Energy and ethanol: The big E's

Bill Bonner - Tue 25 Jul, 2006

...Energy and ethanol...Earlier this year we identified five major trends that were reshaping the world...

 
 
Earlier this year we identified five major trends that were reshaping the world. Then we stopped writing about them because we could never remember what they were. But these days, it's hard to forget at least one of them. So, over the next few days, we will be providing you with updates...

Energy. The First E. Yesterday, the Associated Press reported that gasoline in the United States was at an "all time high." Meanwhile, our old friend Jim Rogers tells the world that "you ain't seen nuthin' yet." He says oil at $100 a barrel is a "sure bet."

What's going on? Is the world running out of oil? No. As far as we can see, there is plenty of the stuff. At today's oil prices, all the producers are adding capacity as fast as they can. New wells are being drilled. Old wells are being re-opened. They're also busy trying to squeeze oil out of sand, tar, rock, turnips...or at least, find substitutes. In the US, one of the substitutes, ethanol, is becoming a major swindle. Of course, it takes more energy to produce a gallon of the stuff than you can get from it. And it costs more to make a gallon than a gallon is actually worth. But it's the kind of boondoggle that everyone seems to like. Congress likes it because the polls get to hand out more of other people's money. Farmers like it because it helps hold up grain prices. And a lot of other people like it because it sounds 'green' and they believe the country ought to be 'energy independent.'

So there is plenty of E. Only it's not cheap E and the US economy depends on cheap E. Your typical American family spends all that it earns from its work – and a little more - in a house that needs a generous input of E. But as home prices in the US rose in the last 10 years, people started looking for bargain housing farther away from town and the suburbs began to stretch farther and farther into the boondocks. Meanwhile, the average fuel economy of American automobiles – at 21 mpg – stayed the same as it was in 1982. Now, with gasoline at $3 a gallon, a lot of people must be wondering if moving so far out was such a good idea. As the price of E rises, the amount of money the family has left over goes down. It must either spend less – which would cause a recession immediately – or burrow deeper into debt – which would cause an even worse recession eventually.

No question, oil is getting more expensive. And no question that with no further home equity against which to borrow, American consumers are beginning to cut back on discretionary spending. Walmart, where the lumpen go shopping, has seen its stock sink to the lowest level in five years. Middle-American sit-down restaurants – Red Lobster, Outback Steakhouse, Appelbee's, etc – are seeing the worst fall-off in sales in industry history. Retail stocks, overall, are down. Builders have taken a hit, with confidence in the homebuilding industry at a 14-year low. Transports are sliding. All of which looks to us like the beginning of a consumer-led economic slump.

But back to the Big E. Energy. Energy, we believe, is going to get more expensive and it's going to put into jeopardy the lifestyles of the people most dependent on it - Americans. The reason is obvious. While users are proliferating like energizer bunnies, the supply of ready fuel – which took millions of years to build up – is going no where. Indeed, it's running out rapidly. On one hand, India and China devour energy for capital development. On the other, North America needs it for consumption. But while the Asians earn the money to pay for their energy, the typical American has to face higher energy costs without cash in his pocket. No wonder his standard of living is going down.

More of the Big E's as the week continues...

Back in Vancouver:

*** Vancouver is a nice city – maybe the nicest in North America. But it has a disadvantage. It is too far from Europe.

"Good morning," we said to the customs officer at the airport.

"You mean, good evening, eh?" she replied.

That's the problem. We don't know whether it is morning or evening. We will have to wait a few hours to find out which way the sun is going.

*** "Dad, I need 100 euros," said Jules yesterday. "You know, I told you; the university requires blood tests. I had to get them done here in Paris."

"Why didn't you tell them to mind their own business?"

"Thanks, Dad, I know that will help my college career."

"But seriously, Jules, who do these people think they are? Why should they want to have your blood? What if you didn't believe in blood samples, or in sharing your blood information with every Tom, Dick and Harry?

"What kind of world do we live in?" we went on, warming up, and to no one but ourselves. "The whole idea of privacy and liberty has simply disappeared completely. Instead, everyone everywhere is always asking you for information. Every time you open a bank account, you practically have to have an FBI background check. Why can't you just give them some money, take a receipt, and walk away? And when you travel, you have to show your papers over and over again and answer a lot of idiotic questions. "Did you pack these bags yourself?" It's none of anyone's business who packed the bags, for Pete's sake. It's just amazing that so many people think they have the right to boss other people around. Do this, do that; go here, go there. But what's even more amazing is that people allow themselves to be bossed around: Grown men and women. Everyone perfectly willing to have others tell them what to do. It's enough to make one feel sorry for smokers..."

"Dad, it's nice you're campaigning for freedom and the American way, but could you just give me those 100 euros..."


Regards,

Bill Bonner
The Daily Reckoning