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tnrkitectThe Future’s So Bright, I Gotta Wear Shades
The 1980’s and 1990’s were more than just big hair, personal computers, and the end of the cold war, the space shuttle, the internet, and MTV (back when it actually aired music videos). They were also times of racial strife, bankrupt farmers, savings and loans collapses, sexy cigars, Black Tuesday, and the first Gulf War. One of the key elements to the remarkable excesses of the two decades is one that is often overlooked; OPEC finally figured out how to manage oil prices.
If you recall, the 1970’s were a fairly dark time economically for America. OPEC engineered a price hike on oil, and America was sucker punched. The high prices of oil caused prices in every sector of the economy to go up as well, since everything was now dependent upon oil for either its manufacture or its transportation.
An economic depression started with the oil embargo of 1973, which aside from causing the first gas crisis and long lines at the gas pumps, also caused a meltdown in the stock market. Between December of 1973 and late 1974, big cap stocks plunged over 30% and the smaller stocks suffered even worse. Only gold stocks were spared.
A new term entered our lexicon at that time, “Stagflation”. This word was a mash-up of Stagnant and Inflation. The economy was stagnant, not showing much growth. Yet Inflation was present, as prices for goods continued to rise. This inflation was directly due to increasing oil prices. As the price of oil steadily rose, so too did the price of manufacturing and transporting a product to market. This caused the corporations to raise their prices, passing on these increased costs to the consumer. The increased prices helped to deflate any economic growth that might be occurring, causing the economy to stagnate. Stocks treaded water.
At the end of the 1970’s, the Iranians kicked the oil companies out of their oil fields and nationalized them in the name of the Ayatollah Khomeini. This resulted in a dramatic spike in oil prices, which hit the economy hard. In the early 1980’s the US suffered through two recessions and unemployment went into double digits. Interest rates went through the roof, going well over 20%. Even healthy, businesses with robust growth went under due to their debt load.
A typical example occurred in Nashville, TN when a young lady managed to build an extremely successful business installing and taking care of live plants in businesses around the metropolitan area. From lawyer’s offices to bank lobbies to fine restaurants to fast food, the clients demanded her services. It became a cachet amongst the city’s professionals to have her taking care of the plants in your office. She had her best year ever in 1980, with record revenues. Yet her business went under, as every last penny of that income went to pay the debt on the small business loan that she used as start up capital, leaving nothing behind to feed herself and her 9 year old son.
This scenario played itself out in every sector of the economy, in every part of the nation. It wasn’t until 1982 that the economy finally began to recover as the price of oil finally started to fall, from a high of near $40 a barrel to a low of around $10 a barrel in 1986. This reduction in prices kicked off one of the greatest bull markets our nation has experienced.
In August of 1982 the Dow Jones Index was at a nadir of 780. By 1987, the Dow reached a high of 2700. The economy was in high gear, growth was steady and strong, and inflation was decisively put back under control, dropping to just a tad over 1% for the Consumer Price Index by the end of 1986.
This remarkable recovery was brought about by one thing. OPEC kept oil prices well behaved.
The $10 a barrel oil prices in 1986 were brought about by a number of occurrences. The earlier oil embargos had resulted in a spate of new oil field development outside of OPEC, most notably the Barents Sea in Alaska, the Gulf of Mexico, and the North Sea between Great Britain and Norway. The higher price of oil in the 1970’s made the increased cost of production of these new sources economically viable. Yet it takes time to go from discovery to production in quantity. By the mid 1980’s these new fields were online and producing, helping to drive prices down.
OPEC could only take so much of this, and started curtailing production slightly to raise prices back up into the mid teens. This brought about the dark side of the oil/prosperity correlation. As the price of oil began to rise again, tame as they were compared to the price hikes of the 1970’s, other commodities rose in cost as well. Inflation climbed back above 4%, and the dollar began to tumble, no longer able to buy as much.
The stock market began to falter in the summer of 1987, culminating in Black Monday in October of 1987, when the Dow Jones Industrial Average fell more than 500 points in one day, and for the month, stocks market wide fell by 30%.
However, this crash did not trigger a widespread economic recession. Inflation was still low, which allowed the Fed to pour money into the economy, staving off a contraction. This allowed the 1987 crash to become a non-event, as the economy continued to roar along in high gear for another 3 years, allowing stocks to not only recover the value lost in 1987, but to go 20% beyond their previous highs. OPEC was behaving, making oil prices a nonevent, and the heady days of investors making money hand over fist were upon us.
Then a dictator by the name of Saddam Hussein decided to expand his holdings of oil fields, and invaded Kuwait. The political turmoil sent oil prices spiking, up over 50% in a matter of weeks, to above $30 a barrel. Stocks were pummeled, and a recession was again upon us.
Yet this recession was short lived, as the intervention of a multi-lateral force spearheaded by the Americans retook Kuwait from the Iraqis and demolished the ability of Saddam to cripple oil production. Oil prices collapsed back into the high teens, and the recession ended. The Stock market embarked upon a bull market unequaled in history.
From 1991 to 2000, stocks soared to heights never seen in any financial market before or since. If in January 1991 you had invested in a index fund, which invested in the top 500 companies in the market, you would have gained on average 20% a year for the next 9 years. To put this in numbers, a $10,000 investment would have turned into more than $50,000. Since these years were also years with low inflation, those gains were mostly real gains in regards to their purchasing power. Growth seemed on a tear, soaring ever higher with no signs of stopping, while inflation was relegated to history, a thing of the past.
Oil prices remained just below $20 a barrel, getting knocked down quickly any time they ventured above that point until 1998. In that year, the Asian economies tanked just as OPEC raised production, driving prices down to near $10 a barrel. Yet OPEC quickly got its act together, and massaged prices back to near $20, supported by the surging world economies of 1999.
But in 2000, something happened. Oil prices kept rising, in spite of the economies of the world slowing down. Prices rose above $35 a barrel, and showed no signs of retreating despite a worldwide recession.
History points to oil prices falling during recessions, being demand driven. As the economies demand less, prices drop. In the early 2000’s, economic growth slowed to 2.5%, 20% slower than the average rate of growth in the preceding 50 years. Yet prices did not drop.
A transformation in the world oil markets had occurred. For the first time since its formation, OPEC was no longer merely an important player in the oil arena; it had become the controlling player.
In the 1980’s and 1990’s, the non-OPEC oil producers were able to increase their production to meet the demands of increasing economic growth. In 1999, the world demand for oil reached appoint where it was using every bit of non-OPEC oil produced, and only OPEC had the ability to increase production to meet demand.
In short, the oil market became supply driven.
Since 1999, OPEC has controlled world oil prices. Oil demand in the world has over taken the ability of all but OPEC to supply the oil necessary to keep the world economy going. Only a protracted, worldwide recession has the ability to lower prices without OPEC’s approval.
This is due to oil’s essential nature to our modern economy. It is the easiest energy source to transport, store and use, and is refined into various products from the fuel oil used to heat homes, factories and power plants, to the basis of the chemical industries and the source of plastics, to the gasoline and diesel used to transport everything.
We rely on oil for almost everything in our day to day existence. Not just to fuel our cars, trucks and SUV’s, or to heat our homes, but virtually everything we touch and use required oil at some point in its existence.
The typical backyard barbeque is a perfect example. We fire up our gas grill using propane that we drove to the store to bring home, slap hotdogs and hamburgers on the grill produced from cattle which was reared across the country and trucked to the grocery store you bought it from, dress out our hamburgers with lettuce and tomatoes which were grown in South America and flown to markets in the US, squirt ketchup and mustard from plastic bottles onto our buns, sit down in front of our plastic TVs eating off of Styrofoam plates and drinking form Styrofoam cups so we don’t have to wash up, and relax in our houses sheathed in vinyl siding.
In our economy oil has become indispensable, the most critical piece of the puzzle. Our current economy can not exist without oil. We can not maintain our current standard of living without oil, and to improve it, and improve our economy, we will require even greater amounts of oil.
In the past, the American economy drove the world. When it was healthy, the world prospered, when it was sickly, the world trembled. Now, there is a new player on the field, and the rules are changing.
Today’s world is very different form the 1980’s and 1990’s. Then, the U.S. economy was the chief engine of world growth, with 5% of the world’s population consuming nearly a third of the world’s resources, followed by Europe and Japan. These economies all shared a very important element; they were making the transition from being driven primarily by manufacturing to being driven primarily by services. Although Japan has sputtered a bit, due in part to the collapse of its banking system, today, the US and Europe are still the engines that drive the world’s economy. But there is a new face on the scene that is beginning to set the world economic markets on their collective ear. China.
Although China has roughly 1 out of every 6 in the world’s population of 6.5 Billion people, its economy is only now beginning to transition from agriculture to manufacturing. In other words, China is currently undergoing its industrial revolution.
China uses more grain per year than the U.S. does, consuming 380 million tons in 2005 to the U.S.’s 260 million tons.
China eats more meat than the U.S. does, consuming 67 million tons a year to the U.S.’s 38 million tons. Half of the world’s pigs are found in China.
China burns more coal than the U.S. does, consuming 960 million tons a year to the U.S.’s 560 million tons.
China uses more steel than the U.S. does, consuming 258 millions tons a year to the U.S.’s 104 million tons.
China uses more concrete than the U.S. does, consuming 1 trillion metric tons a year to the U.S.’s 99.1 million metric tons.
China leads the world in the number of cell phones, television sets, and refrigerators, and trails only the U.S. in personal computers and automobiles.
China trails only the U.S. in oil consumption, using 6.5 million barrels per day versus the U.S.’s 20.4 million barrels a day. Yet in the 10 years between 1994 and 2004, China’s oil use doubled, whereas the U.S.’s use expanded by merely 15%.
On a per-capita use, China still lags far behind the U.S, consuming 1/10th the oil of the average U.S. citizen.
Yet the transition from agriculture to manufacturing means that China’s per capita oil usage is certain to explode, if they continue to follow the western economic model. As manufacturing becomes more important to the economy, and agriculture becomes more centralized, the use of oil for production and transportation rises sharply. As the citizens gravitate towards an urban existence, their standard of living demands rise.
To extrapolate the figures, let’s just suppose that China catches up to current U.S. levels of consumption of resources in the next 25 years. By 2031, the Chinese population is estimated to reach 1.45 Billion.
At current U.S. levels of paper use, China’s population would consume 305 million tons of paper a year. Current worldwide output of paper products? 161 million tons.
At current U.S. levels of automobile use, 3 cars for every 4 people, in 2031 there would be 1.1 billion automobiles on the roads of China. Current worldwide number of automobiles? 800 million.
At current U.S. levels of grain use including industrial use of 900 kilograms per person, China would use 1.3 trillion kilograms of grain, or roughly 2/3rds the current world production levels.
At current U.S. levels of oil use, China would consume 99 million barrels of oil a day. Current world output of oil? 84.5 million barrels a day.
And we wonder why demand is beginning to outstrip supply, driving prices up in every sector of the economy.
The 1980’s and 1990’s were more than just big hair, personal computers, and the end of the cold war, the space shuttle, the internet, and MTV (back when it actually aired music videos). They were also times of racial strife, bankrupt farmers, savings and loans collapses, sexy cigars, Black Tuesday, and the first Gulf War. One of the key elements to the remarkable excesses of the two decades is one that is often overlooked; OPEC finally figured out how to manage oil prices.
If you recall, the 1970’s were a fairly dark time economically for America. OPEC engineered a price hike on oil, and America was sucker punched. The high prices of oil caused prices in every sector of the economy to go up as well, since everything was now dependent upon oil for either its manufacture or its transportation.
An economic depression started with the oil embargo of 1973, which aside from causing the first gas crisis and long lines at the gas pumps, also caused a meltdown in the stock market. Between December of 1973 and late 1974, big cap stocks plunged over 30% and the smaller stocks suffered even worse. Only gold stocks were spared.
A new term entered our lexicon at that time, “Stagflation”. This word was a mash-up of Stagnant and Inflation. The economy was stagnant, not showing much growth. Yet Inflation was present, as prices for goods continued to rise. This inflation was directly due to increasing oil prices. As the price of oil steadily rose, so too did the price of manufacturing and transporting a product to market. This caused the corporations to raise their prices, passing on these increased costs to the consumer. The increased prices helped to deflate any economic growth that might be occurring, causing the economy to stagnate. Stocks treaded water.
At the end of the 1970’s, the Iranians kicked the oil companies out of their oil fields and nationalized them in the name of the Ayatollah Khomeini. This resulted in a dramatic spike in oil prices, which hit the economy hard. In the early 1980’s the US suffered through two recessions and unemployment went into double digits. Interest rates went through the roof, going well over 20%. Even healthy, businesses with robust growth went under due to their debt load.
A typical example occurred in Nashville, TN when a young lady managed to build an extremely successful business installing and taking care of live plants in businesses around the metropolitan area. From lawyer’s offices to bank lobbies to fine restaurants to fast food, the clients demanded her services. It became a cachet amongst the city’s professionals to have her taking care of the plants in your office. She had her best year ever in 1980, with record revenues. Yet her business went under, as every last penny of that income went to pay the debt on the small business loan that she used as start up capital, leaving nothing behind to feed herself and her 9 year old son.
This scenario played itself out in every sector of the economy, in every part of the nation. It wasn’t until 1982 that the economy finally began to recover as the price of oil finally started to fall, from a high of near $40 a barrel to a low of around $10 a barrel in 1986. This reduction in prices kicked off one of the greatest bull markets our nation has experienced.
In August of 1982 the Dow Jones Index was at a nadir of 780. By 1987, the Dow reached a high of 2700. The economy was in high gear, growth was steady and strong, and inflation was decisively put back under control, dropping to just a tad over 1% for the Consumer Price Index by the end of 1986.
This remarkable recovery was brought about by one thing. OPEC kept oil prices well behaved.
The $10 a barrel oil prices in 1986 were brought about by a number of occurrences. The earlier oil embargos had resulted in a spate of new oil field development outside of OPEC, most notably the Barents Sea in Alaska, the Gulf of Mexico, and the North Sea between Great Britain and Norway. The higher price of oil in the 1970’s made the increased cost of production of these new sources economically viable. Yet it takes time to go from discovery to production in quantity. By the mid 1980’s these new fields were online and producing, helping to drive prices down.
OPEC could only take so much of this, and started curtailing production slightly to raise prices back up into the mid teens. This brought about the dark side of the oil/prosperity correlation. As the price of oil began to rise again, tame as they were compared to the price hikes of the 1970’s, other commodities rose in cost as well. Inflation climbed back above 4%, and the dollar began to tumble, no longer able to buy as much.
The stock market began to falter in the summer of 1987, culminating in Black Monday in October of 1987, when the Dow Jones Industrial Average fell more than 500 points in one day, and for the month, stocks market wide fell by 30%.
However, this crash did not trigger a widespread economic recession. Inflation was still low, which allowed the Fed to pour money into the economy, staving off a contraction. This allowed the 1987 crash to become a non-event, as the economy continued to roar along in high gear for another 3 years, allowing stocks to not only recover the value lost in 1987, but to go 20% beyond their previous highs. OPEC was behaving, making oil prices a nonevent, and the heady days of investors making money hand over fist were upon us.
Then a dictator by the name of Saddam Hussein decided to expand his holdings of oil fields, and invaded Kuwait. The political turmoil sent oil prices spiking, up over 50% in a matter of weeks, to above $30 a barrel. Stocks were pummeled, and a recession was again upon us.
Yet this recession was short lived, as the intervention of a multi-lateral force spearheaded by the Americans retook Kuwait from the Iraqis and demolished the ability of Saddam to cripple oil production. Oil prices collapsed back into the high teens, and the recession ended. The Stock market embarked upon a bull market unequaled in history.
From 1991 to 2000, stocks soared to heights never seen in any financial market before or since. If in January 1991 you had invested in a index fund, which invested in the top 500 companies in the market, you would have gained on average 20% a year for the next 9 years. To put this in numbers, a $10,000 investment would have turned into more than $50,000. Since these years were also years with low inflation, those gains were mostly real gains in regards to their purchasing power. Growth seemed on a tear, soaring ever higher with no signs of stopping, while inflation was relegated to history, a thing of the past.
Oil prices remained just below $20 a barrel, getting knocked down quickly any time they ventured above that point until 1998. In that year, the Asian economies tanked just as OPEC raised production, driving prices down to near $10 a barrel. Yet OPEC quickly got its act together, and massaged prices back to near $20, supported by the surging world economies of 1999.
But in 2000, something happened. Oil prices kept rising, in spite of the economies of the world slowing down. Prices rose above $35 a barrel, and showed no signs of retreating despite a worldwide recession.
History points to oil prices falling during recessions, being demand driven. As the economies demand less, prices drop. In the early 2000’s, economic growth slowed to 2.5%, 20% slower than the average rate of growth in the preceding 50 years. Yet prices did not drop.
A transformation in the world oil markets had occurred. For the first time since its formation, OPEC was no longer merely an important player in the oil arena; it had become the controlling player.
In the 1980’s and 1990’s, the non-OPEC oil producers were able to increase their production to meet the demands of increasing economic growth. In 1999, the world demand for oil reached appoint where it was using every bit of non-OPEC oil produced, and only OPEC had the ability to increase production to meet demand.
In short, the oil market became supply driven.
Since 1999, OPEC has controlled world oil prices. Oil demand in the world has over taken the ability of all but OPEC to supply the oil necessary to keep the world economy going. Only a protracted, worldwide recession has the ability to lower prices without OPEC’s approval.
This is due to oil’s essential nature to our modern economy. It is the easiest energy source to transport, store and use, and is refined into various products from the fuel oil used to heat homes, factories and power plants, to the basis of the chemical industries and the source of plastics, to the gasoline and diesel used to transport everything.
We rely on oil for almost everything in our day to day existence. Not just to fuel our cars, trucks and SUV’s, or to heat our homes, but virtually everything we touch and use required oil at some point in its existence.
The typical backyard barbeque is a perfect example. We fire up our gas grill using propane that we drove to the store to bring home, slap hotdogs and hamburgers on the grill produced from cattle which was reared across the country and trucked to the grocery store you bought it from, dress out our hamburgers with lettuce and tomatoes which were grown in South America and flown to markets in the US, squirt ketchup and mustard from plastic bottles onto our buns, sit down in front of our plastic TVs eating off of Styrofoam plates and drinking form Styrofoam cups so we don’t have to wash up, and relax in our houses sheathed in vinyl siding.
In our economy oil has become indispensable, the most critical piece of the puzzle. Our current economy can not exist without oil. We can not maintain our current standard of living without oil, and to improve it, and improve our economy, we will require even greater amounts of oil.
In the past, the American economy drove the world. When it was healthy, the world prospered, when it was sickly, the world trembled. Now, there is a new player on the field, and the rules are changing.
Today’s world is very different form the 1980’s and 1990’s. Then, the U.S. economy was the chief engine of world growth, with 5% of the world’s population consuming nearly a third of the world’s resources, followed by Europe and Japan. These economies all shared a very important element; they were making the transition from being driven primarily by manufacturing to being driven primarily by services. Although Japan has sputtered a bit, due in part to the collapse of its banking system, today, the US and Europe are still the engines that drive the world’s economy. But there is a new face on the scene that is beginning to set the world economic markets on their collective ear. China.
Although China has roughly 1 out of every 6 in the world’s population of 6.5 Billion people, its economy is only now beginning to transition from agriculture to manufacturing. In other words, China is currently undergoing its industrial revolution.
China uses more grain per year than the U.S. does, consuming 380 million tons in 2005 to the U.S.’s 260 million tons.
China eats more meat than the U.S. does, consuming 67 million tons a year to the U.S.’s 38 million tons. Half of the world’s pigs are found in China.
China burns more coal than the U.S. does, consuming 960 million tons a year to the U.S.’s 560 million tons.
China uses more steel than the U.S. does, consuming 258 millions tons a year to the U.S.’s 104 million tons.
China uses more concrete than the U.S. does, consuming 1 trillion metric tons a year to the U.S.’s 99.1 million metric tons.
China leads the world in the number of cell phones, television sets, and refrigerators, and trails only the U.S. in personal computers and automobiles.
China trails only the U.S. in oil consumption, using 6.5 million barrels per day versus the U.S.’s 20.4 million barrels a day. Yet in the 10 years between 1994 and 2004, China’s oil use doubled, whereas the U.S.’s use expanded by merely 15%.
On a per-capita use, China still lags far behind the U.S, consuming 1/10th the oil of the average U.S. citizen.
Yet the transition from agriculture to manufacturing means that China’s per capita oil usage is certain to explode, if they continue to follow the western economic model. As manufacturing becomes more important to the economy, and agriculture becomes more centralized, the use of oil for production and transportation rises sharply. As the citizens gravitate towards an urban existence, their standard of living demands rise.
To extrapolate the figures, let’s just suppose that China catches up to current U.S. levels of consumption of resources in the next 25 years. By 2031, the Chinese population is estimated to reach 1.45 Billion.
At current U.S. levels of paper use, China’s population would consume 305 million tons of paper a year. Current worldwide output of paper products? 161 million tons.
At current U.S. levels of automobile use, 3 cars for every 4 people, in 2031 there would be 1.1 billion automobiles on the roads of China. Current worldwide number of automobiles? 800 million.
At current U.S. levels of grain use including industrial use of 900 kilograms per person, China would use 1.3 trillion kilograms of grain, or roughly 2/3rds the current world production levels.
At current U.S. levels of oil use, China would consume 99 million barrels of oil a day. Current world output of oil? 84.5 million barrels a day.
And we wonder why demand is beginning to outstrip supply, driving prices up in every sector of the economy.
