Commentary on the Flux of Events
January 3rd, 2006
Remarks by James Howard Kunstler
Author of The Long Emergency
The Clusterfuck Nation Chronicle
The sheer weight and inertia of American
life kept our systems on their feet through 2005,
despite a worsening economic climate and some harsh body blows, like
the hurricanes that pounded oil and gas production in the Gulf of Mexico.
In a way, some perverse law of sociopolitical physics seemed to concentrate
all the year's destructive potential in the devastation of New Orleans,
Biloxi, and other Gulf Coast towns -- while the mighty din of motoring
and cheeseburger sales roared on elsewhere without pause from Cape Cod
to Catalina.
First, a little background briefing on
where we are at -- to use some of the bad grammar now normative
in American life -- before I make predictions (i.e. guesses) about the
year ahead.
You can only introduce so much perversity
into an economic system before distortions cripple it. From 2001 through
2005, consumer spending and residential construction had together accounted
for 90 percent of the total growth in GDP, while over two-fifths
of all private sector jobs created since 2001 were in housing-related
sectors, such as construction, real estate and mortgage brokering. Much
of the money spent did not really exist except as credit -- incomes
as yet unearned, hallucinated liquidity, wished-for wealth, all based
on the expectation that house values would continue to rise at 10 to
20 percent a year forever. It became a reckless racket, all predicated
on sustaining an economy that had lost its other means for generating
wealth -- foremost its infrastructure for making things besides suburban
houses.
This housing bubble economy represented, holistically
speaking, the wish to maintain a sense of normality in American life,
under conditions of disintegrating normality, and it is no symbolic
accident that it centered on the images of hearth and home, because
fundamental comforts were what many Americans actually stand to lose
in a reality-based future. The
decay of standards and norms in banking behavior applied-to-housing
started, as in the case of the proverbial rotting dead fish, at the
head, the federal reserve, and infected every lowly loan officer through
the body until, in effect, lending standards ceased to exist.
The suburban housing bubble and its related
activities were predicated on the idea that we could continue building
out a living arrangement dependent on cheap oil and methane gas, and
that all the subdivisions and strip malls would retain value for decades
to come. Of course, this was the central delusion of the suburban sprawl
economy, because it was obvious to anyone who gave the situation more
than a cursory glance that cheap oil and gas were the things we were
least likely to have in the decades to come.
This reality had begun to penetrate the
American collective consciousness and will be represented in 2006 by
millions of individual choices to not buy a new suburban house,
either because the individuals fear the expense of long commutes or
they fear the cost of heating a 4000 square foot house occupied by only
a few people (or both). As the inventory of unsold new houses mounts
up, the prices of all houses, new and old, will start to go down. There
will be enormous psychological resistance to this reality, expressed
in a lag of correct pricing, as the owners of these value-shedding "investments"
wait for the bubble behavior (anticipated 10 t o20 percent asset appreciation)
to return. Eventually they will get the picture.
The velocity of change in the housing
bubble (and the psychology involved) will be greatly affected by oil
and gas prices. It seemed to many of us watching the energy markets
that the world may indeed have passed through its all-time oil production
peak in 2005. Production in 2005 was nearly flat over 2004. The world
was producing and also using roughly 82 million barrels of oil a day.
Oil coming into new production was not making up for signs of depletion
showing among virtually all the world's major producers. Iran, Russia,
Mexico, Venezuela, the North Sea, and, of course, the USA, were all
past peak. The big mystery was Saudi Arabia, but their inability to
boost production from the 50-year-old fields that comprised their main
reserves suggested that they were topping out, too. Which left an energy-hungry
world with the need to either A.) make other arrangements for powering
industrial economies, or B.) contesting for control of the remaining
oil reserves, which were substantially concentrated in the Middle East
and Central Asia.
Here, I hasten to remind the reader that
peak is peak, meaning right now we are all operating on the basis of
a lot of oil flowing around the world. The comfort level is still high.
The factories are still humming in China, and the six-lane commuting
corridors are still full of big cars around Atlanta, Dallas, Denver,
and Minneapolis. The problem is that the oil supply will soon steadily
diminish at a rate of at least three percent a year, and that necking
down of supply is likely to be expressed in greater geopolitical friction
and turmoil between the great nations who crave oil. The US entered
into the military phase of this turbulence before
any other nation. We used our superpower status to set up a centrally-located
Middle East garrison in Iraq, under the idealistic cover story that
we were removing a dangerous head-of-state and helping to set up a model
democracy that would invite us to stick around the vicinity indefinitely,
and thus retain some control over the deportment of other oil-rich states
in the region.
The foregoing is the background of my
predictions for 2006, which will
be the year that the hardships and difficulties I lump together as The
Long Emergency get some serious traction.
The world oil allocation system is now
so fragile that any disturbance in one producing region can send damaging
shock waves around the planet. There is no more "swing producer."
The US squeaked through the huge loss of oil production capacity this
fall by taking oil from our own strategic petroleum reserves and from
Europe's. These actions kept oil prices in the high fifty-dollar-range
through the holidays, giving Americans a false sense of festive security.
Those withdrawals are now over. Global demand for oil is still increasing.
The strategic reserves will now have to be refilled (they're called
strategic reserves for a reason). This will start oil prices moving
upward again -- they already have moved above $61 as of this morning.
I can't predict whether some maniac
will drive a Zodiac boat into a tanker in the straits of Hormuz, or
fire a shoulder-launched missile at an Arabian refinery. If nothing
like that happens, the first year of post-peak will express itself in
turbulent oil markets. Fear of not getting enough will rule. Futures
will be overbought and then dumped or shorted and then overbought again.
This will at least increase the violence of the ratcheting effect in
the markets. Overall I expect to see $100-a-barrel oil at some point
this year. Last year I made a bet with a friend that oil would end 2005
at $75. I lost the bet. But it is a fact that the price of oil altogether
ended the year 40 percent higher than 2004, so it is not as if the markets
did not show extraordinary stress.
New laws regulating gasoline mixtures
will also contribute substantially to higher gasoline prices (perhaps
as much as 40 cents a gallon). So I will predict gasoline breaking through
the $4-a-gallon mark sometime this year.
Our natural gas situation is pretty dire.
Prices shot up for a while above $17 (per one million btu's), but that
was the energy equivalent of $100-a-barrel oil) and based at the time
on the enormous damage in the Gulf of Mexico prior to the start of the
heating season. The heating season so far as been abnormally mild in
the northern US and prices have slumped back to the $11 range -- which
is still a lot higher than the $7 range in 2004. Unlike oil, we will
get no quick relief from international gas sources if the rest of winter
turns sharply colder. We're short of terminals to receive significant
quantities of imported liquefied natural gas and they cannot be built
quickly (or cheaply). The natural gas markets in the US respond very
sharply to current conditions. A warm week and the prices sink. A cold
one and the price shoots up. Our gas storage for the year is slightly
below 2004 levels. Even if we have a mild winter overall, there will
be spikes of cold. Our production is still crippled in the Gulf. Therefore,
I'll predict that methane gas prices will spike above $20 sometime before
May.
High gasoline, heating oil, and methane
gas prices will absolutely kill the housing bubble for reasons I've
already outlined. The production home builders will be idle, stuck with
huge inventories in places that never should have been suburbanized
in the first place. A lot of Americans holding "creative"
mortgages -- no money down, interest only, adjustable rate, what-have-you
-- will be crushed by the expense of their obligations. Many of them
will go bankrupt under new bankruptcy laws that leave no wiggle room
for escaping partial repayment. Their houses will flood the real estate
markets in an orgy of distress selling. "Greater fools" will
snap up these "bargains," failing to realize that many of
the logistical liabilities will remain -- namely remote locations and
huge heating costs of enormous McHouses -- even if the ownership terms
are less hazardous than the previous owner's. At some point in the future,
after several flippings perhaps, all those 4000 square foot houses 44
miles outside Denver (or Cleveland, or Seattle) will be seen as the
mistakes that they are, and their cash value will reflect that.
With
the cratering of the housing bubble, the US economy has to fall on its
ass. The global economy is likely to fall on its ass, too, since so
much of it depends on the decisions of Americans to take out exotic
loans for buying houses they can't afford. Large numbers of jobs will
vanish in construction, remodeling, real estate sales, and the various
mortgage rackets -- those things precisely related to the recent gains
in GDP.
The sheer falloff in new mortgages
will send a tsunami through financial markets addicted to continuous
supplies of new "money" to preserve the illusion of expansion.
I'd called for a Dow-4000 late in 2005. I think that was just an error
in timing, and still call for the Dow to sink into that range, or worse,
in 2006. This will represent a moment of painful clarity for market
professionals, as they realize that an industrial economy and the finance
that serves it must be based on the expectation of generating real future
wealth, not on zero-sum rackets, games of monetery musical chairs, or
casino legerdemain. Hedge funds, which depend on predictable stability,
will be especially vulnerable. They will certainly take some large banks
down with them when they go. I'll call for the so-called government
sponsored entities of Fannie Mae and Freddie Mac to groan under
and then drown in a sea of non-performing loans, probably with overtones
of criminal irresponsibility.
If these things occur, ugly things would
happen to the dollar. I would predict an episode something short of
hyperinflation -- say a rapid 30 percent drop in dollar value -- with
a later deflation in the price of things like houses, paintings by Childe
Hassam, and many consumer goods. Which means that standards of living
will fall across the board as incomes vanish with jobs and food and
energy prices rise -- while Americans try to shed their houses, at the
same time that consumer products sit unsold on the shelves of WalMart,
Target, and Best Buy. This will spell the beginning of the end for the
chain store universe.
The commercial airline industry is already
whirling around the drain. 2006 will send it decisively down that drain.
Since we cannot do without aviation in a nation as large as the US (with
train service on the level with Bolivia) then the government may have
to take over the crippled air routes. If that happens, then service
will certainly be greatly diminished. Fewer people will be flying under
the circumstances, anyway, but there is no reason to believe that this
will all occur smoothly. Among other things, huge pension obligations
would remain to be worked out.
By similar reasoning, I see an excellent
chance for General Motors and Ford to go out of business in 2006. Sales
of their stupid SUVs were already tailing off in the second half of
last year, and they are not positioned to offer much of anything else.
Anyway, a middle class groaning under insupportable debt and bankruptcy
is not likely to be assuming new time payments for exactly the kinds
of vehicles they would be insane to depend on.
As America roils in economic pain,
factory workers in China will be thrown out of work. They will be extremely
pissed off, and as their appeals go unappeased, they might start making
political trouble in their country. That could easily stimulate Chinese
leaders to divert their nation's attention with a compelling military
project -- say some moves into the oil-rich former Soviet lands to China's
west. Sooner or later, China eventually will go cuckoo from a shortage
of fossil fuels. It only remains to be seen how this will express itself.
So far it has only done so in terms of an aggressive outreach in oil
contracts with producers like Venezuela and Canada. But those arrangements
were based on a peaceful world and a peaceful China.
I have no idea what will happen
with Iran. Their leader Mr. Mahmoud
Ahmadinejad, is clearly a maniac -- calling for Israel to be removed
to Alaska, for instance. But here I invoke my allergy to conspiracy
theories by saying I do not necessarily expect any US or Israeli strikes
against that country. One could argue that Iran could comfortably kick
back and watch America get tortured by the insurgency next door in Iraq,
and I think they will do just that through 2006. The nuclear card is
wild, however, and anything could happen if they keep slapping it on
the table.
Which brings us to the extremely sore
subject of Iraq. I maintain that our reasons for being there have not
changed one bit, namely to make sure that we don't lose access to Middle
East oil in any shape or form. Now my stating that
does not mean I think we will necessarily succeed. The creation of a
constitution in Iraq and holding elections based on it amounted to an
admirable stunt, but I tend to think this experiment will dissolve into
sectarian violence and civil war, probably within 2006, no matter what
else we do. I predict that circumstances will impel us to withdraw from
the Iraqi cities but that we will not give up large bases near the oil
production areas of the north and south, and that we will continue to
control the air space over Baghdad. Our position in that country would
then devolve to a sort of Fort Apache situation. I imagine the vast
emptiness of the desert combined with air cover will afford us some
protection. But our presence there will only inspire more turmoil, hatred,
and jihad elsewhere.
King Abdullah seems to be in pretty
good health, but he is going on 82. I predict that there will be fissures
in the kingdom, and continued confusion about their oil production capacity.
But by the end of the year it ought to be clear that they have not increased
their output. Peak for Saudi Arabia may be the beginning of the end
of the Saud kingdom -- since peak itself is highly destabilizing.
In Europe, we are beginning to see some
of the first tectonic heavings over energy as Russia jerks poor Ukraine
around on their natural gas shipments. England has managed to piss away
all the former advantage of their North Sea oil bonanza and they now
face a future of dependence on Russian gas plus the bankruptcy of their
remaining industrial base. France enters
2006 somewhat more energy self-sufficient, at least as far electricity
is concerned, since 70 percent of it comes from nuclear reactors. The
other nations of Europe are apt to get restive this year, and may more
actively join the worldwide contest for access to fossil fuels. At the
same time, they will be struggling to contain large Muslim immigrant
populations and I would be surprised if there were fewer problems in
2006 than last year -- with the riots in France and the London subway
bombings. We tend to write off Europe as a region of sclerotic cafe
layabouts, but for the time being many of these nations can still mobilize
potent military forces if they have to defend vital interests. Generally,
I predict 2006 will see a shift in power to the big energy bear, Russia.
It's industrial infrastructure is otherwise decrepit. It's armed forces
are bankrupt. But it has at least enough nuclear arms to blow up the
world a few times over, so that, combined with its oil-and-gas assets,
require us to take it very seriously.
Japan has nearly been forgotten. It now
imports 95 percent of the fossil fuel it needs to run itself. God knows
what they will do if geopolitical turmoil shuts down the shipping lanes
that bring a steady stream of oil tankers to the islands. They are capable
of mobilizing to defend their vital interests. We just haven't seen
them do it since the 1940s. What role Japan will play in the Pacific
remains a mystery, especially in relation to the growing power of China.
Perhaps some of this oriental mystery will be revealed in 2006. Perhaps
Japan will enter into some kind of Asian co-prosperity sphere alliance.
Japan's economy will otherwise be subject to the severe economic strains
emanating out of America.
South America is going loco on us. They
will probably never amount to a united front, but one-by-one they will
become more hostile to us, in the manner of Venezuela's Hugo Chavez
and the newly elected Evo Morales of Bolivia, a former coca farmer who
aims not to allow America any more say in what crops his people can
grow. Chavez can jerk America around on oil imports if he wants to,
but probably not without risking his health and position. Mexico's
economy is dependent on ours, only Mexico will suffer by another order
of magnitude if the US economy turns down in a big way. In 2006 I think
we'll see the first signs of overt hostility between our two nations
as the US desperately tries to come to grips with the flow of illegal
immigrants, and Mexico attempts to divert its suffering peoples' attention
by making threats of incursion and reviving claims to lands along the
border. We could see the first shots of what could turn into a huge
ongoing border nuisance, perhaps even a quasi-war. Meanwhile, Mexico's
premier oil field, Canterall, has entered depletion. They depend on
imports of natural gas from us, and under the rather insane terms of
NAFTA, we in the US depend on imports of gas from Canada to make up
for the stuff we have to sell to Mexico. Those relationships may be
subject to review.
Here in USA, I predict that we will
be diverted by a fantastic circus of congressional hearings and court
proceedings. It will be scandal-o-rama for the Bush administration and
the Republican party. The domestic spying issue will be a huge stink
(I recognize I defended it on this blog), but it raises issues that
our political system cannot digest right now. The Abramoff scandal is
going to be huge and may take down twenty congressmen. Karl Rove will
probably join Lewis "Scooter" Libby in the indictment pen
for the Valarie Plame incident. Tom Delay is going to have a very ugly
trial in Texas, and senate majority leader Bill Frist may end up being
prosecuted for stock sale irregularities. These shows may so successfully
entertain the public -- and the cable news impresarios -- that we will
fail to notice the rising predicament of oil and gas prices and the
cratering of the suburban sprawl economy (just as Watergate -- a very
satisfying melodrama for those of us who were young reporters in 1973-4
-- diverted the US from the first throes of the oil crisis). All this
activity will tend to degrade the standing of the Republican party to
"junk" status. But there is no sign that the Democrats offer
an alternative world-view to the "non-negotiable American way of
life."
Political circuses will not completely
divert the middle class from its own suffering, as their mortgages devour
what is left of their financial lives. But as they sink in fortune and
hope, I predict we will see a turning of all the recent celebrity envy
-- and the infotainment value spun off it -- into a vicious hatred of
the rich and famous and a new desire not to emulate them, but to punish
them. Look out, Nicole Ritchie and the Donald Trump. The grandchildren
of Ozzie and Harriet will be looking to eat you for dinner starting
in 2006
Remarks by James Howard Kunstler
Author of The Long Emergency
The Clusterfuck Nation Chronicle