The peak oil crisis: pondering the near future  

Tom Whipple's latest "peak oil passnotes" has an ominous undertone, talking about everyone getting poorer as a result of peak oil / financial crisis / global warming and taking the menial jobs currently performed by immigrants in the US - The peak oil crisis: pondering the near future. What happens to the immigrants isn't discussed.

In thinking about the years ahead, is there anything, other than speculation, that can be said about what human life will be like in the rest of this century?

A few points seem obvious.

First, most of us are likely to become much poorer in terms of our physical possessions and our consumption of services. This is already happening at an alarming scale, with real estate values, equities, and employment plummeting worldwide; only a few living in remote areas will be left untouched. For nearly a year now governments around the world have been thrashing around in efforts to stem the decline. Opinions on the success of these efforts vary widely.

Government officials by the very nature of their positions must exude optimism and constantly tell us that changes for the better are just ahead. Others, without these responsibilities, and perhaps with a better grasp of the problems ahead, are skeptical and can foresee no immediate end to the economic troubles that could extend for decades.

What we will be doing to earn a living in the years ahead will change for many. The economic system that allowed so many of us to live better lives, or at least consume more, with much time for recreation and leisure, is clearly coming to an end for a while - perhaps a very long while. The abundance of wealth that allow so many to earn livings while sitting around offices - reading, writing, talking, designing, teaching, coordinating, meeting and leading -- is going to gradually melt away. With real wealth evaporating so rapidly, there simply will be less left over to support such activities that are not directly productive on the scale we have come to know.

This transition is going to be brutal for many. With white collar, manufacturing, construction, retail and hospitality jobs slipping away, keeping millions gainfully employed is going to be a major challenge for all levels of government. Currently, extended unemployment insurance and government stimulus programs are seen as the answer. The problem will come when we realize that the stimulus, while doing some good, is not sufficient. Unemployment insurance will run out and it will become apparent that we can longer print enough money to finance annual stimulus packages.

At some point, it is likely that the "free market", bereft of capital and customers, is not going to provide new jobs quickly enough to keep ahead of mounting social tensions. For many, friends and relatives will be the first resort after benefits and savings are used up. As distasteful as it may be to many, direct hire government job programs as were created in the 1930's may be the only way to avoid political unrest and damaging social problems.

The millions of essential, but hard, dirty, and far less desirable jobs - farm labor, construction, food processing, cleaning services, care of the elderly - that have come to be occupied by millions of legal and illegal immigrants will be an interesting case. As more desirable jobs slip away, the willingness and ability of people to move into much lower paying and less skilled jobs in order to survive will be a key test of civilization's resiliency.

Over the next decade or so the question of education and retraining a major portion of our workforce will come to the fore as it is highly doubtful that the job mix pattern which has grown up over the last few decades will last much longer. There obviously will be massive amounts of work to be done, at all skill levels, retooling our civilization to survive and prosper in the midst of climate change with sharply reduced liquid fuels and much less fossil fuel derived energy in general.

What appears to be lacking in the current economic debate is a coherent plan of where the U.S. and indeed the world's civilizations need to go. Unfortunately the only stated, and politically feasible, goal at the minute seems to be a return to "economic growth," an objective which is clearly unrealizable in the midst of the current but as yet unrecognized transition to non-fossil fuel energy.

Gradually, the realization will set in that returning to "economic growth", with cheap credit, McMansions in the suburbs, traffic jams and large cars simply is not going to happen. Somewhere in the next 12 months to 12 years the realization will come that returning to the abundance of the oil age is not going to happen for a long while and we can settle down to serious work.

Glenn Greenwald notes the US bailout packages are looking like going the way of IMF structural adjustment programs in the developing world, keeping the elite in place and devastating services provided to the middle class and poor - Comparing the U.S. to Russia and Argentina. Its interesting (from a tinfoil viewpoint, if nothing else) how well Tom Whipple's prediction for the future dovetails with this analysis, albeit coming from a completely different direction.

Desmond Lachman -- the former chief strategist for emerging markets at Salomon Smith Barney and a long-time official with the IMF (no raving socialist he) -- argues today that the most apt comparison for the U.S. now is not Japan's "lost decade," but rather, "that the United States is coming to resemble Argentina, Russia and other so-called emerging markets, both in what led us to the crisis, and in how we're trying to fix it." He begins by recounting an IMF trip to Yeltsin-era Russia:

I still recall the shock I felt at a meeting in Russia's dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia's economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia's economic czar at the time.

He then describes the numerous similarities between the U.S. today and those corrupt, collapsing nations he studied in the past:

The parallels between U.S. policymaking and what we see in emerging markets are clearest in how we've mishandled the banking crisis. We delude ourselves that our banks face liquidity problems, rather than deeper solvency problems, and we try to fix it all on the cheap just like any run-of-the-mill emerging market economy would try to do. And after years of lecturing Asian and Latin American leaders about the importance of consistency and transparency in sorting out financial crises, we fail on both counts: . . . .

In visits to Asian capitals during the region's financial crisis in the late 1990s, I often heard Asian reformers such as Singapore's Lee Kuan Yew or Japan's Eisuke Sakakibara complain about how the incestuous relationship between governments and large Asian corporate conglomerates stymied real economic change. How fortunate, I thought then, that the United States was not similarly plagued by crony capitalism! However, watching Goldman Sachs's seeming lock on high-level U.S. Treasury jobs as well as the way that Republicans and Democrats alike tiptoed around reforming Freddie Mac and Fannie Mae -- among the largest campaign contributors to Congress -- made me wonder if the differences between the United States and the Asian economies were only a matter of degree. . . .

In the twilight of my career, when I am hopefully wiser than before, I have come to regret how the IMF and the U.S. Treasury all too often lectured leaders in emerging markets on how to "get their house in order" -- without the slightest thought that the United States might fare no better when facing a major economic crisis. . . . If we insist on improvising and not facing our real problems, we might soon lose our status as a country to be emulated and join the ranks of those nations we have patronized for so long.

Does anyone really doubt any more that the predominant characteristic of our political culture is "the incestuous relationship between governments and large [] corporate conglomerates"? Yet another former Goldman Sachs official and long-time derivatives advocate who played a major role in the repeal of key banking regulations, Gary Gesner, is now poised to become Obama's chief of the Commodities Futures Trading Commission, the body charged with regulating commodities and financial futures. The sleazy, central role Goldman Sachs has played in the events of the last six months -- from their current CEO's still-unexplained presence with Paulson (its former Chairman) and Geithner (protegé of its other former Chairman, Robert Rubin) as the AIG bailout was designed to the massive government windfalls that firm has received (including from that very AIG bailout) -- is merely illustrative of how our Government has long functioned and continues to.

Yves Smith last night noted the rather extraordinary (though unsurprising) development that the very institutions that played such a critical role in the crisis -- Citibank and Bank of America -- are now using TARP funds they received not to extend more loans (the ostensible purpose of the bailout), but rather, to buy up more and more of the very distressed assets that Geithner insists they need to be relieved of, because they now know that, under Geithner's plan, they will be able to sell them at a substantial profit courtesy of public funds (i.e, the Government will buy those crippled assets at well above their current market price). As Smith puts it: "So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money. . . .Welcome to yet more looting."

Despite the limitless gorging on public funds by the very oligarchs (government owners) who caused the financial crisis in the first place, the predominant sentiment from our establishment media now is that Obama needs to force ordinary Americans to "sacrifice more." Back in 2006, Jonathan Schwarz wrote this very prescient post predicting that the U.S. would soon adopt the type of so-called "structural adjustments" which, through the IMF, we repeatedly forced upon other heavily indebted, defaulting nations: whereby we would demand that they pursue solutions that further enriched their economic elites while massively cutting the social spending that provided the barest of safety nets to their ordinary citizens. As Schwarz put it yesterday in citing highly revealing comments by Tim Geithner at a CFR conference this week:

There's been a common phenomenon in the third world over the past three decades or so. A country's financial sector, in collaboration with the larger financial world, would create some type of gigantic economic fuck up. The IMF would then (in collaboration with the local financial elites) step in and provide loans in return for what was called "structural adjustment." Structural adjustment involved getting rid of any kind of social spending that made life bearable for everyone else.

In other words, the country's financial elites would use the catastrophes they'd created themselves in order to do what they'd always wanted to but couldn't get away with in normal times. They took the profit, and then imposed all the costs on everyone else.

Isn't that exactly what is now happening here? When I first heard Chuck Todd questioning Obama at Tuesday's Press Conference about why Obama wasn't demanding "sacrifice" from ordinary Americans -- as though the massive loss of jobs, homes, retirement security and financial opportunities isn't sufficient "sacrifice" -- I mistakenly attributed Todd's question to the standard vapid ignorance and insularity of our media stars. I assumed that Todd was just mimicking a question he heard about 9/11 and decided to repeat it seven years later without realizing what a complete nonsequitur it is when applied to the financial crisis.

But there was actually a more pernicious aspect to his question. He was basically demanding of Obama: shouldn't you be telling those dirty masses that they can't have health care and education improvements and that they're also going to have to give up their Medicare, Medicaid and Social Security benefits (while Citibank and BoA use taxpayer money to buy up distressed assets that they will then sell at a huge profit, also to the taxpayer under the Geithner plan)? Among our coddled elites, anger at the oligarchs who pillaged and who continue to pillage is misplaced, irresponsible and dangerous populist rage that must be stigmatized and suppressed. Instead, what is needed -- as Digby and DougJ noted weeks ago would be the prevailing message from our media class -- is a further reduction in the standard of living for average Americans in the name of "fiscal responsibility" to ensure that the subsidies to our oligarchical class -- the ones who enriched themselves for the last decade (and who own our media outlets) -- can continue (and that is, more or less, what Lachman advocates today as the necessary solution).

The key dynamic underlying all of this -- the linchpin that allows it all to happen and, historically, the primary hallmark of a deeply broken nation -- is the total elimination of the rule of law for the ruling class, with a simultaneous intensification of the law as a weapon against the citizenry. Does anyone expect there to be any widespread prosecutions for those most responsible for the looting, systematic fraud and grand-scale theft of the last decade? Identically, as more and more evidence emerges of the vast war crimes of the prior administration, the failure to enforce the law and our legal obligations against our nation's most powerful becomes even more transparent. As law professor Jonathan Turley put it on Rachel Maddow's show Monday night:

The president refuses to allow the investigation of war crimes. And we just found out the international Red Cross, also the definitive body on torture, found that this was a real torture program. And yet, the president is having a debate with the guy [Cheney] over whether it was good policy. . . .

It is just as bad to prevent the investigation and prosecution of a war crime as its commission because you become part of it. There‘s no question about a war crime here. . . .

You know, some people say, what do you need, a film? We actually had films of us torturing people. So this would be the shortest investigation in history. You have Bush officials who have said that we tortured people. We have interrogators who have said we tortured people. The Red Cross has said it. A host of international organizations have said it. . . .

He should be appointing a special prosecutor. There is no question about that. This is the most well-defined and publicly known crime I have seen in my lifetime. There is no debate about it. There is no ambiguity. It is well known.

Contrast these desperate efforts to avoid any criminal accountability at all for the country's most powerful lawbreakers with the merciless application of criminal law to ordinary Americans. As Brown University Glenn Loury recently wrote:

Simply put, we have become a nation of jailers and, arguably, racist jailers at that. The past four decades have witnessed a truly historic expansion, and transformation, of penal institutions in the United States — at every level of government, and in all regions of the country. We have, by any measure, become a vastly more punitive society. Measured in constant dollars and taking account of all levels of government, spending on corrections and law enforcement in the United States has more than quadrupled over the last quarter century. As a result, the American prison system has grown into a leviathan unmatched in human history.

Here, as in other areas of social policy, the United States is a stark international outlier, sitting at the most rightward end of the political spectrum: We imprison at a far higher rate than the other industrial democracies — higher, indeed, than either Russia or China, and vastly higher than any of the countries of Western Europe. . . . With approximately one twentieth of the world’s population, America had nearly one fourth of the world’s inmates.

The treatment in our justice system of ordinary citizens ("a nation of jailers") and our elites (immunity from lawbreaking) could not be more disparate. We have (and are continuing to solidify) exactly the state of affairs that political science literature and the American government itself have long self-righteously warned other countries is the prime enabler for tyrannical rot: a two-tiered system of justice which exempts the country's elites from accountability. ...

Related to Johnson's observation that "needing to squeeze someone, most emerging-market governments look first to ordinary working folk," here is The Washington Post's Paul Kane today explaining what the U.S. must do to solve its deficit and debt problems:

Even if you were to curb a bunch of Obama's most ambitious programs, you're still looking at trillions and trillions of dollars in debt.

The real fiscal answer is entitlement reform -- that's code word, everyone, for slashing Medicare benefits and raising the retirement age/payout time for Social Security recipients.

So our political class cheers on treasury-draining wars, allows financial elites to rob and pillage, witnesses huge transfers of wealth to the richest, and then when the whole thing explodes, the "real fiscal answer" is for ordinary Americans to have their Medicare benefits "slashed" and Social Security benefits reduced.

Cryptogon points to a Fortune article on the firm that seems best able to work the system (with the possible exception of JP Morgan) for its own benefit - Goldman Sachs and the Manipulation of Oil Prices.

How Goldman Sachs was at the center of the oil trading fiasco that bankrupted pipeline giant Semgroup.

When oil prices spiked last summer to $147 a barrel, the biggest corporate casualty was oil pipeline giant Semgroup Holdings, a $14 billion (sales) private firm in Tulsa, Okla. It had racked up $2.4 billion in trading losses betting that oil prices would go down, including $290 million in accounts personally managed by then chief executive Thomas Kivisto. Its short positions amounted to the equivalent of 20% of the nation’s crude oil inventories. With the credit crunch eliminating any hope of meeting a $500 million margin call, Semgroup filed for bankruptcy on July 22.

But now some of the people involved in cleaning up the financial mess are suggesting that Semgroup’s collapse was more than just bad judgment and worse timing. There is evidence of a malevolent hand at work: oil price manipulation by traders orchestrating a short squeeze to push up the price of West Texas Intermediate crude to the point that it would generate fatal losses in Semgroup’s accounts.

“What transpired at Semgroup was no less than a $500 billion fraud on the people of the world,” says John Catsimatidis, the billionaire grocer turned oil refiner who is attempting to reorganize Semgroup in bankruptcy court. The $500 billion is how much the world would have overpaid for crude had a successful scam pushed up oil prices by $50 a barrel for 100 days.

What’s the evidence of this? Much is circumstantial. Proving oil-trading manipulation is difficult. But numerous people familiar with the events insist that Citibank, Merrill Lynch and especially Goldman Sachs had knowledge about Semgroup’s trading positions from their vetting of an ill-fated $1.5 billion private placement deal last spring. “Nothing’s been proven, but if somebody has your book and knows every trade, it would not be difficult to bet against that book and put the company into a tremendous liquidity squeeze,” says John Tucker, who is representing Kivisto.

What’s known for sure is that Goldman Sachs, through J. Aron & Co., its commodities trading arm, was in prime position to use such data–and profited handsomely from Semgroup’s fall. J. Aron was Semgroup’s biggest counterparty, trading both physical oil flowing through pipelines and paper oil, in the form of options and futures.

When crude oil peaked in July, Semgroup ran out of cash to meet margin requirements on options contracts it had with Aron, contracts on which it had paper losses of $350 million. Desperate to survive, Semgroup asked Aron to pony up $430 million it owed on physical oil. Aron said no, declared Semgroup in default on its contracts and demanded immediate payment of losses.

Cryptogon also points to some grim scenario analysis from The Economist about the possibility of social unrest as a result of the financial crisis - Economist Intelligence Unit: Manning the Barricades.

This special report is the third by the Economist Intelligence Unit since the credit crisis erupted in August 2007. In the first report, we looked at the implications of a financial meltdown on the global economy. In the second, we considered the wider economic effects, including the risk of a 1990s, Japan-style collapse in the US. This time we focus on the political fallout from the crisis. To sharpen that analysis, we have created a new social unrest index that identifies where the risks are greatest. We have paired that with a new set of scenarios that chart possible paths for the global economy.

The political risks from the economic crisis are increasingly dire.