Tuesday, June 12, 2012

The Economy Will Turn Around, Faster Than You Think

In addition to a shortage of labor, which will raise labor rates, we are about to enter a period of cheap energy.  Combined, this will mean a turnaround in the economy, perhaps in as little as a few years.

A funny thing has happened in the USA in the last five years.  We are making a lot of energy - oil and natural gas, from shale deposits, oil sands, new wells, etc.   And worldwide, although demand for energy is up, new sources of it are being found all over.   And as Arab countries recover from the "Arab Spring" we may actually see stability in these regions, and more energy production.   Libya is already up to 90% of its pre-war production.

America in particular is awash in a sea of cheap natural gas, thanks to Fracking.   Some folks are against Fracking, of course, and they wave identical signs printed by the Coal Industry, which is the number one competitor to natural gas.

While States that have banned Fracking languish in the economic doldrums (e.g., New York State), others that have embraced it have taken off like a rocket.  And cheap energy will fuel the economy and create jobs and wealth.  GM is talking about making cars that run on gasoline - or natural gas.  The fuel is that cheap.

We saw this during the Reagan years.   Ronald Regan, who is an historical figure to many of you, wasn't the greatest President in the history of the USA (but he wasn't the worst, either).    The economy gradually improved in the Reagan years because energy prices started to come down.   During the Clinton years, they fell precipitously, and at one point in the 1990's, gas was below a dollar a gallon.

Today, the price of oil is below $100 a barrel, and it appears that it may stay that way for some time, and fall even further.   Availability of lower priced natural gas will suppress demand for oil, and as a result, lower energy prices across the board.

Our economy runs on energy, and when energy prices spike (as they have, since the Arab Oil Embargo of 1973) the economy slumps.   Everything you own and consume has an energy component, from the materials used to make it, to the energy used in making it, to the energy used in transporting it.  When energy prices spike, the cost of production goes up, and we have inflation.   And since energy is one of our largest imports, when the cost of energy goes up, our balance of trade becomes more lopsided.

It is still too early to tell, but it is possible with all the oil shale, oil sands, and fracking projects in the pipeline (and speaking of which, the pipelines to carry it all, which are or will be built) we may in fact become an energy exporter.   We are already a large exporter of refined fuel to other countries around the world.

So what does this mean?   Well, in a few years, perhaps five to ten, we may see a radically different economic landscape in the US.   With cheap energy fueling our factories, we will be less costly and more efficient that Japan, where high labor costs and high energy costs (now that they have shut down all their nuclear power plants) will doom them to a decades-long recession.

And since we are already in recovery, compared to our European cousins, our economy will be poised to roar back, while theirs languishes.

In other words, things could change, and change dramatically, in a relatively short period of time.   Now, to a young person who is unemployed, five years may sound like forever, but trust me when I say, the days pass more quickly with time.

Of course, these changes will probably occur after the next election cycle - in 2016 or thereabouts.   So whoever is President then, will no doubt take credit for it all.

Of course, there is a downside to all of this.  Increased consumption of hydrocarbons and generation of more greenhouses gases will no doubt make our environmental problems worse.  The fundamental problem with the world economy - the human economy - has still not been solved.  And that problem is this:  The human economy prospers only when it is growing.   We have not figured out a way to create a stable and prosperous economy that is not dependent on growth.   And no matter whether you believe in global warming or not, it is a mathematical certainty that our planet can support only a finite number of human beings, at least in any level of comfort.   We can only grow our way out of our problems so far - before we grow into new ones.