It's about energy--it's always about energy

One of the things that never ceases to amaze me is how mainstream economists fail to appreciate the economic importance of energy.  Not only is energy essential to life as we know it by heating our homes and cooking our foods, but energy powers all those little mechanical slaves that make it possible for ordinary middle-class members of industrial societies to live like monarchs with human slaves just a few generations ago.  Raise the price of fuels and it's like all those mechanical slaves just struck for higher wages.

Here are two more examples of how energy impacts our lives.

Will Global Warming Amplify The Energy Crisis? Look At Australia

Gregor MacDonald, Gregor.us | Jan. 5, 2011, 7:11 AM  

One detects a slow, ironic hooray welling up from the climate change community this week because after a year of intense weather that’s devastated food crops worldwide now an epic flood in Australia threatens to cripple the production of coal. Accounting for 30% of global energy supply–and ready to go higher as oil supply declines–coal was thought to be permanently relegated to the 19th century only a decade ago. Now, however, coal is the go-to energy source of the developing world, the 5 billion people now passing through the gears of industrialism. And Australian coal, both thermal and metallurgical, is called upon heavily to feed this soaring demand. But as flooding in Queensland, Australia’s northern coal country, spreads over an area as large 350,000 square miles, what will happen to coal production and the export of coal?

One country asking that question today is China. Over the past 10 years developing world coal-consumption growth has been rising by nearly 7.5% per year. The majority of that growth has come from China, which uses metallurgical coal to make steel and thermal coal to stay warm, and keep the lights on. This NASA Earth Observatory shot was taken just last week, and covers the Beijing-Tianjin axis. The 35-40 million people here under the gaze of NASA’s satellite are drawing their electricity from coal because that’s what powers China. Not oil, not solar, not wind, but coal.

Over 70% of China’s economy is funded by coal energy. Moreover, if developing world coal demand growth is advancing at nearly 7.5% per year, then obviously that makes for a doubling of coal demand every ten years. And that’s exactly what took place over the past decade. Can China and the other emerging markets double their coal consumption a second time, this coming decade? The nightmare of a world transitioning back to coal is no longer just a subject for discussion at Copenhagen, or Cancun. It’s not just climate change activists who are alarmed by the heady production of worldwide CO2, or the extreme weather events now associated with global warming. Munich Re reported on Monday that 2010 was one of the most loss-intensive years since 1980, for natural catastrophes. More importantly, landslides, storms, super-fires, and floods featured prominently in the details of the Munich Re report.

And now comes the Australian flood. Like a film released too late for consideration in the 2010 class of catastrophes, the massive deluge which will not only affect coal exports but also wheat supply will no doubt feature prominently in Munich Re’s 2011 report next year. Below is just a detail of the massive Bowen Basin, capturing some of the big export facilities from Abbot Point to Dalrymple Bay. Coal observers, and coal investors, will know that Australia has been going through an infrastructure upgrade cycle the past ten years that has significantly boosted the volumes from this coast. But that is not going to be of much help now, as companies from Rio Tinto, Peabody, and Anglo-American have declared force-majeure on coal shipments, and the list is growing. more

I think based on historical memory, the answer to the following question is yes.

Fed Watch: Are Oil Prices About to Undermine the Recovery?

Tim Duy:

Calculated Risk directs us to an LA Times story identifying the possibility that rising gasoline prices will undermine the recovery. He also reminds us that James Hamilton recently wrote on the subject as well, concluding:

I could certainly imagine that an abrupt move up in gasoline prices from here could hurt the struggling recovery of the domestic auto sector and dampen overall consumer spending. I do not think it would be enough to give us a second economic downturn, but it could easily be a factor reducing the growth rate.

I would add that the current price appears inline with the general upward trend since the beginning of last decade. Here I extrapolated on the 2000-2006 trend:

The sudden rise in oil in 2007, a clear deviation from the trend in the first half of the decade, led to substantial demand destruction, a severe blow to the US economy which at the time was struggling under the weight of the housing meltdown and the financial crisis (and arguably still is). The recent rise in oil appears different, more a reestablishment of the previous trend.

From this point on, I tend to think the issue is less of will oil continue to rise, but at what speed will it rise. The trend over the last decade appears to make a lie of recent claims that we have entered into a period of plentiful energy (see also James Hamilton), and while higher oil prices will tend to crimp growth, a gradual price increase should allow for non-disruptive adaptation on the part of economic agents.

What I more concerned with is the possibility of another sharp spike in prices, such as occurred in 2007-08. A repeat of that incident would once again cripple households, who, after 18 months of recovery, are just barely starting to see the light. The most obvious channel to trigger such a spike is monetary, that the Federal Reserve's large scale asset purchases trigger a disruptive decline in the Dollar. Federal Reserve Chairman Ben Bernanke was not buying that story last week. From theWall Street Journal:

Mr. Bernanke says his quantitative easing policy is not to blame for the sharp increase in the price of oil. Instead, oil’s rise is the result of strong demand from emerging markets. The dollar, he notes, has been “quite stable” in the past few months. One worry in the run up to the Fed’s $600 billion bond-buying announcement in November was that it was going to cause the dollar to fall sharply, which would in turn put upward pressure on commodities like oil priced in dollars. The stable dollar, which has risen since the program’s announcement, implies the Fed isn’t the problem in commodities markets, Mr. Bernanke notes.

Movements in commodity prices have not been sufficiently disruptive to suggest a Fed-induced cause is at hand, and have tended to be more consistent with indications of general economic improvement.

In short: Energy prices are yet another thing to keep an eye on. Still, recognize the increase to date appears to be more of a return to the recent trends than a disruptive price spike. Not that rising prices won't have consequences, but the trend of the past decade may simply be something we need to learn to live with. Rather than watching the trend itself, be watching for upward spikes from that trend - those would almost certainly translate into something nasty for the still struggling US economy. more