Letters to the Editor: The Readers Write Some More

MY RECENT THREE-PART series of articles on the subject of Planning, Policy, Strategy, and Energy brought out the best in some of you, dear readers. Your many e-mails on the topic are thoughtful and offer great insight. My only critique is that a lot of you do not say from where you hail. Don’t worry, we are not going to track you down. We just ask you to provide us with a state or region so we can place you in some sort of geographical perspective. Thus, once again into the breach, dear friends, I am turning the forum over to you all. Here is a sampling of the mailbag, with my short comments.

From Bud, Location Unknown:

“After reading Byron’s comments — always instructive — I’m a bit mystified as to whether he really thinks libertarians are nut cakes because they believe in a free market, individual liberty, and sound money. [Ed: No, not at all. You should hear Byron when he cuts loose on those subjects at the Agora Financial editorial meetings.]

“‘The answer to high prices,’ as the old saying goes, ‘is high prices.’ [Ed: Byron has said exactly that in some of his writing, OBTW.] In response, market participants eventually adjust if those prices remain high. That doesn’t mean prices will necessarily fall, though they may if demand slackens. But it does mean that dominant market choices must change to accommodate the new reality. The biggest risk now is that politicians will again step in and attempt to ‘moderate’ high gas prices to reduce political consequences to them of the economic pain those high prices inflict. To put it bluntly, the government will again become the problem by attempting to massage the market to cushion the economic blow of reality that might otherwise cause Americans to alter the trend of their spending habits required to successfully meet the future.

“These efforts will, of course, finally fail. When the Federal Reserve can no longer conjure the illusion that the U.S. dollar is anything more than a paper tiger worth no more than what it costs to print it, the faith-based buck will lose — what? — an estimated 30% or more of its value. And then the price of oil for Americans will surely rise even more drastically for the long term. As in ‘forever.’ No government taxes will be required to get people’s attention because basic economic reality will impose far more severe penalties on energy guzzling. No socialist central planning Politburo with a cast of thousands of D.C. mandarins will be required to light a fire under a squeezed populace about the need to conserve and seek alternatives.

“Indeed, the political bunco artists and apparatchiks in D.C. have — for many decades — officially and consistently promoted and eagerly subsidized wasteful patterns of development and shamelessly promoted nonsense about ‘the American Dream,’ which were sustainable only by the flow of cheap oil. These worthies accomplished this infamous goal precisely by manipulating the tax code to encourage risky behavior, and then further supplemented this outrageous subsidy by below-market lending costs to encourage people to buy large and buy on time. The suburbs that author James Kunstler so rightly criticizes as grotesque are a direct consequence of government-backed mortgages that no sane and temperate banker would ever have lent on with his own private money at such cheap rates. Without Fannie Mae and [other government entities] steadily handing out boatloads of cheap credit to encourage grand construction at far below market rates, given the risk, there would be no current housing boom nor the relentless historical expansion since World War II of the suburbs outward in every direction — closely attended by collapse of central cities, which were largely abandoned to the vagrant, the drugged, and the poor. Much of what was formerly productive farmland is now capped in concrete and blacktop, growing houses and shopping centers instead of cash crops. What’s wrong with this picture?

“Show me any problem that government proposes to solve and I’ll show you a problem previously exacerbated by public policies of that very same government. This bizarre abuse of the national wealth continues to be accomplished chiefly by way of taxation intended to manipulate behavior — exactly what Byron now recommends as a remedy. ‘The power to tax,’ ruled Chief Justice John Marshall, ‘involves the power to destroy.'”

Byron Replies:

Lots of great points, Bud. If you review my articles in Whiskey & Gunpowder, I believe that you will not find a single kind word in my assessment of the Federal Reserve or its management of the U.S. currency since December 1913. And allow me to note that it was yours truly who turned numerous members of the Agora Financial clan, including our Argentine amigo Bill Bonner, on to the great study of fascism, published in 1944 by John T. Flynn, entitled As We Go Marching (see my review at Amazon.com). I have not written much about things like government subsidies for otherwise uneconomic development, embodied in such programs as federal flood insurance. But you can be sure that I am not terribly sympathetic to people who try to fool with Mother Nature. I have always marveled at the hubris of people who develop real estate on barrier islands or in the heart of flood plains. It is only a question of time before one of those so-called “weather events” takes you down.

From Dorothy in Calgary:

“I appreciated your comments on the tar sands of this province. I understand that you were putting Canadian tar sand development into context with other world oil production, but I have to make an important point. Tar sands development is utterly devastating the once pristine environment of this region. There are strip mines covering literally hundreds of square miles and lakes of toxic ooze that just litter the landscape. Air pollution is significant, along with occupational diseases related to the industrial effort. Yes, I know that a lot of people are making a lot of money out of all of this, including many members of my own family. And yes, Alberta has become a ‘prize’ in a new global tug of war over energy resources, what with the Chinese pipeline to the coast of the Pacific Ocean. But whether the final refined product is burned up in an automobile in Beijing or Chicago, we who live here will be stuck with the environmental cost. But I don’t suppose you can really price that into the cost at the gas pump, can you?”

Byron Replies:

No, Dorothy, we are not in Kansas anymore, are we? You make a lot of very valid points. From an investment standpoint, the tar sands are just another “play.” Up in Alberta, you and your neighbors have to live every day with the results. The good news in all of this is that increasing wealth permits a society to “afford” the luxury of remediating the environment, although we will never again see the “pristine” days of yore. I have written about the history of such rip-roaring development in the days of Titusville, Pa., during the 1860s. See, for example, “Barrels of Oil, Miles of Mud.” Today, 140 years later, Titusville is a nice place to visit and not a bad place to live. But I do not suppose that any of us will be around in another 140 years to see what Alberta looks like.

From Roland, Location Unknown:

“There is a natural law — the law of supply and demand. When demand is greater than supply, prices go up. When supply is greater than demand, prices go down. When a country is unable to control the supply, as is the case with the United States and oil, it must try to control the demand. In the case of gasoline and other related petroleum products right now, demand is outstripping supply and prices are going up, up, up. Other countries, as you pointed out, have tried successfully to control demand by increasing taxes on gasoline. A substantial increase in the gasoline tax by the federal government might just help get people out of their big pickup trucks, SUVs, and Hummers and into public transportation and car pools, and it might also help to get big trucks off the roads by putting the trailers on trains. We are going to have to do that eventually anyway, as supplies of petroleum are depleting. Even suggesting raising taxes makes me feel sick, but it is the only way that I can see to control demand. We have met the enemy and he is us. We waste precious natural resources foolishly.”

Byron Replies:

I agree, Roland, that raising taxes on fuel is a sickening thought. More money is not exactly what Leviathan requires. But prices for fuel are going to increase in any event, due to global demand and depleting supplies of oil. If raising the price of fuel via a consumption tax will curtail demand, I would just as soon keep the funds in the United States as see the funds shipped overseas to people who do not like us very much. If the U.S. government does raise taxes on fuel, it should cut taxes on other things, such as the payroll tax, which is a regressive tax on incomes and on families on the lower end of the economic ladder. There is a lot more I would like to say, but this is the readers’ forum.

From Robert in Guam:

“I’ve read your articles on Peak Oil in Whiskey & Gunpowder with great interest. I believe your statements are correct regarding the future of oil production and consumption worldwide, except for one variable, which unfortunately is largely undetermined and/or unpredictable, but certainly has tremendous potential impact on all outcomes to the looming energy crisis. This variable is world population. Oil and other energy consumption estimates have to be based on certain estimates of population. I’m sure your estimates are at least based on consumption by a stable world population base, more likely one that continues to grow.

“Now, I’m not a crazy, ‘end of the world is near’ kind of person, but I suspect that the next 20-30 years will likely see some event that dramatically reduces the population of the world, perhaps as much as 90%. Ignoring the possible but less probable event of an all-out nuclear war to do the job, I think a plague of ‘biblical’ proportions is all but certain at some point.

“Richard Preston’s 1995 book The Hot Zone was based on a true story of an airborne Ebola virus outbreak in a facility in Virginia in 1989, fortunately lethal only to monkeys. Had that virus been virulent for humans, we could have already wiped out a significant chunk of the world population. Preston says that as population grows and encroaches more on animal habitats, more crossovers from animals to humans will occur, like HIV/AIDS, Ebola, SARS, and bird flu. As the world’s population grows, even ignoring other fundamentals like food supply, population density increases and approaches an ‘infestation’ on the surface of the planet. Throughout nature, we have seen over and over that nature abhors an infestation, and through either outrunning its food supply or disease, increasing population density in any species will fix itself, possibly overshooting, nearly to the point of extinction. As if nature wasn’t capable of doing this itself, with the potential for bioterror out there, the odds increase even more. In this day of mass air travel, an agent that is spread by the respiratory route has an incubation period of a couple of weeks during which the infected individual is free of symptoms but actively spreading disease to everyone with whom he comes in contact, and has a fatality rate of 90%-plus… well, you see the potential, I’m sure. Bird flu, when, and not if, it gets here, will be a trailer for the main feature.

“I would imagine places like China and India, if not the origin of the plague, will be the hardest hit, for a number of reasons I won’t go into here. No way the health systems of the world will cope. Forget the Third World, where medical care is 100 years behind the developed world. Even in the United States and other developed countries, it is unlikely that an effective treatment or vaccine will be developed in time. Doctors will be among the first to contract the disease and be killed off early on, and the usual government screw-ups will exacerbate the problem. See the book The Great Influenza by John Barry for how the government contributed in many ways to the carnage of the 1918 flu epidemic. [Ed: Byron discussed this book in an article last summer, “History and Its Footnotes.”] The fragile infrastructure of the entire planet, not just the United States, will slow dramatically, possibly almost to a halt over, about a six-month period. So what does it do to your Peak Oil calculations if there is 10% or less of the present world population, with gaps in the infrastructure such that energy consumption by the 10% or so that survive is half of what they consume today? [Ed: Only half? Just wondering.] The biggest unknown I can see is where on the backside of Peak Oil this occurs. Even if it happens 30 years out, I suspect there will be oil for those who survive and their descendants for 50-100 years…

“My credentials, which you may edit as you see fit, are that I am a physician board-certified in aerospace medicine (a subspecialty of preventive medicine) and also board-certified in emergency medicine. I am retired from the U.S. Army Reserve as a colonel in the Medical Corps with 30 years of service.”

Byron Replies:

Col. Bob, this is a rather gripping e-mail. You have said too much for me to even begin to reply and still have room for other reader comments. This subject is grist for a series of articles in and of itself, and you and other readers are welcome to write it all up and send it to Greg.

From Dave in Michigan:

“I read Byron’s assessment of future oil supplies. The current issue of The Economist (April 22-28 — articles on pages 11, 65-67, and 74) forecasts oil supply for the next several years, and it’s up, up, up. Supply? No problem! The publication has a large staff of analysts and writers that specialize in energy. Why should we believe Byron’s assessment more than The Economist staff of experts? What are the flaws in logic of The Economist’s articles?”

Byron Replies:

In the late 1990s, The Economist and its so-called “staff of experts” was forecasting cheap oil for decades to come. If you followed that advice as your investment lodestar, you lost money and/or missed a lot of good boats to improving your financial situation. Starting in the late 1990s and early 2000s, Agora Financial began to promote investing in energy resources, as well as in gold and other important industrial commodities. If you followed that advice, you should by now have made lots of money. [Ed: And you still can do so if you know what you are doing, which we here at Agora Financial do.] As for dissecting The Economist magazine articles, I do not have space for it right here. But see a well-written critique in a Web site called The Oil Drum, right here.

From Joe, Location Unknown:

“Byron also falls into a common fault. He writes that even if the tax on gasoline is only one penny per gallon, the nation has still made the policy decision to have a gasoline tax and ‘America has to export a lot of soybeans and Boeing jet airliners to pay for all that imported oil.’ And Byron referred favorably in a few paragraphs to Sweden’s national goal of becoming oil independent within 20 years.

“I’m pretty sure that over 250 million Americans were NOT part of the decision to have a gasoline tax. The decision was taken by fewer than 535 individuals in Washington, D.C., who arrogantly thought they were representing ‘the nation.’ The same is true of the Swedes: The ‘national goal’ was set by some 350 individuals in the Riksdag. Similarly, it is not ‘America’ that sells soybeans and planes. The exports are done by individual companies and persons.”

Byron Replies:

Joe, you are correct if you mean that there was never a direct national referendum on establishing a federal tax on gasoline. The U.S. government did it the old-fashioned way, by following the process set forth in the U.S. Constitution. Congress enacted a motor fuel tax a long time ago, back in the 1950s, with the stated purpose of using the funds to construct the so-called “National System of Interstate and Defense Highways.” The nation built its interstate highway system, and the rest is history. Sweden too has its own way of enacting policy and laws, and is by no means some glorious Greek democracy of ancient folklore and myth. As to overseas sales of “American” soybeans and jet airliners, these are most certainly, and very heavily, subsidized by the federal government. In general, U.S. agriculture benefits from massive federal subsidies for such grass-roots things as crop research, erosion control, water diversions, long-term storage, and transportation to market. And agriculture also benefits from export enhancements through things like the Export-Import Bank. Good old Boeing has been a key beneficiary of federal largesse for over six decades, from military research and development funds plus a continuous stream of government procurement contracts that have paid for a lot of overhead to the same foreign sales assistance as agricultural products get from the Export-Import Bank.

From Robert, Location Unknown:

“Thank you for your essay on our current predicament. Will the public only wake up when it is too late to reverse course and blindly trust that science will get us out of the hole we have dug for the last 40 years? Also, current policies of business and government are to get as much production as possible without thinking of future needs with a runaway population explosion that is going to strain all things needed to sustain life. China knows well the problems of population, increasing desertification, massive floods, and the [apparent inability to maintain] control even with a repressive government. We are messing badly with ‘Mother Nature’ and will pay for not being prudent as to our planet, our home.”

Byron Replies:

I too have to wonder what it will take to awaken the public to the potential for disaster embodied in the Peak Oil predicament. But I am optimistic that if the problem is spelled out accurately, the American public will go along. By way of comparison, the attacks on the United States on Sept. 11 were perfectly obvious to everyone. Thus President Bush had the overwhelming support of the public at the initial stages of devising the U.S. response. But as things unfolded in the months thereafter, it seems that the U.S. policymaking process went off the rails. I think that future energy policy is even more important, in the sense that one key component of Sept. 11 was the U.S. dependence on oil and the related overseas military commitment to “ensure access” to the stuff. No less an authority than Osama bin Laden said that his efforts against the United States were in direct consequence of the U.S. presence in Saudi Arabia. Should we discount this information, just because it comes from Osama? My impression is that while Osama does not like America, he speaks his mind. But let’s get back to another reader comment.

From Ron, Location Unknown:

“Raising [fuel] taxes in the United States does not impact consumption overseas, especially in China and India. Any conservation effort caused by higher U.S. energy taxes is very likely to accelerate consumption overseas as the market price falls because of decreased U.S. demand. [In addition], energy taxes almost always lead to inflation, which…discourages consumers [from] saving and can also tighten labor markets. [Finally], higher taxes provide more income for government waste, as it provides the politicians a new source of income for pork spending…

“A much better way to decrease consumption is to raise interest rates. Business and governments will decrease spending and make better use of capital as it becomes too expensive to waste. Increases in U.S. interest rates affect the global markets, by forcing all industrialized nations to raise raises in order to prevent the flow of capital to foreign markets. Increases in interest rates reward savers and penalize debtors that consume beyond their means. This is important for people who are retired and are living on a fixed income and cannot adjust to higher energy costs. During the first time gasoline prices rose, in the 1970s, it did little to decrease consumption. It wasn’t until the early 1980s, when U.S. interest rates rose, did businesses and consumers become more energy efficient.”

Byron’s Reply:

Ron, I am wondering why President Bush did not nominate you to become chairman of the Federal Reserve, instead of Ben Bernanke. Yes, taxes are inflationary if they drive up the cost of goods in the basket that is used for calculating the consumer price index (CPI). But inflation is more of a monetary phenomenon than a symptom of fiscal policy. We are talking here about the cost of money versus the cost of energy. It seems that everything is related to everything else. Sometimes it is hard to wrap your brain around all of it. As for China, I have said and written that China may be making a strategic error of the first magnitude by attempting to build itself into an imitation of a 20th-century industrial power in a 21st-century world of resource scarcity. Depending on how old you are, we may all live to see how it plays out, one way or the other.

Well, dear readers, I hope that you gained some perspective from the thoughts of these other “intrepid correspondents” who took the time to write. Thanks to all of you who wrote with comments, whether we published them or not. Now you can see some of what everyone else is saying or thinking.

Until we meet again…
Byron W. King
May 2, 2006