
cartoon by Ken Avidor of "The hope of
Road Kill Bill"
Oh
Six
by James Howard Kunstler on 2 January 2006
The sheer weight and inertia of American life kept our systems
on their feet through 2005, despite a worsening economic climate
and some harsh body blows, like the hurricanes that pounded
oil and gas production in the Gulf of Mexico. In a way, some
perverse law of sociopolitical physics seemed to concentrate
all the year's destructive potential in the devastation of
New Orleans, Biloxi, and other Gulf Coast towns -- while the
mighty din of motoring and cheeseburger sales roared on elsewhere
without pause from Cape Cod to Catalina.
First, a little background briefing on where we are at --
to use some of the bad grammar now normative in American life
-- before I make predictions (i.e. guesses) about the year
ahead.
You can only introduce so much perversity into an economic
system before distortions cripple it. From 2001 through 2005,
consumer spending and residential construction had together
accounted for 90 percent of the total growth in GDP, while
over two-fifths of all private sector jobs created since 2001
were in housing-related sectors, such as construction, real
estate and mortgage brokering. Much of the money spent did
not really exist except as credit -- incomes as yet unearned,
hallucinated liquidity, wished-for wealth, all based on the
expectation that house values would continue to rise at 10
to 20 percent a year forever. It became a reckless racket,
all predicated on sustaining an economy that had lost its
other means for generating wealth -- foremost its infrastructure
for making things besides suburban houses.
This housing bubble economy represented, holistically speaking,
the wish to maintain a sense of normality in American life,
under conditions of disintegrating normality, and it is no
symbolic accident that it centered on the images of hearth
and home, because fundamental comforts were what many Americans
actually stand to lose in a reality-based future. The decay
of standards and norms in banking behavior applied-to-housing
started, as in the case of the proverbial rotting dead fish,
at the head, the federal reserve, and infected every lowly
loan officer through the body until, in effect, lending standards
ceased to exist.
The suburban housing bubble and its related activities were
predicated on the idea that we could continue building out
a living arrangement dependent on cheap oil and methane gas,
and that all the subdivisions and strip malls would retain
value for decades to come. Of course, this was the central
delusion of the suburban sprawl economy, because it was obvious
to anyone who gave the situation more than a cursory glance
that cheap oil and gas were the things we were least likely
to have in the decades to come.
This reality had begun to penetrate the American collective
consciousness and will be represented in 2006 by millions
of individual choices to not buy a new suburban house, either
because the individuals fear the expense of long commutes
or they fear the cost of heating a 4000 square foot house
occupied by only a few people (or both). As the inventory
of unsold new houses mounts up, the prices of all houses,
new and old, will start to go down. There will be enormous
psychological resistance to this reality, expressed in a lag
of correct pricing, as the owners of these value-shedding
"investments" wait for the bubble behavior (anticipated
10 t o20 percent asset appreciation) to return. Eventually
they will get the picture.
The velocity of change in the housing bubble (and the psychology
involved) will be greatly affected by oil and gas prices.
It seemed to many of us watching the energy markets that the
world may indeed have passed through its all-time oil production
peak in 2005. Production in 2005 was nearly flat over 2004.
The world was producing and also using roughly 82 million
barrels of oil a day. Oil coming into new production was not
making up for signs of depletion showing among virtually all
the world's major producers. Iran, Russia, Mexico, Venezuela,
the North Sea, and, of course, the USA, were all past peak.
The big mystery was Saudi Arabia, but their inability to boost
production from the 50-year-old fields that comprised their
main reserves suggested that they were topping out, too. Which
left an energy-hungry world with the need to either A.) make
other arrangements for powering industrial economies, or B.)
contesting for control of the remaining oil reserves, which
were substantially concentrated in the Middle East and Central
Asia.
Here, I hasten to remind the reader that peak is peak, meaning
right now we are all operating on the basis of a lot of oil
flowing around the world. The comfort level is still high.
The factories are still humming in China, and the six-lane
commuting corridors are still full of big cars around Atlanta,
Dallas, Denver, and Minneapolis. The problem is that the oil
supply will soon steadily diminish at a rate of at least three
percent a year, and that necking down of supply is likely
to be expressed in greater geopolitical friction and turmoil
between the great nations who crave oil. The US entered into
the military phase of this turbulence before any other nation.
We used our superpower status to set up a centrally-located
Middle East garrison in Iraq, under the idealistic cover story
that we were removing a dangerous head-of-state and helping
to set up a model democracy that would invite us to stick
around the vicinity indefinitely, and thus retain some control
over the deportment of other oil-rich states in the region.
The foregoing is the background of my predictions for 2006,
which will be the year that the hardships and difficulties
I lump together as The Long Emergency get some serious traction.

cartoon "Super America" by Ken Avidor
The world oil allocation system is now so fragile that any
disturbance in one producing region can send damaging shock
waves around the planet. There is no more "swing producer."
The US squeaked through the huge loss of oil production capacity
this fall by taking oil from our own strategic petroleum reserves
and from Europe's. These actions kept oil prices in the high
fifty-dollar-range through the holidays, giving Americans
a false sense of festive security. Those withdrawals are now
over. Global demand for oil is still increasing. The strategic
reserves will now have to be refilled (they're called strategic
reserves for a reason). This will start oil prices moving
upward again -- they already have moved above $61 as of this
morning.
I can't predict whether some maniac will drive a Zodiac boat
into a tanker in the straits of Hormuz, or fire a shoulder-launched
missile at an Arabian refinery. If nothing like that happens,
the first year of post-peak will express itself in turbulent
oil markets. Fear of not getting enough will rule. Futures
will be overbought and then dumped or shorted and then overbought
again. This will at least increase the violence of the ratcheting
effect in the markets. Overall I expect to see $100-a-barrel
oil at some point this year. Last year I made a bet with a
friend that oil would end 2005 at $75. I lost the bet. But
it is a fact that the price of oil altogether ended the year
40 percent higher than 2004, so it is not as if the markets
did not show extraordinary stress.
New laws regulating gasoline mixtures will also contribute
substantially to higher gasoline prices (perhaps as much as
40 cents a gallon). So I will predict gasoline breaking through
the $4-a-gallon mark sometime this year.
Our natural gas situation is pretty dire. Prices shot up for
a while above $17 (per one million btu's), but that was the
energy equivalent of $100-a-barrel oil) and based at the time
on the enormous damage in the Gulf of Mexico prior to the
start of the heating season. The heating season so far as
been abnormally mild in the northern US and prices have slumped
back to the $11 range -- which is still a lot higher than
the $7 range in 2004. Unlike oil, we will get no quick relief
from international gas sources if the rest of winter turns
sharply colder. We're short of terminals to receive significant
quantities of imported liquefied natural gas and they cannot
be built quickly (or cheaply). The natural gas markets in
the US respond very sharply to current conditions. A warm
week and the prices sink. A cold one and the price shoots
up. Our gas storage for the year is slightly below 2004 levels.
Even if we have a mild winter overall, there will be spikes
of cold. Our production is still crippled in the Gulf. Therefore,
I'll predict that methane gas prices will spike above $20
sometime before May.
High gasoline, heating oil, and methane gas prices will absolutely
kill the housing bubble for reasons I've already outlined.
The production home builders will be idle, stuck with huge
inventories in places that never should have been suburbanized
in the first place. A lot of Americans holding "creative"
mortgages -- no money down, interest only, adjustable rate,
what-have-you -- will be crushed by the expense of their obligations.
Many of them will go bankrupt under new bankruptcy laws that
leave no wiggle room for escaping partial repayment. Their
houses will flood the real estate markets in an orgy of distress
selling. "Greater fools" will snap up these "bargains,"
failing to realize that many of the logistical liabilities
will remain -- namely remote locations and huge heating costs
of enormous McHouses -- even if the ownership terms are less
hazardous than the previous owner's. At some point in the
future, after several flippings perhaps, all those 4000 square
foot houses 44 miles outside Denver (or Cleveland, or Seattle)
will be seen as the mistakes that they are, and their cash
value will reflect that.
With the cratering of the housing bubble, the US economy has
to fall on its ass. The global economy is likely to fall on
its ass, too, since so much of it depends on the decisions
of Americans to take out exotic loans for buying houses they
can't afford. Large numbers of jobs will vanish in construction,
remodeling, real estate sales, and the various mortgage rackets
-- those things precisely related to the recent gains in GDP.
The sheer falloff in new mortgages will send a tsunami through
financial markets addicted to continuous supplies of new "money"
to preserve the illusion of expansion. I'd called for a Dow-4000
late in 2005. I think that was just an error in timing, and
still call for the Dow to sink into that range, or worse,
in 2006. This will represent a moment of painful clarity for
market professionals, as they realize that an industrial economy
and the finance that serves it must be based on the expectation
of generating real future wealth, not on zero-sum rackets,
games of monetery musical chairs, or casino legerdemain. Hedge
funds, which depend on predictable stability, will be especially
vulnerable. They will certainly take some large banks down
with them when they go. I'll call for the so-called government
sponsored entities of Fannie Mae and Freddie Mac to groan
under and then drown in a sea of non-performing loans, probably
with overtones of criminal irresponsibility.
If these things occur, ugly things would happen to the dollar.
I would predict an episode something short of hyperinflation
-- say a rapid 30 percent drop in dollar value -- with a later
deflation in the price of things like houses, paintings by
Childe Hassam, and many consumer goods. Which means that standards
of living will fall across the board as incomes vanish with
jobs and food and energy prices rise -- while Americans try
to shed their houses, at the same time that consumer products
sit unsold on the shelves of WalMart, Target, and Best Buy.
This will spell the beginning of the end for the chain store
universe.
The commercial airline industry is already whirling around
the drain. 2006 will send it decisively down that drain. Since
we cannot do without aviation in a nation as large as the
US (with train service on the level with Bolivia) then the
government may have to take over the crippled air routes.
If that happens, then service will certainly be greatly diminished.
Fewer people will be flying under the circumstances, anyway,
but there is no reason to believe that this will all occur
smoothly. Among other things, huge pension obligations would
remain to be worked out.
By similar reasoning, I see an excellent chance for General
Motors and Ford to go out of business in 2006. Sales of their
stupid SUVs were already tailing off in the second half of
last year, and they are not positioned to offer much of anything
else. Anyway, a middle class groaning under insupportable
debt and bankruptcy is not likely to be assuming new time
payments for exactly the kinds of vehicles they would be insane
to depend on.
As America roils in economic pain, factory workers in China
will be thrown out of work. They will be extremely pissed
off, and as their appeals go unappeased, they might start
making political trouble in their country. That could easily
stimulate Chinese leaders to divert their nation's attention
with a compelling military project -- say some moves into
the oil-rich former Soviet lands to China's west. Sooner or
later, China eventually will go cuckoo from a shortage of
fossil fuels. It only remains to be seen how this will express
itself. So far it has only done so in terms of an aggressive
outreach in oil contracts with producers like Venezuela and
Canada. But those arrangements were based on a peaceful world
and a peaceful China.

cartoon "McDonalds" by Ken
Avidor
I have no idea what will happen with Iran. Their leader Mr.
Mahmoud Ahmadinejad, is clearly a maniac -- calling for Israel
to be removed to Alaska, for instance. But here I invoke my
allergy to conspiracy theories by saying I do not necessarily
expect any US or Israeli strikes against that country. One
could argue that Iran could comfortably kick back and watch
America get tortured by the insurgency next door in Iraq,
and I think they will do just that through 2006. The nuclear
card is wild, however, and anything could happen if they keep
slapping it on the table.
Which brings us to the extremely sore subject of Iraq. I maintain
that our reasons for being there have not changed one bit,
namely to make sure that we don't lose access to Middle East
oil in any shape or form. Now my stating that does not mean
I think we will necessarily succeed. The creation of a constitution
in Iraq and holding elections based on it amounted to an admirable
stunt, but I tend to think this experiment will dissolve into
sectarian violence and civil war, probably within 2006, no
matter what else we do. I predict that circumstances will
impel us to withdraw from the Iraqi cities but that we will
not give up large bases near the oil production areas of the
north and south, and that we will continue to control the
air space over Baghdad. Our position in that country would
then devolve to a sort of Fort Apache situation. I imagine
the vast emptiness of the desert combined with air cover will
afford us some protection. But our presence there will only
inspire more turmoil, hatred, and jihad elsewhere.
King Abdullah seems to be in pretty good health, but he is
going on 82. I predict that there will be fissures in the
kingdom, and continued confusion about their oil production
capacity. But by the end of the year it ought to be clear
that they have not increased their output. Peak for Saudi
Arabia may be the beginning of the end of the Saud kingdom
-- since peak itself is highly destabilizing.
In Europe, we are beginning to see some of the first tectonic
heavings over energy as Russia jerks poor Ukraine around on
their natural gas shipments. England has managed to piss away
all the former advantage of their North Sea oil bonanza and
they now face a future of dependence on Russian gas plus the
bankruptcy of their remaining industrial base. France enters
2006 somewhat more energy self-sufficient, at least as far
electricity is concerned, since 70 percent of it comes from
nuclear reactors. The other nations of Europe are apt to get
restive this year, and may more actively join the worldwide
contest for access to fossil fuels. At the same time, they
will be struggling to contain large Muslim immigrant populations
and I would be surprised if there were fewer problems in 2006
than last year -- with the riots in France and the London
subway bombings. We tend to write off Europe as a region of
sclerotic cafe layabouts, but for the time being many of these
nations can still mobilize potent military forces if they
have to defend vital interests. Generally, I predict 2006
will see a shift in power to the big energy bear, Russia.
It's industrial infrastructure is otherwise decrepit. It's
armed forces are bankrupt. But it has at least enough nuclear
arms to blow up the world a few times over, so that, combined
with its oil-and-gas assets, require us to take it very seriously.
Japan has nearly been forgotten. It now imports 95 percent
of the fossil fuel it needs to run itself. God knows what
they will do if geopolitical turmoil shuts down the shipping
lanes that bring a steady stream of oil tankers to the islands.
They are capable of mobilizing to defend their vital interests.
We just haven't seen them do it since the 1940s. What role
Japan will play in the Pacific remains a mystery, especially
in relation to the growing power of China. Perhaps some of
this oriental mystery will be revealed in 2006. Perhaps Japan
will enter into some kind of Asian co-prosperity sphere alliance.
Japan's economy will otherwise be subject to the severe economic
strains emanating out of America.
South America is going loco on us. They will probably never
amount to a united front, but one-by-one they will become
more hostile to us, in the manner of Venezuela's Hugo Chavez
and the newly elected Evo Morales of Bolivia, a former coca
farmer who aims not to allow America any more say in what
crops his people can grow. Chavez can jerk America around
on oil imports if he wants to, but probably not without risking
his health and position. Mexico's economy is dependent on
ours, only Mexico will suffer by another order of magnitude
if the US economy turns down in a big way. In 2006 I think
we'll see the first signs of overt hostility between our two
nations as the US desperately tries to come to grips with
the flow of illegal immigrants, and Mexico attempts to divert
its suffering peoples' attention by making threats of incursion
and reviving claims to lands along the border. We could see
the first shots of what could turn into a huge ongoing border
nuisance, perhaps even a quasi-war. Meanwhile, Mexico's premier
oil field, Canterall, has entered depletion. They depend on
imports of natural gas from us, and under the rather insane
terms of NAFTA, we in the US depend on imports of gas from
Canada to make up for the stuff we have to sell to Mexico.
Those relationships may be subject to review.
Here in USA, I predict that we will be diverted by a fantastic
circus of congressional hearings and court proceedings. It
will be scandal-o-rama for the Bush administration and the
Republican party. The domestic spying issue will be a huge
stink (I recognize I defended it on this blog), but it raises
issues that our political system cannot digest right now.
The Abramoff scandal is going to be huge and may take down
twenty congressmen. Karl Rove will probably join Lewis "Scooter"
Libby in the indictment pen for the Valarie Plame incident.
Tom Delay is going to have a very ugly trial in Texas, and
senate majority leader Bill Frist may end up being prosecuted
for stock sale irregularities. These shows may so successfully
entertain the public -- and the cable news impresarios --
that we will fail to notice the rising predicament of oil
and gas prices and the cratering of the suburban sprawl economy
(just as Watergate -- a very satisfying melodrama for those
of us who were young reporters in 1973-4 -- diverted the US
from the first throes of the oil crisis). All this activity
will tend to degrade the standing of the Republican party
to "junk" status. But there is no sign that the
Democrats offer an alternative world-view to the "non-negotiable
American way of life."
Political circuses will not completely divert the middle class
from its own suffering, as their mortgages devour what is
left of their financial lives. But as they sink in fortune
and hope, I predict we will see a turning of all the recent
celebrity envy -- and the infotainment value spun off it --
into a vicious hatred of the rich and famous and a new desire
not to emulate them, but to punish them. Look out, Nicole
Ritchie and the Donald Trump. The grandchildren of Ozzie and
Harriet will be looking to eat you for dinner starting in
2006.
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