A visitor to Switzerland asks what people in those small mountain villages do for a living. He is told that each village gets paid for doing the laundry for the next village. Since the US economy is now largely a service economy, we aren't supposed to worry about the prices of oil and copper.

In the aftermath of the 1930s, institutions like the Federal Reserve Board were put in place to prevent future depressions. Interest rates have been lowered to stimulate the economy. However, Big Ben Bernanke has now dropped the interest rate lower than the rate of inflation (the real rate, including energy and food). He's pumping up the economy by handing out money, to be paid back later with cheap dollars.

The first of the American Girl dolls mentioned in the New York Times was Kit Kittredge, "a child of the Great Depression." That grabbed me instantly, I was born in 1931. Right away, I ordered a Kit doll for my granddaughter. Unfortunately, there is some renaming to do: Kit is now a child of the First Great Depression.