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Sunday, May 25, 2008

The End of the World ?











A captivating headline, but is it justified and not just dramatic?

We seem to be watching the slow-motion meltdown of large economies. The cost of food is rising at an alarming rate. Natural disasters of extraordinary significance are happening with such regularity so as to become commonplace. Unnecessary wars are ongoing all around the globe to the extent that we have become numb. Terrorists are trying to kill us just because we go about our daily business, and individuals are committing some of the most mind-boggling anti-social acts.

The cost of oil has stood at a reasonable level for many years after once having climbed to unaffordable heights in the 1970’s. At a cost of between 50 to 60 dollars a barrel the world could cope. I remember $25 a barrel not such a long time ago. Now, the cost of oil on the futures market has hit $135 a barrel, and climbing. (I have had to revise the figure twice).

Meanwhile, in Europe, the euro, that once stood at par with the US dollar now costs $1.55 to buy one euro. Simply put, European manufacturers are finding it harder, or actually impossible to export their goods to one of the greatest consumer markets in the world. To make matters worse, even that economy, The United States of America, is in recession. That means unemployment on a grand scale for European workers is just down the road.

For the moment I want to focus on the effects of exorbitant oil prices. Oil is fuel, and here is a partial list of what is affected when oil is in short supply; is withheld from the market; and/or is just too expensive.

Start with the farmer producing our food. If he is not able to work the machinery to grow the lettuce and potatoes and corn, we will have a food shortage. The food that does get produced has to be brought to market, but if the same factors apply to transportation it won’t even be brought to the supermarket. That which does get through will be amazingly expensive and available only to a select few who can afford it.

Unemployed people will most likely not be able to afford to purchase food, so that will lead to theft and food fights.

Unemployed people will also not be able to afford to run their vehicles or to afford medical care. Even those people who are lucky enough to have jobs will have to car pool to get to work. The same scenes that we see in Africa of vastly over crowded trucks with people hanging on just to get a lift can become the norm in the large cities of the developed world. Is this so impossible to imagine? Think again!

The other thing that unemployed people cannot do is to afford to pay their mortgages. If you have never had your home repossessed there is no way that you, or I can imagine the horror of all that that entails. This must surely be the ultimate in personal tragedy other than the loss of life of a loved one.

All of the above constitute the set-up for the perfect economic storm of depression and simultaneous hyperinflation.

Oil companies’ profits can no longer be called profits. I think that the results that they are reporting fall outside the ambit of profits, and can probably be more properly compared to grand theft. But, this is the effect of the free market. The free market works along the base of supply and demand. Short supply and big demand equal high prices. Falling demand and high inventory equal falling prices. But, the catch here is that there is no real shortage of oil, simply a perception of runaway demand coming from emerging nations such as China and India, or so they say.

I must reiterate that the trading in oil futures takes place on the open commodity markets, and it is in the hands of such traders that the bidding up of prices into the stratosphere is being done, but, the sooner that bubble bursts, the better.

I am trying my best to imagine the ramifications of oil when the price hits $200 a barrel, as so many people expect it to do. We must also remember that so many of our everyday use products are oil based as well, such as plastics. Even families with both adults working are finding themselves just staying afloat. How will they cope in the coming disaster, possibly born of greed?

The cause of such high prices for oil can be debated forever, but the fact is that the consumer can only pay just so much before having to scale back or do without. I may be naive, but without sparking a round of hyper-inflation the cost of oil will have to come back down to earth before too long. The problem is that in the meantime the disruption to normal life will be severe.


Well, perhaps we had all better sit up and take note of what is happening on the world’s commodity markets because, as always, what happens there affects us all. Our only response under the circumstances at present is to reduce demand. We have to somehow turn our backs on the product. If we can reduce demand sufficiently, those who would see civilization turn on itself simply in the name of their own greed should instead take a bloodbath and lose their money. That would be justice.

Whatever little we can do, we should, because if we each do a little we all do a lot.

Copyright © 2008 Eugene Carmichael