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$120 oil and the rise of the Gulf

by Brad Setser
April 28, 2008

The Economist put the Gulf on its cover this week. It isn’t hard to see why. The Gulf was booming with oil at $ 60 a barrel. It is roaring with oil at close to $120 a barrel.

Consider the following graph, which shows the Middle East’s oil export revenues over time.* For the calculations, I assumed oil will average $120 a barrel in 2008. That is on the high side – as oil would have to average more than $120 a barrel over the remainder of the year to bring the annual average up to $120. On the other hand, oil keeps on rising …

gulf_1

* I calculated oil export revenues by multiplying the oil price (using the IMF’s data) by a country’s net oil exports (using the BP data set)

Looking at nominal dollars though can be a bit deceptive. Relative to world GDP, the Middle East’s surplus is actually a bit smaller this time around.

gulf_2

Real oil prices are back where they were in 79-80. But the world has become a bit less oil-intensive over time. A barrel of oil produces more output now than in the early 80s – or, alternatively, it takes a bit less oil to generate a dollar of output.

The oil importers though shouldn’t be celebrating too much. At least not the US. The following graph shows US and EU oil imports against the Middle East’s oil exports, both plotted against world GDP.

gulf_3

Two things jumped out at me.

First, if oil does average $120 over 2008, the rise in the United States oil import bill would be as steep as in 1973 and 1979. Going from $70 to $120 in a year would be a shock – not the steady rise of 2003-2006.

Second, the relative position of the US and Europe have shifted. Back in the 1970s, Europe imported more oil (relative to world GDP) than the US. Now the US imports a bit more than Europe. Chalk that down to falling domestic oil production – and a vehicle fleet that is only ½ as efficient as Europe’s vehicle fleet.

The result: US oil imports are as large – relative to the world’s GDP – as in the 1970s, while Europe is importing less than in the 1970s.

What of the Gulf itself?

MORE FOLLOWS

The conventional wisdom is that this boom is different from than past booms. The private sector is playing a bigger role in the Gulf’s current boom – the state less. This boom is driven by private investment, not state spending.

Think Dubai.

The Economist writes:

The Gulf is doing its best to spend its windfall. Stately pleasure domes are springing up all along the coast. Saudi Arabia announces six, no seven!, new economic cities, which it hopes will create millions of jobs for its restive, youthful population. There are worrying echoes of the wasteful 1970s. But this time round, more of the spending is being done by private companies, with an eye to consumer demand, rather than by states.

That argument has a grain of truth. But I also suspect that it overstates the differences. A lot of the rise in private investment is being supported by the state, in one way or another. And in many cases, there are very close ties between the state and private businesses. The families that own many key construction companies are often close to the families than run the state. Other big investors are owned by the state – or privately owned by the family that runs the state. That makes financing big projects a lot easier.

Moreover, the policy of pegging to the dollar has encouraged a lot of investment. Pegging to the dollar has in practice meant very negative real interest rates – as the Gulf’s interest rates have fallen along with US rates even as inflation has increased. Saudi inflation is now close to 10% — implying real rates are now very negative. That makes it costly not to invest.

It also causes problems for those Gulf residents that aren’t busy flipping Dubai condos and plotting their next land deals. Their cost of living is rising rapidly. Roula Kalaf in the Financial Times:

But the upbeat mood has been marred by soaring inflation, which independent analysts estimate at 15 per cent in the United Arab Emirates and as much as 20 per cent in Qatar. Across the Gulf, both nationals and expatriates are complaining as rents climb and food prices surge. The pressure comes two years after many Gulf nationals were devastated by the collapse of stock markets, as state attempts to distribute oil wealth through initial public offerings turned sour.

…. Nor is it clear that the boom is creating sufficient employment for Gulf nationals, given the construction sector’s near total reliance on cheap foreign labour and the dire state of the region’s education systems. This may be less pressing a concern in countries with small national populations but it is putting governments in populous states such as Saudi Arabia under political pressure. “The corporate sector is making money but the man in the street does not feel better off; maybe some people feel even worse off,” says Anais Faraj, executive director at Nomura Investment Banking in Bahrain.

“The big beneficiaries of this boom are the companies but most employ non-locals, and at a certain level, the low-paid-level people, like secretaries, are hurting a lot,” argues Khalifa Jassim al-Thani, head of the chamber of commerce in Doha. “Over the past four years, prices of real estate have gone up four to five times.”

The Economist’s leader also notes that two potentially important reforms haven’t taken place.

The Gulf continues to peg to the dollar (Kuwait is a partial exception, but even Kuwait still manages its currency primarily against the dollar)

And the Gulf countries — unlike Alaska — do not use their surplus oil revenues to pay “oil dividends” to their citizens

Both reforms would tend to shift some of the region’s economic purchasing power out of state hands. A currency that rose with the price of oil would increase the external purchasing power of existing salaries. Government employees – and private workers – wouldn’t need to wait until their salaries were increased to benefit from the oil boom. Oil dividend payments would directly distribute the oil windfall to the gulf’s citizens.

The Economist, again:

Currency reform is not just a way to constrain inflation, but also a means of redistributing spending. At present, the petrodollars are converted into local money at a fixed rate and doled out as governments see fit. With stronger local currencies the state would get fewer dirhams, dinars or riyals for every petrodollar. But Gulf residents would be able to buy more with their money, and guest workers could send more rupees home to families in Kerala.

There is another way to transfer economic initiative from governments to people. At present the Gulf states buy social peace by doling out generous benefits and subsidies, such as cheap housing and medical care, expanding the public payroll and forcing private companies to hire locals in the name of Omanisation or Saudi-isation. …

Could there be a better way? Last winter, 604,000 Alaskans each pocketed a $1,654 cheque from the state’s Permanent Fund, which invests Alaska’s oil revenues on their behalf. Each year, the fund distributes a fraction of its profits, averaged over five years, to every resident. … In a region that likes to impress people with outlandish projects, paying a simple dividend cheque to every Gulf national would be a more audacious venture than the tallest new tower.

Both reforms have a second virtue: they would create mechanisms — a weaker currency, smaller dividend payments — that would help the Gulf adjust to falls in the price of oil — and thus insulate it against the boom and bust cycle that has marked the region’s economic development.

Oil doesn’t only go up. Or so the oil-importing economies hope.

27 Comments

  • Posted by Guest

    "…The aggregate official reserves for the GCC countries are US$151 billion, roughly the size of Hong Kong’s reserves, but about double the UK’s reserves. Of the US$27 billion increase in the reserves of the GCC countries in the latest month, more than 96% can be attributed to interventions… if oil reached US$120, the annual inflow would be about US$800 billion…" http://www.morganstanley.com/views/gef/archive/2008/20080425-Fri.html#anchor6278

    "…At US$100 a barrel, the total value of proven oil reserves underground in the world is around US$121 trillion: US$48 trillion of this belongs to the GCC member countries, the rest of the OPEC owns another US$44 trillion, while the non-OPEC countries (Canada, Norway, Mexico and Russia) own another US$12 trillion worth of oil reserves.

    At the current pace of production and exports, and at US$100 a barrel, the GCC, non-GCC OPEC and ‘other’ oil-exporting countries are projected to earn a total of US$2.1 trillion annually, with the shares of these receipts roughly evenly split between the three categories of countries. Since ‘other’ oil exporters are producing at a more rapid pace relative to their proven stocks of oil reserves, they are, collectively, expected to run out of oil in about 15 years’ time, while the GCC and the non-GCC OPEC countries could continue to export oil for another 65-70 years, at the current pace of extraction, assuming no new discoveries…" http://www.morganstanley.com/views/gef/archive/2008/20080222-Fri.html

  • Posted by satish

    $120 oil will create huge deficits in oil importing countries. Even east asian nations except china will have deficits. Japan is in brink of trade deficit, South korea already in one. Taiwan will soon follow suit. So are thailand, Phillipines. Won has fallen at one time to 1100 and caused central bank to interfere. If there is a scramble for oil oil could well spike beyond 180$ very soon. Turkish lira has already depreciated 20 % from peak. Then there is south asia, eastern europe which are historically been in a trade deficit. It’s a structural problem for them.

    Brad, which are the countries that are exposed to a currency crisis including external factors like capital controls?

    Which countries are likely to use forex to defend the currency?

    Will US avoid such type of crisis given its currency’s reserve status.?

    Will ME invest all their oil surplus in euros’ and anglo-saxon currencies or is there any diversification possible?

    or

    Can we avoid a currency crisis at all?

  • Posted by JB

    Couple of comments in regard to our new incredibly oil rich friends across the pond. Oil @ $120 a barrel. Why is it that the commodity has been so incredibly mis-priced by the market for the last 3 years? The recent rally starting in August of 2007 leaves me thinking that speculation is really what is fueling these price gains. I think that speculation is the result of new transparency and availability to the speculative investor via Exchange Traded Funds. Have there been any dramatic supply shifts or is this information foggy at best considering that OPEC doesn’t really want to expose the supply side of oil. Demand seems a little more clear, the major one I can think of is China’s GDP growth,still prices don’t seem to pencil out. Brad,you talk about negative real interest in the GCC countries…that is one hell of an interesting concept. Is this a positive (actually negative) feedback process? Does that imply major currency devaluation considering that the rationally economic agent would dump all fiat currency and invest in….I don’t know….commodities? Seems like negative real interest rates mean, zero currency demand, and greater inflation. I’ve been pontificating about commodities alot lately….see below. I hope you don’t mind that I’ve linked your blog.

    http://econdynamism.blogspot.com

  • Posted by DC

    Twilight In The Desert

    In case you missed it there was an excellent report by Matthew Simmons who is addressing the question: Are we nearing the peak of fossil fuel energy?

    http://www.simmonsco-intl.com/files/Connecticut%20College.pdf

  • Posted by DC

    Is War With Iran Imminent?

    This time, it’s more than a rumor…

    http://www.antiwar.com/justin/?articleid=12755

    The shooting has already started in the Persian Gulf – and chances are we’ll be at war with Iran before President Bush’s term is up. The Washington Post reports: "The nation’s top military officer said yesterday that the Pentagon is planning for ‘potential military courses of action’ as one of several options against Iran".

  • Posted by Stormy

    Twilight, indeed.

    "Oil doesn’t only go up"–let us hope that is true. Production is not keeping up with rising demand. And for those who hope that high prices will create significant demand reduction, they should define what they mean by "signficant," oil being a rather pivotal and essential commodity. Furthermore, what will any "significant" demand reduction mean in terms of our economy and the economy of others?

    This problem is not in any way comparable in causation to that in the 1970′s, whose causation was purely a political act.

  • Posted by bsetser

    JB — in this case, negative real interest rates are a sign of strong pressure for appreciation, not depreciation. the Gulf has followed the $ down even as its main export has soared in real terms, creating pressure for a real appreciation of its currency. that happens through inflation. or to put it more simply, as the Gulf puts its petrodollars at work at home, that pushes up prices — and with the price of imported goods rising b/c of the weak GCC currencies, there is even more upward pressure.

  • Posted by Guest

    How much of the oil export revenue on the graphs flows directly to governments? All of it?

  • Posted by Judy Yeo

    Actually, Brad, the plight of foreign cheap labour building all those edifices in the Gulf had been the focus of an article in Bloomberg (can’t provide the link ‘cos the site doesn’t have archives and it was a special report. ) The conditions cited were dismal and the time rrame then (by estimate) was at least 6 months ago, would think matters are far worse.

    Though efforts of recent years has been to transform the image of gulf governments to one of modern sophistication , slightly distanced from the royal families, supportive of private enterprise, but most people aren’t deluded enoiugh to think that power (economic and otherwise) have really changed hands; would a distribution of "oil dividends" ironically smack of old time royal largesse?

  • Posted by flipper

    If oil consuming countries want lower oil prices, the first thing to do is to fix monetary policy. The key thing behind high oil prices is investment in

    commodities as a hedge agains inflation, fueled by fed rate cuts + specualtion.

    This is not to be contested, numbers speak for them selves. According to Societe Generaly commodty research quaterly the amount of investment in oil in last 3 years is roughtly equal to the total surplus demand from China.

    The annual real demand growth is just 0.2% a year higher for this decade than it was during 90ies. Fundametals for oil are good they are not good enought for 120$ price tag.

    The best thing to do to curb oil prices would be a Fed rate hike. Looks like mr. Volker is very right then he is hammering Bernanke for not supporting the dollar.

    So strong dollar policy + more effitient use (think of it – only 2 or 3 big cities in US have trams, while only comparable amount of cities in France doe not have them, gibrids. etc) + stoping the war in middle east (geopolitical premium is estimated at at leat 20$, and recent hammering of Syria and Iran by pentagon do not help)

    would quickly send oil to at least 70$ per barrel.

  • Posted by flipper

    Also if US wants lower oil price the key factor would be putting a leash on it’s millitary. It’s not just 20$ premium due to tensions with Iran. It is also Iraq and a network of military all other the world. It’s estimated that Pentagon alone is consuming more oil than mid-sized european country, like Belgium. Oil consumption per solder have risen 10+ times since Vietnam war.

    So, in short, US itself is a key driver of higher oil prices, as a biggest consumer and investor/ Emerging markets fundamentals and China artifitially low oil prices are the second tier effect for now. But solving those things is imho impossible with the current administration and affilated Fed, so prices most likely will have to stay high untill there is a demand destruction.

  • Posted by charlie

    It’s pretty obvious to me that building a city that looks like New York City isn’t the same as having a city as prosperous as New York City. Do the OPEC nations really believe that companies will relocate to their new cities? Without oil, these countries would have no economies, hence no incentive to do business there.

    I think it would be smarter for them to invest in solar energy to drive desalinisation plants and pumps to pump fresh water to inland farms. They have plenty of sunshine and my hunch is food will still be in demand long after they run out of oil. Their economy could be similar to the inland empire in California.

  • Posted by bsetser

    Guest — almost all the oil export revenue flows to the government through national oil companies. A few Gulf states — Abu Dhabi — have some foreign participation in their oil sector and thus pay a fraction of their revenue to their foreign (minority) partners. However, this is small relative to the total, and foreign partners are very much minority partners. Basically, the national oil co has a monopoly on development/ production and thus the revenue – fair enough, as the oil is a public resource of the nation. Allowing private cos to have bought oil development rights for the equivalent of $20 a barrel and pocket the difference would have produced huge private fortunes.

    The problem is that the oil revenue then isn’t distributed all that broadly …

  • Posted by DC

    Even at $120 per barrel of Oil, the US continues to fill the strategic oil reserve at an accelerated rate. At the Pentagon, war-hawk General David Petraeus replaced Admiral William Crowe who opposed a US military strike on Iran. Under the direct orders of VP Dick Cheney, Admiral William Crowe was fired from his position as Joint Chief of Staff. The Neo-conservatives that led the US military into the Iraqi fiasco are firmly back in control of US foreign policy across the world. The US military is said to have 10,000 targets in Iran.

    Writes Canada’s Global Research, "Two offensive aircraft carriers fleets are now on station near Iran and another is reportedly en route. In late March, Saudi Arabia practiced how it will cope with nuclear fallout following a US attack on Iran. In early April, Israel practiced how it will cope with retaliatory missiles following a US attack on Iran. Everyone in the region is getting ready for the bombing of Iran’s nuclear power plant and enrichment facilities. Iran, too, is ready for war.

    The USA and Israel are preparing the public to accept such insanity by announcing that they successfully bombed a Syrian nuclear reactor, with no ill effects. Israel has also recently released video of its 1981 bombing of the Osiraq nuclear reactor in Iraq. See, it’s easy. Nothing bad happens. But those were both construction sites, not loaded reactors full of tons of enriched uranium. "

    http://www.globalresearch.ca/index.php?context=va&aid=8839

  • Posted by cmc

    Great article. One question though: isn’t another option to simple stop repatriating so many of the profits?

  • Posted by DC

    "In the Middle East, unlike market-driven empire builders, the US militarists have invaded Iraq and Afghanistan, destroying many lucrative oil deals and joint ventures and leading to the quadrupling the world price of oil. Instead they have invested (and lost) over a trillion dollars in non-productive, non-economic, military activity. Militarist imperialism has weakened the entire economic fabric of the US Empire without any ‘compensatory’ gains on the military side. The prolonged war in Iraq (6 years and running) has demoralized the US ground troops and weakened US military capability to engage in any ‘third front’ in which the US has important economic interests. US liberal market-driven imperialists describe this as ‘imperial overstretch’. While the US invests in non-productive and unsuccessful military conquests, profoundly indebting the domestic economy, China, India, Korea, Russia, Europe, the Middle East and even Latin America pile up trade surpluses while expanding their economic empires via private and sovereign investments.

    The newly emerging empire building states (like China), rely almost exclusively on market-driven strategies designed by political elites linked to industrialists and technocrats. They are quickly dominating manufacturing markets, accessing strategic raw materials and securing long-term trade agreements at the expense of the increasingly militarist, but internally deteriorating US empire. "

    http://www.globalresearch.ca/index.php?context=va&aid=8841

  • Posted by RebelEconomist

    "Real oil prices are back where they were in 79-80. But the world has become a bit less oil-intensive over time. A barrel of oil produces more output now than in the early 80s – or, alternatively, it takes a bit less oil to generate a dollar of output."

    Or maybe…..real oil prices are not back where they were in 79-80, because the US inflation figures have been fiddled down.

  • Posted by Guest

    Our own Energy Info Admin systematically overreports demand in its weekly data only to MASSIVELY revise demand down after the fact in its Monthly reports, but by the time the monthlies come out, it is in the rear view mirror as the oil has priced. January demand was revised down over 600 Thousand Barrels a day, and February down 700 THOUSAND bbls a day vs the weekly data. This is a MAJOR issue that is going under the radar. Are Oil companies misreporting? Or something even worse happening inside the EIA?

  • Posted by JB

    Oil, Oil, Oil. I hate my government and economic leaders. Take the $1 Trillion spent in Iraq + $1Trillion in Oil Imports = $2 Trillion right? We can’t find a more feasible energy plan with $2,000,000,000,000? Some people just don’t want to change. Our lack of innovation and complacency with the Good Old Boy mentality has just exported our super power stature. I’m waiting for the economic paper titled "How good old boy oil company politics sacked the Unitied States of America".

  • Posted by Cassandra

    There is oh-so-much near-obscene wastefulness and inefficiency in American energy use, it is wholly plausible to rebalance and close the gap without resorting to yogic parsimony or ancient asceticism. In this regard, everyone in the world who is pained by America’s laziness in adapting to a world of scarce resources, short-termist thinking, and unwillingness of the individual to cede any individual rights for the sake of longer-term public interest should look upon high (and higher) oil prices as not only necessary but positively good. The regret that everyone should feel, and the lesson to be learned – economically, socially, and environmentally – is that a concerted policy of high energy taxation in preparation for the inevitable peak-oil (and beyond) was, and remains a requisite for sustainability and innovation on many fronts. America should endeavor to KEEP energy prices high (and make them even higher!), reward conservation, discourage wastefulness systematically, – something that only price whether directly or through the tax regime – can accomplish.

  • Posted by Guest

    "…This has indeed not been our finest hour in the U.S. Times are bad enough, in fact, to make us mourn the American leadership skills of WWII and the generosity and foresight of the Marshall Plan. We can all wonder at the incredible vision, drive, organizational skill, and willingness to sacrifice resources that were required by the Manhattan Project and compare it to the rudderless or even deliberate avoidance of leadership of the greatest issues today: climate change and energy security. We can only wonder what a Manhattan Project aimed at alternative energy might have accomplished by now, had it been started 15 years ago. What we have had in lieu of vision, leadership, and backbone is a series of easy paths taken…" https://www.gmo.com/websitecontent/JGLetter_ALL_1Q08.pdf

    "…’all of these bubbles are not truly separate, but instead represent different facets of a single Great Boom of unprecedented size and duration… globalization either will succeed and humanity will achieve a degree of freedom and prosperity that can scarcely be imagined, or globalization will fail and capitalism or even humanity itself may come to an end. The real alternative to good globalization is world war… the Great Boom, taken as a whole, either is not a bubble at all, or it is the final and greatest bubble in history’… changing small probabilities of total collapse — is screwing around with asset prices to an unprecedented degree…" http://www.marginalrevolution.com/marginalrevolution/2008/04/peter-thiel-on.html

  • Posted by koteli

    I totally agree with Cassandra’s post, but… no hope at all!

    "Once oil really gets scarce, its use as a military tool trumps all else. Countries without it will be defenceless."

    Even our great Nouriel Roubini, now in the top 100 intellectuals list (congratulations!), the man who was on the right track on housing and the crisis as P. Krugman dixit, with your help, Brad (I personally think you deserve a higher position that lots of the names in that list), is beginning to say some things more clearly:

    "Some of these BW2 economies – especially the GCC – are not likely to abandon their pegs any time soon for political reasons: they get the effective security blanket of the US military support in their volatile region and the last thing the US wants is to have them abandon their dollar pegs, a move that could then lead them to abandon the US dollar as the unit of account for oil pricing."

    or

    ““Peak oil and peak resources arguments would point out that longer term demand – driven by Chindia and other emerging markets – will grow much faster than supply; so this price increase is both fundamental and likely to persist over time."

    As a factor of course!

    Some months ago, I pasted here the link of a good researcher of military oil expenses and energy needs. I got his blog in a comment in TOD. It’s worth a look and a reading:

    http://karbuz.blogspot.com/

    On the other hand it’s depressing to read G. Mankiw smiling from reading a NYT article about ms clinton’s "Gas Tax Holiday", and making a clever comment:

    “I don’t know any prominent economist who favours this McCain-Clinton proposal. More common is the reaction of a friend of mine (a veteran of the Clinton administration) who calls the idea "ludicrous."

    Maybe, that’s the reason Krugman is silent in his blog the last two days…

    When you have to support an economist “of the other side of the fence”, and see at the same time the democrat candidates… spraying hate on the opponent…, isn’t it time to send your passport to Washington D.C.?

    Any hope?

    The 800 military bases around the world and, the half of the budget (directly or shaded in interests of previous debt and injurees, etc.) used from the USamerican tax payers’ money, in financing the US military Corporation , would welcome a lot of clever analysis and research from good economists inside the USA.

    But USA democracy doesn’t go so far, does it?

    When Hillary says she supports the 18.4 cents a gallon tax exemption of "hard-hit middle-class families and older Americans who have proven to be the bedrock of her support. She has accused Mr. Obama of being out of touch with ordinary Americans who are struggling to meet their mortgages and gas up their cars and trucks."

    I’d say do you call populist to Hugo Chavez?

    If $18 bucks of tax exemption/moth is enough to a get a vote in this democracy-of-the-world USA, with its or her great universities, clever and mixed populations, what’s the difference with a banana-republic?

    Oh, yeah, you have nukes, lots of military, lots of people in jail, and lots of debt…

    But you are the bosses of the world, as far as it survives, spreading debt, military democracy and arms!

    Sorry for the long rant,

    Thank you for your good work,

    And forgive me those attacks (I smoke and my blood pressure gets to high with some readings; not yours -:).

  • Posted by bsetser

    Cassandra — I agree. The associated dependence on financing from non-democratic states has also become a major strategic handicap (my view). The energy intensity of the US economy (which is hard to change b/c it is based on a lot of investments — a "heavy" vehicle fleet, a dispersed housing stock) is the United States’ achilles heel.

  • Posted by koteli

    P. Krugman corrects, slightly:

    Gas tax follies

    I’ve been on the road (actually doing a public dialog with Barney Frank on financial reform), so I’m just catching up. Anyway, John McCain has a really bad idea on gasoline, Hillary Clinton is emulating him (but with a twist that makes her plan pointless rather than evil), and Barack Obama, to his credit, says no.

    Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.

    Is the supply of gasoline really fixed? For this coming summer, it is. Refineries normally run flat out in the summer, the season of peak driving. Any elasticity in the supply comes earlier in the year, when refiners decide how much to put in inventories. The McCain/Clinton gas tax proposal comes too late for that. So it’s Econ 101: the tax cut really goes to the oil companies.

    The Clinton twist is that she proposes paying for the revenue loss with an excess profits tax on oil companies. In one pocket, out the other. So it’s pointless, not evil. But it is pointless, and disappointing.

  • Posted by RealThink

    @Brad

    "The energy intensity of the US economy (which is hard to change b/c it is based on a lot of investments — a "heavy" vehicle fleet, a dispersed housing stock) is the United States’ achilles heel."

    I’m glad to see comments like this and those from NR quoted by Koteli, pointing to an increasing recognition of reality. Now, let reasoning flow free for a moment. If "a dispersed housing stock" is a liability, then more of that is good or bad? And if it’s bad, then a crash in residential building is good or bad? In other words, if you realize you’re in a hole, shouldn’t you stop digging?

    I’d like to quote Kunstler at this point (with my quotes interspersed).

    "Because the creation of suburbia was the greatest misallocation of resources in the history of the world, it has entailed a powerful psychology of previous investment – meaning, that we have put so much of our collective wealth into a particular infrastructure for daily life, that we can’t imagine changing it, or reforming it, or letting go of it. The psychology of previous investment is exactly what makes this way of life non-negotiable."

    (And I relate the concept of "non-negotiable way of life" with the last point in PK’s post http://krugman.blogs.nytimes.com/2008/04/25/thoughts-on-oil/)

    "The psychology of previous investment is, for us, a force too great to overcome. … We will blame other people who behave differently for the consequences of our own behavior. We will not understand the messages that reality is sending us, and we will drive ourselves crazy in the attempt to avoid hearing it."

    (Actually the blame could go to people who try to behave LIKE Americans. How dare those billions of Asians want to have one car per family and actually drive them?)

    "I haven’t changed my view of what is happening to us. We have run out our string of stunts and tricks in the money rackets. We’ve spent our legitimacy. The rest of the world will strive mightily to get free of their obligations to us, including their respect for the value of our currency."

    (Kunstler is wrong here: respecting the value of the US dollar is obviously not an obligation of the rest of the world.)

    "The meta-cycle of suburban development, including the "housing" and all its accessories in roads and chain stores, is hitting the wall of peak oil. The suburban build-out is over. This will come as an agonizing surprise to many. The failure to make infinite suburbanization the permanent basis for an economy will rock our society for years to come."

    (And the failure to make infinite growth on a finite planet the permanent basis for ALL economies will rock the world for decades to come. Mind you, even so-called "steady state" economics is not an option at this point. There’s no way to stabilize economic activity at current levels, because there’s no way to stabilize fossil fuels production at current levels either.)

  • Posted by Guest

    "…Good-Bye, Cheap Oil. So Long, Suburbia?.." http://www.businessweek.com/magazine/content/08_18/b4082056979063.htm

    "…Life after peak oil: Following an initial period of painful adaptation, we can live happily and healthily in a world with high energy costs… living in such dense urban settings where destinations are walkable or bikeable, just as in pre-industrial cities (the city of London in 1801 had 100,000 inhabitants in one square mile). Homes will be much smaller, but instead of caverns of off-white sheet rock, we will spend our money in making much more attractive interiors. Nights will be darker. We will not have retail outlets lit up like the glare of the midday sun in Death Valley… Such a lifestyle is not only possible it will be much healthier. We are not biologically adapted to the suburban lifestyle…" http://www.sacbee.com/110/story/585637.html

  • Posted by suburbia

    Suburbia is very resilient. During the last period of high energy periods there were lots of people who thought that housing prices would fall in the burbs and everyone would move back toward the central business districts (CBD). But for the most part that didn’t happen. Instead of residents moving to employment, the opposite happened, the employers opened suburban office parks to be closer to their employees. Sears left downtown for Oakbrook, and Chevron left SF for San Ramon and Google avoided the CBD complete opting instead for the office campus. The trend for the last 40 years has been suburbanization.

    The employment growth centers were in very suburban areas like the silicon valley, Phx and Vegas. Areas with large established central business districts like Cleveland, Detroit and Buffalo still continue having trouble attracting employers and employees to the CBD, even when they are much cheaper than sprawling areas like Phx, Houston and Dallas.

    Internationally this is true as well. Central Paris continues to lose people. Carrefour became the second largest retailing group in the world, because lots of French folks like living in the burbs shopping at hypermarkets and that model traveled very well. If the Europeans are are still going nuts for suburbia at twice what we pay for gas. The limited increase in gas prices here isn’t going to turn that around.

    There will always be some who like living in an urban area. But try parallel parking a minivan downtown. If you have more than two small children under five you need a minivan because you can’t put a car seat in the front passenger seat. Without a minivan, who is going to take the kids to soccer practice? Try finding a restaurant or a boutique you can change a diaper in an urban area or take a child to. The reason people go to Applebys isn’t the food, but that its so family friendly. If your 2 year old screams no one cares and their is food bland enough for your 6 year old who only eats hotdogs. Its also cheap enough to take your wife and kids and grandma there once a week. Low density living gives you space to grill in the back yard (cheaper than eating out) and a place for your dog to do its business.

    Its those factors that make suburbia so popular world wide.