The Government Takes Over—Prices, Shortfalls and What Comes Next

One of the most interesting things about the recent $850 billion Wall Street bailout is how foregone a conclusion its passage was. Even with the temporary revolt of House Republicans (and a number of Democrats) in the end there was no question that as member after member of Congress said, “everyone agrees that we have to do something.” The only questions were really when, how much, and to whom, exactly, the money would flow.

The fact is, pumping money into the system at the first hint of trouble has for a very long time been a matter of economic orthodoxy—an orthodoxy so powerful that events like last Friday’s bailout, today’s worldwide coordinated central bank action or last month’s takeover of Fannie and Freddie were, in truth, faits acccomplis years ago (and were predicted—in outline, but with surprising clarity—by numerous observers, including Stephen Leeb, Jim Puplava and a number of others). In a choice between debt collapse and inflation, governments will always choose the latter if they can.

Meanwhile, an even more serious crisis is rapidly brewing—a crisis that Leeb and Puplava, at least, have also been predicting for some time. Its symptoms were seen a few weeks ago when hurricanes Gustav and Ike shut down some 60 percent of the Gulf Coast’s oil production and took at least five refineries off line, thereby causing gasoline shortages throughout the southeastern United States. Weeks afterward, there were still reports that half of Atlanta’s gas stations were closed, and in Nashville, the mere rumor of gasoline shortages caused panic buying and an almost complete emptying of city gas reserves. The depth and persistence of shortages has surprised almost everyone—everyone, that is, except for observers of peak oil.

In a June 2008 post on the Oil Drum, Jeffrey Brown pointed out that net exports of crude from Venezuela and Mexico to the United States seemed to be dropping rapidly, with virtually all of the shortfall concentrated in the Gulf Coast region:

The EIA has recently reported a large drop in US oil imports and fairly large crude oil inventory declines, with almost all of the decline concentrated in the Gulf Coast area. Gulf Coast crude oil inventories have dropped by 15.6 million barrels (9%) in two weeks . . .
So, in looking at those numbers it seems quite possible that we are seeing some real, tangible near term effects from the ongoing net export declines from Venezuela and Mexico, and it's possible that we could see some problems with refined product deliveries in the Gulf Coast area in the very near future, perhaps in a matter of weeks if the trend were to continue, and there seems no reason to expect it not to.

And, as Matthew Simmons has been pointing out with increasing alarm for the past two years, if inventories fall far enough, they will breach “minimum operating levels”—a point below which there is not enough gasoline present “to push product further through the pipe” according to the Energy Information Agency. In fact, last year Simmons predicted a potential disaster for the summer of 2007 if inventories could breach minimum operating levels.

As Simmons has frequently explained, the operating level problem is greatly exacerbated when people begin to panic. Under normal conditions, the average tank of gas is half full. But when people hear there are shortages, they top off their tanks. Enough people doing this together could drain millions of barrels of oil from the system, virtually overnight, as the situation in Nashville showed.

For the moment, such shortages are local, but what happens if panic begins to spread at a time when operating levels are so low? According to Simmons, the entire gasoline infrastructure could unravel extremely rapidly (“in less than a 30-day window”). Panic in the Unites States could spread rapidly to the rest of the world. In a worst-case scenario, Simmons says, the transportation and trucking system grinds to a halt and grocery stores begin to run out of food in a week to ten days.

Last year Simmons was so nervous that he suggested to a U.S. deputy secretary of energy that the country should immediately put in place contingency plans for emergency gas rationing. Such rationing last occurred on a national scale during the oil shocks of the 1970s, and was implemented by requiring drivers to fill up on either odd or even days based on license plate numbers. But, Simmons pointed out, with few exceptions the United States no longer has gas station attendants to monitor such a system. To effectively ration now, he said, would require going back to a World War II system of coupons; his suggestion to the deputy secretary was that the government start printing them immediately.

To most people, the prospect of the country returning to World War II-style gas rationing probably seems farfetched, but then again, at the beginning of the year most people would never have believed that within a matter of months investment banking would be dead as a stand-alone industry, the world’s largest insurance company would be taken over by the government and there would be runs on commercial banks everywhere. The truth is, the prospect of gas rationing is as certain now as widespread financial industry bailouts and takeovers were a year ago.

What both the financial bailouts and the prospect of rationing signal is something that will also take most people by surprise—the coming nationalization of large sectors of the economy. It’s a process well underway, but events now in play are likely to accelerate the trend no matter who is in the White House.

Conventional wisdom may tell us that as a Democrat, Barack Obama would be more likely to call for greater government intervention. But consider John McCain’s new policy proposal (hastily unveiled at last night’s debate) to have the government buy up bad mortgages and sell them back to the residents at a fixed interest rates and lower prices—hardly a “small-government” conservative approach. Combined with the Freddie and Fannie takeover, the proposal appears to be another step toward having the government run the entire mortgage lending business.

After decades of malinvestment and hallucinated wealth generated by cheap money and historically unprecedented debt, big businesses around the world are finding themselves in liquidation mode, with governments as the buyers of last resort. Certainly, some institutions (such as Lehman Brothers) will be allowed to fail; others will be husbanded into government sponsored mergers with competitors; other will be taken over outright. But the end result seems likely to be an even more direct control of the banking system by the Federal Government.

At the same time, both Barack Obama and John McCain are bracing for aggressive new investment into wind, solar, nuclear, offshore drilling and “clean coal” as responses to the unfolding energy crisis. The metaphors they others use are of a new “Manhattan Project” (another World War II metaphor) or an “Apollo Mission.” Either analogy implies the application of massive government effort to do something that no corporation of any size would have been able to achieve alone.

For those of us of a liberal persuasion, watching the government finally take action on these critical issues may feel gratifying, especially if it finally exposes economic neo-liberalism and globalization for the charade it truly is.

But government takeover is not without consequences. On the financial front, the combination of wild money printing and massive budget and trade deficits risks causing hyperinflation, especially in the United States. Loss of faith in the currency could, ironically, reinforce government authority by amplifying non-monetary modes of coping with the problem (rationing, for example).

The end result could begin to look distressingly like the “future scenario” Permaculture co-founder David Holmgren calls “Browntech”:

The Brown Tech world is one in which the production of oil declines after a peak 2005-2010 at about 2% per annum and the subsequent peak and decline of natural gas is also relatively gentle, but the severity of global warming symptoms is at the extreme end of current mainstream scientific predictions. In this scenario strong, even aggressive, national policies and actions prevail to address both the threats and the opportunities from energy peak and climatic change. The political system could be described as Corporatist or Fascist (which Mussolini described as a merger of state and corporate power).

The tendency in existing systems for massive centralised investment by corporations and governments, give priority to getting more energy out of lower grade non-renewable resources (eg. tar sands, coal and uranium) and biofuels from industrial agriculture and forestry. “Breakthrough” technologies provide the constant promise of a better future but much of the investment in energy harvesting accelerates global warming, at least in the short term.
. . .
Flows of energy from more expensive sources such as tar sands, deep ocean oil, gas to liquids and coal to liquids slow the decline in fuels from crude oil. This transition requires a huge mobilisation of the technical and managerial capacity held mostly by global corporations, along with the financial, legal and military security that only sovereign governments can provide. This resource nationalism by government break down free trade and the faith in international markets that underpins the global economy.

The “Browntech” scenario is only one of four futures Holmgren posits as possible scenarios in the twilight of the oil era (the others he “GreenTech,” “Earth Steward” and “Lifeboats”). None of these scenarios are mutually exclusive, and are likely to be “nested” in differing ways, at different times and places.

The unfolding of the “Browntech” scenario opens a dilemma for advocates of economic relocalization. Will the vital individual and community resources needed to build new local economic systems be siphoned off (through taxation, inflation or expropriation through eminent domain) to fund Browntech boondoggles, or will the “powerdown” community find a ways to work both within and outside the new “big government” system? A lot would seem to depend on the relative beneficence or malevolence of leaders in charge at any given place or point in time.

One thing is certain though; people will, soon enough, have to begin drawing new political maps for themselves to come to terms with an unfolding reality that will not fit neatly into the conventional categories we’ve lived with for so long.

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Panic in the Unites States could spread rapidly to the rest of the world. In a worst-case scenario, Simmons says, the transportation and trucking system grinds to a halt and grocery stores begin to run out of food in a week to ten days.

[Tory Burch]

hat pretty much sums up the broader choice America faces on energy policy. It can listen to the Washington siren song on alternative energy, pouring scarce dollars into green subsidies, driving up the cost of energy, and driving out U.S. manufacturing and jobs. Or it can embrace our own fossil fuel resources, which are cheap and plentiful. "'What I see are people who want affordable energy," says Mr. Watson. "They want strong environmental standards—they want a lot of things—but first and foremost they want affordable energy. A