On the other hand, there has been plenty of evidence for centuries that in the good times, you want to run budget surpluses, so as to build up cash reserves. Such reserves allow you to spend in the bad times with much less borrowing required. Too much debt leads to an interest payment crisis just down the road. The US Congress has completely failed to run budget surpluses, dating all the way back to the good times we had in the 50's and 60's. (It is their constitutional responsibility to pass budgets.)
The third piece of that puzzle is that too-large a debt burden is unsustainable. The Europeans are now learning this lesson the hard way, and we are about to, here in the US. There is no magic to it, it's simply the math of compound interest. Unsustainable debt comes about by excessive borrowing to finance deficit spending, carried on for too long. Your only other option would seem to be printing excessive amounts of paper money, but that’s a bad thing, too.
The fourth piece of this puzzle is that you can’t finance deficits by printing excess money instead of borrowing, for that very quickly drives up inflation very dramatically, and it quickly goes completely out of control, just like 1920’s Germany, and to a lesser extent, the late 1970’s US. I remember 1979's 18.5% per year inflation with a very bad taste in my mouth.
Since neither borrowing nor printing money can “solve” the problem of chronic deficits, the only sane option is just not to run chronic deficits. Do it only during temporary emergencies like wars and depressions.
All that being said, there is a very good reason to believe that neither party's ideologies about the economy are worth a damn as public policy, or that either of them ever had much to do with the severity of what has happened to us economically in recent decades. But fuel prices did.
This country's economy was "designed" (over the last couple of centuries, mostly by the dead hand of Adam Smith, and the rest by the random action of ignorance and neglect) to run on dirt-cheap energy. Since 1973, every major economic downturn (1974, 1979, and 2001) is associated with high fuel prices.
In this context “high fuel prices” is roughly characterized as about $2.50-to-3.00/gallon for gasoline, when expressed in today's dollars, i.e., corrected for inflation. This indicator is important because our economy is much more consumer-driven, and consumer fuel demand is not very much a matter of choice: you still have to drive to work, school, and the grocery store, regardless of price.
Historically, what we remember as “good times” are associated with low fuel prices, which in today's dollars are invariably near $1.75-$2.00/gallon gasoline. Go to my earlier two articles "Oil Prices, Recessions, and the War" dated 2-4-11, and "Iran, Oil, and Economies" dated 3-8-12.
Both articles use an inflation-corrected gasoline price curve versus time from zfacts.com, as was available at each date. I modified these curves to show more current events than zfacts.com did. If you look at the 1958 price of 25-26 cents a gallon in Texas, and use factor-7.5-to-8 for inflation (pretty well-accepted) from then to now, the supply-and-demand price should be just about $1.75-$2.00/gal today. That is, they would be, if oil products really were, and are, a "market-driven" competitive commodity.
They are so very clearly not. They have not been since US oil production peaked and OPEC rose to dominate the oil market in the early 1970’s. Since then, superposed over the basic supply-and-demand pricing, there have been, and still are, frequent large, greed-driven speculator bubbles that burst, and there are huge monopoly cartel punitive pricing spikes, whenever we anger some part of OPEC.
For example, Reagan's "trickle-down" economics is still widely believed by too many to have finally ended the so-called "Carter stagflation years" just about 1986 in his second term. But that's not what really ended it. The Iran-Contra deal gave Iran the weapons they wanted. That deal ended the punitive OPEC pricing spike that started with the Iran hostage crisis in 1979 during Carter's administration. That OPEC punitive pricing spike is what really caused the "Carter stagflation years" to begin with.
My point: government economic policies are quite apparently nothing but a "fine-tuning" control that pales into insignificance when compared to the "channel-changer" that is fuel prices.
By the way, there was no fuel price spike after the 1991 Gulf War invasion of Iraq, because the rest of OPEC actually begged us to do that. Which absence proves my point.
The real trouble facing us is that OPEC production has also just about peaked, which means for the first time in history that world oil supply will begin to fall short of spiraling world oil demand. For those who disbelieve my contentions about “peak oil”, see my original article on the Bakken resource “Drill here, drill now, pay less?” dated 3-14-10. See also my follow-up article “Surprise, Surprise! Oil Boom in the Williston Basin” dated 9-5-11, that takes into account why there is an oil boom going on right now in North Dakota, but also why it is no long-term solution to our fuel demand and pricing problems.
That peak oil effect will destabilize the long constant trend of inflation-corrected supply-and-demand pricing, a constant that has underlain the various price spikes since the 1970’s. It will hence drive this underlying supply-and-demand price ever-higher, even if there were no more speculator bubbles and OPEC monopoly-pricing spikes (those just make things even worse).
Even when Afghanistan is done, and we have no armies stationed anywhere in the middle east, I predict we will never again see prices back down to $2.00/gallon, because China and India are industrializing, and there will very soon be insufficient oil to support both them and us, if it has not already happened. I think the supply shortfall relative to demand has already started. But that’s just my opinion.
According to historical precedents, it takes around 30 to 50 years for one industry to fully replace another in the free market, without some kind of government tax penalty/incentive/subsidy intervention (and all the perils and pain those typically pose). We should have started replacing oil in the 1970’s, around 40 years ago, when we first had the chance. Alas, greed for short-term profit was too strong in the halls of Congress. Now we're going to have to do it fast-and-painful.
And still, almost no one sees it coming, not even today. Because they don't want to see it. Truth can be very uncomfortable, even painful. But it does set you free. Deception, even self-deception, doesn't.
"Cassandra" has spoken.
GW
Update 1-3-15:
The recent explosion of US “fracking” technology (hydraulic
fracturing plus horizontal-turn drilling) has modified the picture of oil
prices versus recessions.
Unexpectedly, the US has become a
leading producer of crude oils for the world market. Plus,
there has been an associated massive production increase and price drop
in natural gas.
OPEC has chosen to take the income “hit” and not cut back
their production in response. Their
reasoning is twofold: (1) fear of loss
of market share, and (2) hope that low
oil prices will curtail US “fracking” recoveries. We will see how that plays-out.
Oil prices are now such (at around $55/barrel) that US
regular gasoline prices are nearing $2.00/gal for the first time in a very long
time. This is very close to the price
one would expect for a truly competitive commodity, based on 1958 gasoline prices in the US, and the inflation factor since then.
It is no coincidence that the exceedingly-weak US “Great Recession”
recovery has suddenly picked up steam.
The timing of the acceleration in our economic recovery versus the
precipitous drop in oil prices is quite damning. There can be no doubt that
higher-than-competitive-commodity oil prices damage economies. Oil prices are a superposition of the competitive
commodity price, overlain by an erratic
increase from speculation, and further overlain
quite often by punitive price levels when OPEC is politically unhappy with the
west. That’s been the history.
This economic improvement we are experiencing will persist
as long as oil, gas, and fuel prices remain low. (Government policies have almost nothing to
do with this, from either party.) How long that improvement continues depends
in part upon US “fracking” and in part upon OPEC. Continued US “fracking” in the short term may
depend upon adequate prices. In the long
term, we need some solutions to some
rather intractable problems to continue our big-time “fracking” activities.
The long-term problems with “fracking” have to do with (1)
contamination of groundwater with combustible natural gas, (2) induced earthquake activity, (3) lack of suitable freshwater supply to
support the demand for “fracking”, and
(4) safety problems with the transport of the volatile crude that “fracking”
inherently produces.
Groundwater
Contamination
Groundwater contamination is geology-dependent. In Texas,
the rock layers lie relatively flat,
and are relatively undistorted and unfractured. This is because the rocks are largely old sea
bottom that was never subjected to mountain-building. We Texans haven’t seen any significant
contamination of ground water by methane freed from shale. The exceptions trace to improperly-built
wells whose casings leak.
This isn’t true in the shales being tapped in the
Appalachians, or in the shales being
tapped in the eastern Rockies. There the
freed gas has multiple paths to reach the surface besides the well, no matter how well-built it might have
been. Those paths are the vast
multitudes of fractures in the highly-contorted rocks that subject to mountain-building
in eons past. That mountain-building may
have ceased long ago, but those cracks
last forever.
This is why there are persistent reports of kitchen water
taps bursting into flames or exploding,
from those very same regions of the country. It’s very unwise to “frack” for gas in that
kind of geology.
Induced Earthquake
Activity
This does not seem to trace to the original “fracking”
activity. Instead it traces rather
reliably to massive injections of “fracking” wastewater down disposal
wells. Wherever the injection quantities
are large in a given well, the frequent
earthquakes cluster in that same region.
Most are pretty weak, under
Richter magnitude 3, some have
approached magnitude 4.
There is nothing in our experience to suggest that magnitude
4 is the maximum we will see. No
one can rule out large quakes. The risk is with us as long as there are
massive amounts of “fracking” wastewater to dispose of, in these wells. As long as we never re-use “frack”
water, we will have this massive
disposal problem, and it will induce
earthquakes.
Lack of Freshwater
Supply to Support “Fracking”
It takes immense amounts of fresh water to “frack” a single
well. None of this is ever re-used, nor it is technologically-possible to
decontaminate water used in that way. The
additives vary from company to company,
but all use either sand or glass beads,
and usually a little diesel fuel.
Used “frack” water comes back at near 10 times the salinity of sea
water, and is contaminated by heavy
metals, and by radioactive minerals, in addition to the additives. Only the sand or glass beads get left
behind: they hold the newly-fractured
cracks in the rocks open, so that
natural gas and volatile crudes can percolate out.
The problem is lack of enough freshwater supplies. In most areas of interest, there is not enough fresh water available to
support both people and “fracking”, especially
with the drought in recent years. This assessment
completely excludes the demand increases due to population growth. That’s even worse.
This problem will persist as long as fresh water is used for
“fracking”, and will be much, much worse as long as “frack” water is not
reused. The solution is to start with
sea water, not fresh water, and then to re-use it. This will require some R&D to develop a
new additive package that works in salty water to carry sand or glass
beads, even in brines 10 times more
salty than sea water.
Nobody wants to pay for that R&D.
Transport Safety with
Volatile “Frack” Crudes
What “fracking” frees best from shales is natural gas, which is inherently very mobile. Some shales (by no means all of them) contain
condensed-phase hydrocarbons volatile enough to percolate out after hydraulic
fracturing, albeit more slowly than
natural gas. Typically, these resemble a light, runny winter diesel fuel, or even a kerosene, in physical properties. More commonly, shale contains very immobile condensed
hydrocarbons resembling tar. These cannot
be recovered by “fracking” at all.
The shales in south Texas,
and some of the shales and adjacent dolomites in the Wyoming region
actually do yield light, volatile
crudes. The problem is what to transport
them in. There are not enough
pipelines to do that job. Pipelines are safer
than rail transport, all the spills and
fires notwithstanding.
The problem is that we are transporting these
relatively-volatile materials in rail tank cars intended for normal (heavy)
crude oils, specifically DOT 111 tank cars. Normal crudes are relatively-nonvolatile and
rather hard to ignite in accidents. DOT
111 cars puncture or leak frequently in derail accidents, but this isn’t that serious a problem as long
as the contents are non-volatile. These
shale-“frack” light crude materials resemble nothing so much as No. 1 winter
diesel, which is illegal to ship in DOT
111 cars, precisely since it is too
volatile.
The problem is that no one wants to pay for expanding the
fleet of tougher-rated tank cars. So, many outfits routinely mis-classify “frack” light
crudes as non-volatile crudes, in order
to “legally” use the abundant but inadequate DOT-111 cars. We’ve already seen the result of this kind of
bottom line-only thinking, in a series
of rather serious rail fire-and-explosion disasters, the most deadly (so far) in Lac
Megantic, Quebec.
Volatile shale-“fracked” crudes simply should not be shipped
in vulnerable DOT 111 cars, period. It is demonstrably too dangerous.
Conclusions
“Fracking” shales for natural gas and light crudes has had a
very beneficial effect on the US economy and its export-import picture. We should continue this activity as a
reliable bridge to things in the near future that are even better.
But, we must address
the four problem areas I just outlined.
And I also just told you what the solutions are. The problem is, as always,
who pays. What is the value of a
human life? What is the value of a
livable environment? It’s not an either-or
decision, it’s striking the appropriate balance!
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