Drill Baby Drill! - Spill Baby Spill!

The unexplained explosion that destroyed the British Petroleum off-shore oil platform in the Gulf of Mexico is much worse that was reported even yesterday. The new leaks that have been learned of make this spill even worse the the Exxon Valdez - already. How much worse is not known yet. Remember, the Exxon Valdez was limited to the amount of oil in one super tanker. This spill comes directly from the geological oil pool underground, so no one can predict how much worse that the Exxon Valdez this is going to get.

Why is this oil spill so bad? Why this spill is it so massive, and more important, so hard to stop? We're told so often that private industry is "always more effective than government is" you'd think this spill was caused by inefficient and ineffective government. But it's not. It's that "inefficient" government organization, the US Coast Guard, that is taking the lead in first saving as many of the crew as possible and later trying to protect the Gulf and the coastal areas.

But back to what caused this to get so bad. Here is some new information from DaveJ at OpenLeft. Dave points out that much of the fault lies in the hands of the private oil drillers.

How many times have you heard, "The private sector does everything more efficiently and effectively than government?" Right. Not this time. Leaking Oil Well Lacked Safeguard Device,

The oil well spewing crude into the Gulf of Mexico didn't have a remote-control shut-off switch used in two other major oil-producing nations as last-resort protection against underwater spills.

So once again the private sector screwed up and created a disaster that is way, way beyond private capabilities to fix things... and again it is government to the rescue: US military joins Gulf of Mexico oil spill effort. But government coming in after the fact to clean things up after the private sector created a major disaster is a very expensive way to do things. Maybe we ought to revisit that "government is bad" ideology that let's this kind of thing happen over and over again.

Anti-government ideology? Deregulation ideology? I wonder where it comes from? Well, all that Koch money you may have been hearing about, funding the Tea Party movement, funding the climate deniers, funding all that anti-government, anti-regulation crap -- that's oil money. Exxon, Schell and BP are in that mix as well.

This stuff follows a model developed by the tobacco companies to keep their franchise going after it became clear they were profiting from a product that was killing people. The model is to fund a political movement to throw as much smoke as possible in the air -- "doubt is our product" -- get people arguing about "personal responsibility" instead of our community responsibilities to each other, and turn people against government so it can't regulate. It works: tobacco still kills over 400,000 Americans a year and it's still legal -- and still very, very profitable. Revise and extend the model and you have today's conservative movement - a pay for play operation serving the biggest companies.

Let's not forget that of the 129 member crew on board when the (still unexplained) explosion occurred, 11 are missing and presumed dead, while seven others are critically injured. Add this to the cost our hunger for more and more cheap energy on top of the recent deaths of 29 coal miners as a result of Don Massey refusing to act to dig coal safely.

I can't find a song about oil roughnecks, but this was one of my favorites 50 years ago. ("Though I remember the superb Peter, Paul and Mary version.) The key line that has always remained with me is the refrain: "Bone and blood is the price of coal. Bone and blood is the price of coal."



Perhaps we should remember why these working people die in greater numbers than necessary. It's cheaper for them to die than for the companies to spend the money to make their jobs safer! The companies make bigger profits and they sell more energy because it it costs less!

Meanwhile, here is one more reason the big corporations are opposing things like wind energy: Wind's latest problem: it ... makes power too cheap.

The key thing here is that we are beginning to unveil what I've labelled the dirty secret of wind: utilities don't like wind not because it's not competitive, but because it brings prices down for their existing assets, thus lowering their revenues and their profits.

Perhaps this is beginning to sound a bit like class warfare. Well isn't it? This is the wealthy investors in older energy sources like coal and oil spending the lives of workers to build their profits. And are they willing to share their profits? Of course not. Consider the attitude of Pete Peterson and Bob Rubin as they work to reduce the American deficit. The deficit is scary and dangerous, so someone is going to have to sacrifice to reduce the deficit. Think the extremely wealth Peterson and Rubin are offering to sacrifice some of their wealth to the effort? Here is a sample of their attitude:

"Peter Peterson and Robert Rubin are both enormously wealthy men. (They joked about dividing their lunch tab based on their net worth.) They are lecturing the country on the need to cut Social Security and Medicare benefits for retirees who have a tiny fraction of their wealth. Many of the victims of the cuts that they would push are people who are already struggling."
[H/t to Digby at Hullabaloo.]

Of course the aristocrats are not going to sacrifice any of the wealth they control. Think Don Massey is going to spend "His" money to make digging coal safer for coal miners. Peterson and Rubin (among others) are working hard to take money from those on Social Security and government operated health care. What they can't get in taxes (such as those that backed the Wall Street bailouts) they will fight to get through the banks by predatory lending. Consider the usury of Pay Day lending, or the sub prime loans required by working people to buy a car from someplace that does not check credit. Since the wealthy prevent building public transportation, the workers have to buy the overpriced crap used cars with overpriced sub prime loans. And the wealthy get richer. See Massey, Rubin and Peterson as examples.

British Petroleum has a similar hesitation to spend money on blow-out protective devices that are only needed if things go badly wrong when drilling. Safety is for the plebeians and cuts into profits. Make them pay for it if they want it.

That's the core reason why the health care public option never had a chance to be adopted, either. The aristocratic wealthy members of the Senate don't want to pay for the working classes. It cuts into profits and makes it harder for them to gather wealth and maintain their exalted social positions.

This is class warfare conducted by the Movement Conservatives on the rest of us. That's the lesson of the growing inequality of wealth and reduced economic class mobility in America. It's also the lesson of the Massey Coal Mine disaster and the current Gulf of Mexico oil disaster.

The refrain keeps ringing for me. "Bone and blood is the price of coal. Bone and blood is the price of coal." That's cheap, high-profit coal with the benefits going to the rich and (rarely) a little bit trickling down to the rest of us.

If you don't like the results of globalization then the higher oil prices are a good thing

Low oil prices have meant that globalization allowed high paying jobs in industrialized nations to be replaced with low paying jobs half way around the world. Guess what happens when the price of oil quadruples and transportation costs increase by 100% to 150%? The New York Times presents an example.

When Tesla Motors, a pioneer in electric-powered cars, set out to make a luxury roadster for the American market, it had the global supply chain in mind. Tesla planned to manufacture 1,000-pound battery packs in Thailand, ship them to Britain for installation, then bring the mostly assembled cars back to the United States.
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But when it began production this spring, the company decided to make the batteries and assemble the cars near its home base in California, cutting more than 5,000 miles from the shipping bill for each vehicle.

“It was kind of a no-brain decision for us,” said Darryl Siry, the company’s senior vice president of global sales, marketing and service. “A major reason was to avoid the transportation costs, which are terrible.”

But it is more than just the higher price of oil. Emissions intensive business models are also impacted.

Cheap oil, the lubricant of quick, inexpensive transportation links across the world, may not return anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Rising concern about global warming, the reaction against lost jobs in rich countries, worries about food safety and security, and the collapse of world trade talks in Geneva last week also signal that political and environmental concerns may make the calculus of globalization far more complex.

“If we think about the Wal-Mart model, it is incredibly fuel-intensive at every stage, and at every one of those stages we are now seeing an inflation of the costs for boats, trucks, cars,” said Naomi Klein, the author of “The Shock Doctrine: The Rise of Disaster Capitalism.”

“That is necessarily leading to a rethinking of this emissions-intensive model, whether the increased interest in growing foods locally, producing locally or shopping locally, and I think that’s great.” [Snip]

The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs. Big container ships, the pack mules of the 21st-century economy, have shaved their top speed by nearly 20 percent to save on fuel costs, substantially slowing shipping times.

The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tariff on trade. “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” the report concluded, and as a result “has effectively offset all the trade liberalization efforts of the last three decades.”

The spike in shipping costs comes at a moment when concern about the environmental impact of globalization is also growing. Many companies have in recent years shifted production from countries with greater energy efficiency and more rigorous standards on carbon emissions, especially in Europe, to those that are more lax, like China and India.

While this is clearly going to change globalization, it does not mean the end of globalization.

As economists and business executives well know, shipping costs are only one factor in determining the flow of international trade. When companies decide where to invest in a new factory or from whom to buy a product, they also take into account exchange rates, consumer confidence, labor costs, government regulations and the availability of skilled managers. [Snip]

The industries most likely to be affected by the sharp rise in transportation costs are those producing heavy or bulky goods that are particularly expensive to ship relative to their sale price. Steel is an example. China’s steel exports to the United States are now tumbling by more than 20 percent on a year-over-year basis, their worst performance in a decade, while American steel production has been rising after years of decline. Motors and machinery of all types, car parts, industrial presses, refrigerators, television sets and other home appliances could also be affected. [Snip]

Soaring transportation costs also have an impact on food, from bananas to salmon. Higher shipping rates could eventually transform some items now found in the typical middle-class pantry into luxuries and further promote the so-called local food movement popular in many American and European cities.

The results of this trend is going to be less globalization and more regionalization.

In addition, the sharp increase in transportation costs has implications for the “just-in-time” system pioneered in Japan and later adopted the world over. It is a highly profitable business strategy aimed at reducing warehousing and inventory costs by arranging for raw materials and other supplies to arrive only when needed, and not before.

Jeffrey E. Garten, the author of “World View: Global Strategies for the New Economy” and a former dean of the Yale School of Management, said that companies “cannot take a risk that the just-in-time system won’t function, because the whole global trading system is based on that notion.” As a result, he said, “they are going to have to have redundancies in the supply chain, like more warehousing and multiple sources of supply and even production.”

One likely outcome if transportation rates stay high, economists said, would be a strengthening of the neighborhood effect. Instead of seeking supplies wherever they can be bought most cheaply, regardless of location, and outsourcing the assembly of products all over the world, manufacturers would instead concentrate on performing those activities as close to home as possible.

Will this be beneficial for America? That's debatable.

But a trend toward regionalization would not necessarily benefit the United States, economists caution. Not only has it lost some of its manufacturing base and skills over the past quarter-century, and experienced a decline in consumer confidence as part of the current slowdown, but it is also far from the economies that have become the most dynamic in the world, those of Asia.

“Despite everything, the American economy is still the biggest Rottweiler on the block,” said Jagdish N. Bhagwati, the author of “In Defense of Globalization” and a professor of economics at Columbia. “But if it’s expensive to get products from there to here, it’s also expensive to get them from here to there.”

This last view seems to look at America is primarily an exporter in the global economy. If that is all that matters, it is correct. But since America HAS lost much of its manufacturing base and skills,and become financialized, this trend will reverse that problem. America's banks and financial institutions will be hurt, but there is a residual belief in America that we are engineers and can build anything.

We probably will prove - again - that this is true. There is no other population in the world sitting on so much high-resource geography with such an excellent internal transportation network with such excellent resources. We also have the necessary infrastructure for an economy mostly measured by markets instead monopolies or the administrative decisions of large businesses or government. Anyone with a good idea can organize a group and create a new business. All we need is an educated workforce and a reversal of the idiotic idea that managers are a special privileged class who create products and so should be treated as a higher social class.

The sharp increase in transportation costs is not going to disappear. It is going to cause a lot of trouble economically, especially in the U.S. which has become addicted to cheap oil and low transportation costs. But after the problems pass, the regionalization will begin to appear to be a blessing.

All we have to do is get through the current tough times, adapt, and then enjoy the blessings of the new situation. The immediate result is going to be a lot of painful belt-tightening, though. The near future is not going to be a good time to be in debt for consumer goods.

American power, wealth was based on oil; That's nearly over

Sara Robinson is a futurist. She studies trends and estimates what they will mean in the future. Last week she reported on a fascinating book about energy as the source of empire. The book, by Thomas Homer-Dixon entitled The Upside of Down postulates that oil has been the source of American world power and the power of the dollar through the twentieth century, and that America's control of oil is running out. What does that mean? Here is an explanation from Sara Robinson:

All empires are built on vast amounts of energy. And no great empire in history has ever come to power without controlling and dominating the market in whatever the current preferred energy resource was at the time. [Snip]

He carefully builds the argument that Rome rose on its ability to harness vast amounts of Mediterranean sunshine, turn it into food, and then reliably move that food around the empire to feed vast numbers of soldiers, builders, and horses and thus consolidate its regime. When that system failed, the empire crumbled.

Likewise, the Dutch built their short-lived empire on the ability to supply oil for Europe's lanterns. They were supplanted by England, which was able to supply better, cheaper fuel out of its vast coal resources. British dominance lasted until a rising America turned out to have unimaginable amounts of coal, which allowed it to undercut the British pound as the world's most stable currency — and outperform the UK economically.

And then came oil, which was soon preferred to coal because it proved to be a far more efficient (hence, cleaner and cheaper) and versatile fuel. You could get far more energy output from a smaller unit (coal's comparative inefficiency made it impractical for small vehicles like cars, for example) and with far less effort; and you could turn it into far more different kinds of products -- not just fuel, but plastics, fertilizers, wonder drugs, and much more.

As the world moved toward oil at the beginning of the last century, the UK — eager not to lose out again — made an early bid for the oil fields of Arabia. But North America counted among its original blessings more oil reserves than any other continent on the planet; and that, argues Homer-Dixon, was decisive. Unable to compete, the British Empire faded, and the American Century began.

Sara then discusses how a second element of developing a full-blown Empire is developing and exporting the infrastructure that allows the rest of the world to build much better lives from that preferred energy source. America leveraged its control of oil resources by developing and exporting oil-fueled cars, power plants, farms and factories. Those exports became the basis of the dollar as the world currency. But that creates a dependence in the dominating nation on both control of the energy source and on world demand for the infrastructure that uses the energy source to create wealth. So Sara continues:

Homer-Dixon also points out another, more sober lesson. It's never happened that an empire that built its wealth on one energy resource also succeeded in dominating the next resource that supplanted it. Human nature being what it is, societies that are deeply invested in the current energy regime tend to fall into denial when that regime comes to its natural end — either because it simply runs out, or because it's superceded by something even more efficient and versatile. People can't believe things won't go on as they always have, or imagine that life could be any different. They shut their eyes to looming trouble, ignore the signs of impending doom, and refuse to make any reasonable plans to navigate the coming changes.

In the meantime, as old system falls apart, someone hungrier and more nimble finds a way to capitalize on a new, more efficient energy resource. And so old empires die, and new ones rise to take their places.

Put it in this perspective, and it becomes obvious that when we talk about running out of oil, we're not just talking about higher prices or low-carbon lifestyles or making an easy transition to something else that America (we like to think) will also dominate. When we fully grasp the foundational role oil played in securing America's wealth and global power, it becomes obvious that when we talk about moving off oil, we're really talking about nothing less than the demise of American power throughout the world, and the end of the American Way of Life as we've known it for generations.

That's serious stuff. But it's the truth that provides the backdrop for everything else that's going on right now. Against this larger process, it's easier to see that the dollar is weakening because our control over the whole oil economy that has supported its value for the past century is in serious trouble — and that we won't be out of financial danger until we can base on the dollar's value on something other than oil. Our political stature is tanking because the world doesn't need to kiss up to us anymore to keep the cars running and the lights on — and it won't rise again until we find something else of equally high value to offer. Our standard of living is falling because it always floated on a sea of oil — and that sea is drying up. Oil prices are high not because of market manipulations and oil company profit-taking (though plenty of oil economists are sure that's part of the story, too); they're high because the whole system is destabilizing, heading for a major tipping point.

The Sara continues by using this view of American world political power as being based on the American oil monopoly. As the oil and our monopoly of it runs out, so does American world political power.

Even before 9/11, the Bush Administration has always had a sense of panicked desperation about it — a desperation we've usually attributed to conservative revolutionary zeal, religious fanaticism, or free-market fundamentalism. But it's also plausible to interpret some of this as the desperation of people who were tasked with protecting the American empire by keeping the oil taps open and under control at any cost — and who know, deep in their guts, that time is running out.

The Project for a New American Century's stated strategy for maintaining the American superpower in the face of a rising China was to invade and dominate the Middle East, and thus control China's access to oil for the next several decades. That was the intended long-term payoff of the Iraq War: control the oil, and thus control the world. In their minds, if we have to bankrupt the country, tear up the Constitution, and piss off every other country in the world along the way, it's worth it — since they know we're not worth a damn economically or politically without the oil anyway. Sure, the means are ugly; but according to their view of the ends, there's simply no alternative — and no other possible future worth discussing. They don't care if we hate them now, because they're convinced we'll thank them in 20 years for having the statesmanlike foresight to do what had to be done.

(Blame it on too much time in the oil patch. That toxic elixer of crude and money so easily goes to one's head....)

This perspective also provides some extra context for why locally-based power generation, like on-site or community wind and solar, are political non-starters for energy execs and their government minions. It's obvious that they hate it because they can't take profit from it; but they also know that America's global hegemony depends on keeping the world dependent on energy supplies they control. Since nobody can capture a monopoly on the wind or the sun, there's no way to build the next global empire on them. And therefore, renewables simply aren't very interesting to people whose first priority is geopolitical dominance and stratospheric profit.

This view of energy and Empire certainly offers a coherent explanation of the twentieth century American world power. It also provides a connection between the period of American Empire, its decline, and the almost panicky reaction of American conservatives to that decline and to the loss of control of world oil.

One thing is very clear, though. Oil as we have known it is gone. Does that mean that American wealth and power is also gone? Remember, no previous empire every outlasted the loss of its control of the dominant energy source. Can America be different? Back to Sara:

From this 10,000-foot view, it's easy to interpret the political spats and economic machinations and deal-making and climate debates and regional wars — the whole parade that dominates the news now — as simply opening acts in a long transition that could end up taking most of this century. Unless a) we discover vast new reserves on a globe that's been already explored from pole to pole (unlikely) and b) we come up with dramatic new evidence proving conclusively that climate change isn't a problem after all (even less likely), then the hard fact is: We will be spending the next several decades moving off oil.

It's going to be the most important work of this century. And Americans can either get out in front of this change and come out of it at the century's end with much of their greatness intact — or continue to fight it, and end up as another of history's has-beens.

Meeting this challenge means we're going to have to get very smart, very fast, about a lot of things.

• First, we need to accept that this change is happening, and start having serious conversations about how we're going to handle it. The Bush Administration's denial has already cost us eight valuable years. It's an understatement to say that the longer we avoid the issue, the worse the transition will be.

• Second, we need to stay mindful of the horrific pitfalls. The unimaginable grimness of the worst-case scenarios alone should be enough motivation to get and keep us talking.

Even the most-likely-case scenarios are disturbingly short on sunshine and roses. Historically, energy transitions (involving, as they do, the collapse of vast economic and political systems) have never happened smoothly. Rome fell so hard that it took a thousand years for anything like it to rise again. The stable world order held together by the British coal empire shattered apart in two vast world wars and another dozen colonial revolutions (some of which still aren't resolved decades later). It's not unreasonable to expect similar disruptions as the American oil empire begins to unravel. It's not going to be pretty.

When complex economic systems fail, they almost always fail catastrophically, leaving vast numbers of displaced, disoriented and righteously angry people in their wake. Bad economic and environmental decisions get made. Critical issues are ignored, or abandoned due to lack of resources. If folks get desperate enough for security, it's entirely likely that they'll reorganize into feudal kingdoms or even warlord-run clans, as has already happened in too many Middle Eastern countries in the wake of war. Restoring these lost democracies can take generations. Much of that risk can be averted — but only if we're aware of the potential for trouble, and start figuring out how to deal with it now.

• Third, an important part of that planning will involve taking stock of the carbon-based resources remaining to us, and figure out how to best invest them to smooth the way to the next era. We can use that remaining margin of oil to rebuild walkable cities, construct next-generation energy infrastructure, and install electric transit. We can leverage it to repave the world with agrichar, restoring millions of acres of arable land, creating a vast new carbon sink, and eliminating the need for petroleum-based fertilizers in the bargain. We will still be able to afford to run oil-fueled bulldozers and trucks and ships for a while yet. Let's use them wisely while we can.

• Fourth, "globalization" may take on a whole new meaning, one that's more about global governance than global trade. Executing transition plans necessarily means empowering planet-wide organizations that have the ability to make and enforce the rules. We've already done this on a limited scale in the CFC treaties, international non-proliferation efforts, and so on. But navigating a transition of this magnitude is going to force us to take the whole idea of global government to the next level. (Can't you hear the far right howling about this already?)

Creating these new powers will raise all kinds of hard questions about national sovereignty and the rights of the global collective. In the end, we may revisit the meaning and purpose of government, and perhaps create entirely new forms of government that better balance local needs against global goals.

I've quoted more than enough of her article. She has an interesting final section entitled "What's Next?" which I suggest that you go read.

Is oil going up in price partly because the banks have no capital left?

Ian Welsh at FireDogLake offers an interesting and plausible reason why oil prices are going through the roof.

Consider this. The world and especially the U.S. has spent the last three to four decades reorganizing our societies so that the extremely wealthy are able to extract money from the middle class and the poor. So what do the extremely wealthy DO with all that money? It is far beyond what they can spend on consumption, and besides, it is the basis of their exalted social status. They have to keep the wealth intact and even grow it where possible.

Investing all that money in potentially productive enterprises is simply too small scale and retail to be bothered with. Only large scale banking, far removed from the real economy and very much subject to government rules and regulations instead of economic success. Keep in mind that neither IBM nor Microsoft bothers with a market that has revenues of less than a billion dollars. They wait for someone else to prove the market and then buy them out. Entrepreneurs do not operate at the level of great fortunes. The uncertainty is too great for the investors with great fortunes to invest. They want only proven markets.

So where do the investors of great wealth invest their money?

See, there's a lot of loose money floating around in the world. Not only are the rich richer than anytime since the Gilded age, but due to the miracle of leverage you can easily take one million and turn it into, no joke, 100 million worth of speculative cash through the joy of leverage. Once you've got all that leveraged cash, however, you need to find something to do with it.

In the nineties that money went mostly into stocks. And so we had the dot-com bubble and the attendant frenzy.

Since then stock prices, if you measure them in Euros, have remained pretty close to flat. There have been some rises and falls, but basically, movement has been minor and soon lost.

Instead, in the 2000's that money split largely between four types of plays.

1. Labor arbitrage plays in which you move production from the 1st world to 3rd;
2. Real Estate plays, largely through the vehicles of mortgage backed Collateralized Debt Obligations (though there are other kinds of CDOs which also got great play) and other chopped up securities packages;
3. Currency speculation; and,
4. Commodity speculation.

Labor arbitrage plays are still ongoing but they're slowing down a great deal as the US economy moves into recession and as costs in China and the core areas of India increase.

Real Estate plays are over. All types of real-estate markets are collapsing.

The other two types of plays - currency speculation and commodity speculation remain available. So you've still got your billions and trillions of money floating around, because rather than allowing deleveraging to occur properly the Fed and other central banks are sweeping the junk into trash bins, and that money is still looking for returns. There are no great new industries or technologies to invest in that can soak all that money up doing useful things. Sure, you can put a few hundred billion into alternate energy, but that's peanuts. The rest of it has no where productive to go.

But it still needs to make returns. And there's nowhere for that money to go but into currency speculation (against the US dollar, not that the US dollar shouldn't be collapsing based on fundamentals) and into commodity speculation. And since there are some fundamental reasons why food and oil supply are down, those are good places to pile that money into.

Oil and food prices, based entirely on fundamentals, would have risen. China and India coming on line is raising the demand for oil significantly. Climate instability and stupid government policies like ethanol price support are amongst the factors decreasing supply relative to demand for food.

But neither of them would have risen as fast or high as they did without speculative excess.

If this is a correct explanation it carries with it proof that extremely unequal incomes carry a major social penalty. The high prices of oil, commodities and food are killing people around the world. No one's personal wealth is worth that social cost.

The Automobile world is going to become a plaything of the very wealthy

Kevin Drum reports on a new study by the International Energy Agency (IEA) that suggest a much higher price of oil in the very near future.

Why?

In the past the IEA has studied and predicted demand for oil and simply assumed that supply will keep up with demand. Now they have also looked carefully at supply and realized that it is no longer keeping up with demand and that currently planned explorations can't change that. The result? They suggest that a shortage of supply "by 2015 of as much as 12.5 million barrels a day, unless there was a sharp drop in expected demand."

If that's the case, then $4 a gallon for gas and $135 per barrel for oil is literally nothing. Goldman Sachs is predicting $200 per barrel next year. At the anticipated prices a shortage of 12.5 million barrels a day will cause, gasoline will become a luxury good available only the the very wealthy, the military and some government agencies. No more selling 15,000,000 cars a year in the U.S. as is expected this year.

Kevin based his report on this article from the Wall Street Journal.

Will oil be the basis for the new international alignments?

What does Saudi Arabia's participation in the Annapolis talks mean?

Can Saudi Arabia hack together a Sunni alliance (with Israel as honorary Sunnis) to counter the Middle East Shiite alliance? Is a hot war likely to ensue?

If so, oil will hit at least $200 per barrel, and the American economy will be in the tank. If that happens, then the dollar will cease to be the international reserve currency, to be replaced by the Europe. Since the Sunni nations in the Middle East have their international reserves in petro-dollars, then those nations will take a major hit in the nest egg. China faced that same problem with the dollar.

But Russia will suddenly be the new rich man on the block and able to really throw their weight around in Europe and the Middle East. How likely is a Russia - Iranian alliance?

Pakistan will be in chaos, as it seems to be headed that direction already.

Emptywheel at the Next Hurrah throws out many of these questions and her commenters address a lot of them.

In my opinion, the oil producing nations of the world appear to be well on their way to dominating international trade because of the value of oil. The European Union, as a highly productive industrial economy which has already adjusted over the years to having relatively little oil well have industrial products to sell. Since the U.S. is a heavy oil-consuming nation, we are likely to be mostly just sitting on the sidelines hoping someone will have pity on us.

The severity of America's problems is going to be a lot worse than it would have been had Cheney and Bush not attempted to substitute military power for diplomacy, economics and heavy doses of research into alternative fuels.

Go read Emptywheels discussion and see what you think.

The dropping dollar and the price of oil

As I mentioned yesterday, the Dollar is still dropping. Here, from Daily Kos, we get another element of the dollar weakness.

[Source: Reuters]:
CARACAS (Reuters) - OPEC is likely to discuss creating a basket of currencies for oil pricing at its next summit due to the steady decline in the dollar, Venezuela's Energy Minister Rafael Ramirez said on Friday.
"The need to establish a basket of currencies ... will probably be a point of discussion in the next OPEC summit," Ramirez told reporters during an evening event in the presidential palace.
"The dollar as a benchmark currency has been weakening quite a lot and it creates distortions in oil markets."

While disturbing, it wouldn't mean much except for the fact that this is merely the latest step in a trend away from the dollar by OPEC nations. For example:

* UAE central bank diversifies away from dollars

* Kuwait unhooks the currency peg to the dollar

* Syria (not an OPEC nation) unhooks currency peg to the dollar

* Saudi Arabia refuses to cut interest rates with Federal Reserve

* Iran sells oil in Euros

* Venezuela currency peg is in danger, and plans to sell oil priced in Euros

The U.S. economy has moved way past the set of problems that caused the meltdown of the Argentine economy in the late 90's. The only thing that has kept the U.S. from suffering a similar meltdown has been 1. the fact that the dollar has been the international reserve currency and 2. that the U.S. economy has been a massive source of international markets as long as other nations would loan the U.S. enough money to be able to buy those goods.

Other nations want the market that is the U.S. economy keep buying their products because that props up their economies, but that will only last as long as the international lenders think they can get back to money they are lending the Americans - with interest. The trend away from the dollar by OPEC nations places that ability to repay in real question.

So unless the trends change the U.S. is on the tracks for an Argentine-style meltdown. But larger. The question is how soon, and this is the kind of thing where bankers go to bed one night thinking the next day will be just like the one just finished, and then they wake up to a whole new economic world. The disaster last Summer in the international credit markets set off by the collapse of the U.S. housing bubble and its associated security backed investment vehicles is only a prelude to the financial problems the U.S. is moving towards.

The movement of OPEC nations away from the dollar is another set of dead canaries in the mine.

[h/t to Emptywheel.]

Why did the Soviet Union fall?

I stumbled [H/T to Kevin Drum.] across this article at Marginal Revolution and found it remarkably informative. True? Let's say that I suspect there is a lot of truth in it.

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In a simplified way, the story of the collapse of the Soviet Union could be told as a story about grain and oil.

That is from Yegor Gaidar. In the 1980s it was necessary to import more and more grain, and Saudi Arabia was no longer supporting oil prices. It worked like this:

The timeline of the collapse of the Soviet Union can be traced to September 13, 1985. On this date, Sheikh Ahmed Zaki Yamani, the minister of oil of Saudi Arabia, declared that the monarchy had decided to alter its oil policy radically. The Saudis stopped protecting oil prices, and Saudi Arabia quickly regained its share in the world market. During the next six months, oil production in Saudi Arabia increased fourfold, while oil prices collapsed by approximately the same amount in real terms.

As a result, the Soviet Union lost approximately $20 billion per year, money without which the country simply could not survive. The Soviet leadership was confronted with a difficult decision on how to adjust. There were three options--or a combination of three options--available to the Soviet leadership.

First, dissolve the Eastern European empire and effectively stop barter trade in oil and gas with the Socialist bloc countries, and start charging hard currency for the hydrocarbons. This choice, however, involved convincing the Soviet leadership in 1985 to negate completely the results of World War II. In reality, the leader who proposed this idea at the CPSU Central Committee meeting at that time risked losing his position as general secretary.

Second, drastically reduce Soviet food imports by $20 billion, the amount the Soviet Union lost when oil prices collapsed. But in practical terms, this option meant the introduction of food rationing at rates similar to those used during World War II. The Soviet leadership understood the consequences: the Soviet system would not survive for even one month. This idea was never seriously discussed.

Third, implement radical cuts in the military-industrial complex. With this option, however, the Soviet leadership risked serious conflict with regional and industrial elites, since a large number of Soviet cities depended solely on the military-industrial complex. This choice was also never seriously considered.

Unable to realize any of the above solutions, the Soviet leadership decided to adopt a policy of effectively disregarding the problem in hopes that it would somehow wither away. Instead of implementing actual reforms, the Soviet Union started to borrow money from abroad while its international credit rating was still strong. It borrowed heavily from 1985 to 1988, but in 1989 the Soviet economy stalled completely...

The money was suddenly gone. The Soviet Union tried to create a consortium of 300 banks to provide a large loan for the Soviet Union in 1989, but was informed that only five of them would participate and, as a result, the loan would be twenty times smaller than needed. The Soviet Union then received a final warning from the Deutsche Bank and from its international partners that the funds would never come from commercial sources. Instead, if the Soviet Union urgently needed the money, it would have to start negotiations directly with Western governments about so-called politically motivated credits.

In 1985 the idea that the Soviet Union would begin bargaining for money in exchange for political concessions would have sounded absolutely preposterous to the Soviet leadership. In 1989 it became a reality, and Gorbachev understood the need for at least $100 billion from the West to prop up the oil-dependent Soviet economy.

Here is the full article.

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Here's why I suspect there is a lot of truth in this.

An interesting tale told me by one of those great fiction artists, an academic Economist, shed some light on the collapse of the economy of the USSR.

It was a planned economy, one in which markets did not provide price the signals an individual business needed in order to plan and function over a period of time. The end of the planned economy was brought about using what was called "Shock therapy" by Economists like Jeffery Sax. Suddenly, bad as it had frequently been under central planning, individual businesses had no idea where to get their raw materials nor did that know what they would be likely to cost. Most of the businesses that did survive this period were large, raw material-based industries run as monopolies. They were large enough to internalize the central planning process that was abandoned by Moscow. Most of the rest of the economy simply didn't survive the change-over.

In the meantime, government was getting out of the business of providing housing, health care and such basic amenities to the population.

For a little over half a decade, the manufactured output of the entire economy of the USSR had a market value that was significantly less than what could have been obtained simply by selling the raw materials used by the economy on the world market. This is fascinating. The entire economy of the USSR actually created a net reduction of the value of the raw materials it had to work with. If this has ever happened over a lengthy period of time to any other economy in the world I certainly have not learned of it.

Given that amazing ~negative~ economic output, the Russian government had to borrow money internationally just to allow a larger percentage of the population to survive. As it is, the reduction in life spans clearly shows what a strain the entire economy was under. A reduction in military spending or in corruption (alternative proposed reasons for the economic problems of the USSR) would have only the effect of limiting distribution of income.

Given these economic circumstances, this story makes a lot of sense. Victor Putin's recent international aggressiveness towards the U.S. rather suggests that the Russian economy has recovered a great deal from the late 80's and early 90's. Putin's nasty tone towards Bush is probably more of a distraction for his population than a real threat towards the U.S., since life spans and general quality of life are recovering slowly.

Any agreements or disagreements?

Halliburton moving HQ to Dubai - Rats? Sinking Ships?

I find the timing of this interesting.

From MANAMA/HOUSTON (Reuters) - U.S. oil services firm Halliburton Co. is moving its headquarters and chief executive to Dubai to better position itself to gain contracts in the oil-rich Middle East.

Texas-based Halliburton, which was led by Vice President Dick Cheney from 1995-2000, did not specify what, if any, tax implications the move might entail. It plans to list on a Middle East bourse once it moves to Dubai -- a booming commercial center in the Gulf.

"My office will be in Dubai, and I will run our entire worldwide operations from that office," said Chief Executive David Lesar at an energy conference in Bahrain on Sunday. "Dubai is a great business center."

Halliburton has drawn scrutiny from auditors, congressional Democrats and the Justice Department for the quality and pricing of its KBR Inc. unit's work for the U.S. army in Iraq. [Snip]

Halliburton said it would maintain its legal registration in the United States and was not leaving Houston, where it was currently based.

But Lesar told reporters: "At this point in time we clearly see there are greater opportunities in the eastern hemisphere than the western hemisphere."

KBR, the engineering and military-services contractor unit that Halliburton is in the process of splitting off, is the Pentagon's largest contractor in Iraq.

This should put their records of what they did in Iraq outside the U.S. where subpoenas can't get at them and where the shredders can operate at a much more liesurely pace. Not only will this make it easier to escape U.S. Justice, they plan to list on the Dubai Bourse, which removes them from the control of the SEC and from any U.S. Stock Exchange regulations.

Think this might have anything to do with the Democrats taking over the Congress and the slow-motion implosion of the Republican Party?