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2008 all over again?

As oil prices reach $100 a barrel for the first time since 2008, many people are wondering whether 2011 will see a replay of crashing car sales, nose-diving airlines, and fuel-starved farmers. Food prices—which these days move almost in lockstep with oil prices—are already at frightening levels, leading Lester Brown of Earth Policy Institute to warn of “The Great Food Crisis of 2011.” 

But there are differences, now versus then. In 2008, the US economy was in the early stages of the biggest credit unwind in world history. Financial wizards had built an upside-down pyramid consisting of giant layers of derivatives (hundreds of trillions’ worth) resting on smaller layers of mortgage-backed securities, themselves balanced precariously on a capstone consisting of millions of home mortgages taken out in recent years by American families. House prices shot upward in the early years of the decade, based largely on the availability of no-doc and subprime loans, and rising home equity enabled households to spend the US economy into a brief bout of ersatz consumer prosperity. When house prices leveled off and started to decline and many home loans went sour, the entire pyramid shook and shuddered. It was saved from total, crushing annihilation only by the injection of trillions of dollars’ worth of government bailouts, stimulus packages, and loan guarantees. The creaking edifice is still teetering.
 
As that financial drama unfolded, speculators fled for safety toward commodities (including oil and wheat), helping drive up prices. But $150 oil dramatically worsened the credit unwind, as the car companies and airlines neared insolvency.
 
The year ended with the world economy on life support, energy demand way down, and oil prices at $35. It was a rollercoaster ride nobody wanted to repeat.
 
Now, in 2011, the global economy is still feeble. The “recovery” seen in the US over the past few months (amounting to about $700 billion in GDP growth) is entirely accounted for by government transfusions of about $700 billion in stimulus and bailout money. But further cash injections are politically contentious as interest payments on government debt add up. Meanwhile state and county governments are laying off workers by the thousands due to falling tax revenues. Even without another oil spike, the US economy looks fragile at best.
 
Greece and Ireland have required bailouts from the EU (read: Germany), and it looks as though Portugal may be the next patient in line. But Germans are wary of refinancing more neighbors’ debts.
 
The only bright spot (if you call massive CO2 pollution bright) has been China, with its 10 percent annual GDP growth. Yet that country has a giddily unsustainable energy economy based on only temporarily feasible rates of coal consumption . . . as well as a home-grown real estate bubble. The whole project is based on an export-led economic model pioneered by Japan—a country whose legendary growth ended in a spectacular stock market and real estate crash followed by two decades of deflation.
 
Now, add political unrest in the Middle East. The nations in this region are largely barren, and able to support only a small percentage of their current (in most cases rapidly growing) populations with indigenous agricultural production. Autocratic leaders—most of them traditionally supported by the US—have been living on oil wealth, largely kept for their personal benefit, while doling out just enough goodies to keep the rabble placid. 
 
Skyrocketing oil prices have put excessive wealth into these leaders’ pockets, while making food and fuel less affordable for the masses. The result: riot and revolt.
 
Meanwhile, the bailing out of fabulously wealthy bankers at the expense of social service payments and government salaries and benefits has led to similar expressions of public displeasure in Greece, Ireland, and Wisconsin. More of this is sure to come.
 
Altogether, 2011 looks to be potentially an even more crucial year than 2008. Libya’s oil production will likely fall to near zero, whatever changes in government occur. The Saudis promise to replace that 1.5 million barrels per day of production from their own spare capacity, but recent history leads some observers to question whether they really can. And Saudi Arabia faces its own potential for domestic unrest (hence the announcement of $36 billion in new social spending in that country just two days ago). We may again see a brief oil price surge to $150a barrel—perhaps even $200—this year, but if this occurs it will trigger a massive recession and financial crash that will prompt further revolt and revolution around the world. But of course the recession will dampen demand such that oil prices will once more collapse, causing further instability in the Middle East.
 
These times just get more and more interesting.
 
(Some of the ideas in this essay are borrowed from an email exchange with Colin Campbell, to whom the author extends his thanks and best wishes.)

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