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By Robert Rapier on Apr 23, 2010 with 35 responses

The Recession is Dead! Long Live the Recession!

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I don’t really know if we are emerging from the recession, but hiring does seem to be up. Most of the people I know who are looking for jobs are starting to get a lot more interest. But I don’t expect the end of the recession – when it does occur – will be like the end of previous recessions. Why? As I have argued before, I believe that as the economy strengthens, it will inevitably put pressure on oil prices. And we are already starting to see oil prices creep back up:

Oil settles above $85 after home sales surge

NEW YORK — Oil prices rose above $85 on Friday helped by strong sales of new homes that surged last month from a record low in February.

The article also said that gasoline prices are down (recall when I said I expected gasoline prices to ease because inventories were flush) but that many analysts expect gasoline prices to average $3/gallon over the summer. That is one caveat I offered at the time. Rising oil prices will trump high inventories when it comes to gasoline prices, so if oil prices remain strong, gasoline prices will follow.

All of this leads me back to the question I keep asking myself: How do you recover from recession when oil prices are at recession-inducing levels? I still think my Long Recession scenario holds true. This recovery won’t be like previous recoveries.

  1. By Rufus on April 24, 2010 at 1:02 am

    Also, of interest: While Gasoline usage is picking up (we’re up to 9.2 million bbl/day) Diesel is stuck on start (3.6 million bbl/day.)

    Part of it may be U.S. demand for trucking taking a while to get wound up, but this could, also, be reflecting a complete lack of growth in Europe (we export the marginal barrel of diesel to the EU. And, of course, trucking is, almost surely, losing a little business to the rails.

    Also, to be remarked upon is the continuing trend toward jobless recoveries as more, and more jobs come back as automation. GM, and Ford got rid of $26.00/hr workers, and are, now, hiring $14.00/hr workers. $4.00 gasoline is going to be rough on Fourteen Dollar/Hr workers.

    Of course, those workers that spent their lay-off retraining, and came back as robotic repair technicians, and computerized-line programmers are going to be just fine. If your skill set is, primarily, picking things up, and moving them around this is going to be a “rough” Century.

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  2. By Rufus on April 24, 2010 at 1:29 am

    Cars Are getting more fuel efficient. A 100% increase in the cost of fuel doesn’t hurt at all if you’re getting Twice the miles per gallon. The Bad news is it will be several years before this trend starts to benefit those that need it the most – the “used car” buyer.

    We’re getting toward the end of the first surge from ethanol. We’re 80% of the way to the initial 15 Billion gpy from corn ethanol, and we won’t start getting appreciable help from cellulosic for at least 5 years, or more.

    I’d say we’re in for a rough decade, at the very least. Don’t wanna say it, but that seems like the way it is.

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  3. By paul-n on April 24, 2010 at 2:02 am

    I would agree a rough decade is likely.  I’m not so sure I agree entirely about the job insecurity of your skill set is picking things up.  A lot of these jobs like cleaners, coffee baristas, garbage collectors, solar panel installers, etc cannot be offshored or automated, I think they will be amongst the most stable jobs, though the pay may well decrease.

    I would be more worried about certain service industry jobs.  Look at how many telemarketing/call centre jobs have gone to India.  We are starting to see the same with certain design disciplines too (websites, graphic design, some medical and engineering analyis).  If your work is communicated via the click of a mouse, then your job can now be offshored much easier than a manufacturing job!

    As for GM, those $26 jobs were actually costing over $70 with all the ridiculous benefits etc.  A good deal for GM, cheaper wages and a younger workforce whom they have to pay less retirement and health benefits and not for a longer time.

    As for oil prices, at least as far as the consumer economy goes, i think most people are keeping their wallets closed because of their employment and house value situations.  Oil may have caused all this, but if gasoline went to $2/gal tomorrow, I don;t think we’d see a dramatic pickup in employment or house prices, just a slight increase in gasoline use.

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  4. By Douglas Hvistendahl on April 24, 2010 at 8:38 am

    I’ve always found it useful to have backup work to do for myself. When laid off in the 2002 recession, the backyard garden was expanded, and more work was done on improving energy efficiency of the house. Being retired now, it is possible to stay busy with things useful to us, even though not getting paid for them.

    Don’t forget, the home used to be a major center of production. While mass production methods cut out many opportunities for paid home production, they don’t eliminate things done for one’s own use.

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  5. By Kit P on April 24, 2010 at 8:41 am

    Well Rufus, you are old enough to
    remember Jimmy Carter. Just how bad were the 80s?

     

    Heaven forbid that the younger
    generation might have to make choices.

     

    “garbage collectors, solar panel
    installers, etc cannot be offshored or automated”

     

    Garbage collectors provide a service
    that is needed. Solar panel installers provide a service of
    installing consumer electronic products.

     

    There are still a lot of very
    productive Americans. Coal miners, farmers who produce food and now
    energy. Sometimes productivity changes have a short term negative
    effect. If a car lasts 10 years instead of 5, auto workers are twice
    as productive. However, fewer cars are needed so we need few auto
    workers. This is compounded by general improvements in productivity.

     

    “the “used car” buyer”

     

    Here is an interesting thing. I am
    generally a used car buyer. When we needed to replace the 19 yo mini
    van with 250k miles, there were very few reasonable priced economical
    cars because they were holding their value as gas prices were
    increasing.

     

    There was a similar situation in the
    early 80s. I had get on waiting list to buy a Tercel in 1981. Ten
    years later which was predicted to be the decade of the ‘green’ car
    by Car and Driver something interesting happened. The economy was
    strong, gas prices were down, and ICE efficiencies had improved. The
    90s turned out to be the decade of the SUV and the double cab 4wd PU.

     

    So Rufus I know it will be hard for
    young people, they may have to car pool or take public transportation
    to get to work. Oh gosh Rufus, thats what my parents did in the
    60s.

     

    One of the interesting things is
    comparing how the ‘poor’ live now compared to when I was growing up.

     

    No dishwasher. One of us would wash
    and the other would dry. The lawn mower did not have a ICE mounted
    on it. We used a cloths line to dry cloths. We were middle class.

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  6. By paul-n on April 24, 2010 at 11:54 am

    Douglas,

     

    You are not the only person thinking like that – interesting essay here about the “home economy”

    http://campfire.theoildrum.com…../6384#more

    It think it’s fair to say that the concept of doing work at home , that has value, but for which you do not get paid, is pretty alien to most 20 somethings today.

    In my town I am seeing an increase in the informal economy, a lot more people doing home services, from yard work to laundry to firewood supply, etc for cash, or, increasingly, bartering their services.  People getting to know, and work with and for, their neighbours – what a concept!

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  7. By Benny BND Cole on April 24, 2010 at 4:19 pm

    I can remember a very gloomy outlook in 1979, when a certain someone entered the labor force after grad school. Oil was headed to $100 a barrel ( we were told), and would run out by 2000. A very compelling speaker named Paul Ehrlich predicted massive population collapses. The Dow Jones was lower than in 1969. The only thing good was disco.

    Instead, after 1979 oil became plentiful, and the world’s population kept growing.

    Now we are seeing huge, epic supplies of natural shale gas developed, even as OPEC takes oil off of the market to prop up prices–prices, btw, largely set by speculators-manipulators on the NYMEX. On some days, speculators trade 17 barrels for every “real” barrel consumed. That number is getting higher and higher.

    I think a terrific future lies ahead, cleaner and more-prosperous. In sharp contrast to 1979, we have wonderful technologies much further developed, including shale gas, PHEVs (the GM Volt comes out soon) and even a Nissan LEAF. Globally, CNG and LPG stations are proliferating, while China seriously investigates nukes, CTL, PHEVs, and BEVs. Lithium batteries get better every year, and possibly we will see some real breakthroughs.

    Just look at the Nissan LEAF and compare it to a battery car of 10 years ago, the GM EV-1. It’s radically better! In just 10 years! And what will come to market 10 years from now?

    With just some intelligent national policy (an oxymoron?) we could easily seize a cleaner and more-prosperous future in the USA. We know we can manufacture cars that can get 50 mpg–and that after 40 miles on the battery! (the GM Volt).

    If oil goes to $6 a gallon, I suspect we will see sustained and serious declines in oil demand.

    Europe uses less oil now than in 1979! And Europe’s GDP per capita has risen sharply in the last 30 years, while they make continuous and tremendous strides on reducing pollution.

    That, I hope dearly, is our future, and I think largely it is.

    Boom, No Doom.

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  8. By Rufus on April 25, 2010 at 2:30 am

    Are we witnessing the automotive iteration of the “disposable razor?”

    Or, as John F’n Kerry might put it, “Whom among us would buy a $10,000.00 battery for a 10 Year Old Car?”

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  9. By Kit P on April 25, 2010 at 2:43 pm

    Rufus could it be some old guy who
    wears spandex and flies across country in his wife’s private jets to
    go wind surfing to show how green it was. Or is it the guy with the
    benefit of an ivy league education became an officer in the navy to
    avoid a war and then volunteered for river boats? He figured out war
    is terrible. Who knew?

     

    I have a friend who joined the navy to
    keep from being drafted. In boot camp he signed up to be a corpsman.
    He was in Guam waiting his turn when this old guy had a heart attack
    in front of him. Some place in the rule book it says if you save a
    old doctors life all the other doctors and nursed look after you.

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  10. By Rufus on April 25, 2010 at 5:14 pm

    Joined the Navy to keep from being drafted, and then signs up to be a “Corpsman!”

    :)

    Peeple is strange.

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  11. By paul-n on April 25, 2010 at 11:37 pm

    Benny,

     

    I think we are in for a tough decade, not actually because of energy issues – all the things you mention will make a difference.  I think it will be tough because the boom of boom times for the last decade is gone, and there will have to be a bit of adjustment.  Governments, and people have got lots of debt to pay off, so I don’t think that we are in for boom times, but I don’t think we have an energy crisis either.

     

    Europe is a good model, but the American view seems to be that going that way (smaller cars, rail transit, high fuel prices from taxes) is an admission of defeat.

    I do hope things recover, but I’ll be OK if disco doesn’t make a return

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  12. By Kit P on April 26, 2010 at 7:53 am

    “Europe is a good model, but the
    American view seems to be that going that way (smaller cars, rail
    transit, high fuel prices from taxes) is an admission of defeat.”

     

    For defeatism. Unfortunately it is not
    in the best interest of the US to let Russian tanks roll across the
    EU. The US is number one in electricity generation and three in oil
    production. Producing an adequate supply of energy to meet our needs
    is only a political problems.

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  13. By Jim Takchess on April 26, 2010 at 12:49 pm

    From the Wall Street Journal to your point….
    http://online.wsj.com/article/…..32768.html

    An unrelenting rise in the cost of raw materials—largely driven by mounting demand from Asia—is cutting corporate profits, hitting stocks and, in some cases, pushing up consumer prices.

    One glaring example is the sky-rocketing cost of rubber, a major tire component, which has climbed nearly 74% this year after rising 92% in 2009. Industry analysts and some tire makers, including Goodyear Tire and Rubber Co., in Akron, Ohio, and Bridgestone Corp., in Tokyo, have warned investors about a potential hit to profits.

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  14. By rrapier on April 26, 2010 at 1:30 pm

    I think a terrific future lies ahead, cleaner and more-prosperous.

    Benny, the problem is that nothing is close to being ready to go and take a significant load off of our oil consumption. Sure, there are things we can do. Those things take time to develop and build, though. So what I have always thought is that we were going to go through a very difficult period of time where oil prices put the squeeze on everyone as we scramble to come up with solutions. Note that demand in the U.S. over the past couple of years is down sharply – and yet oil is still at $85/bbl.

    Even if we determined that we definitely have enough natural gas to fuel all of our needs for the next 50 years, it would be 5 years minimum before that would be massively scaled up. And we would be trying to scale it in the face of very high oil prices, which inflate prices for everything we need to use to scale it up. I am definitely in the “rough decade” camp.

    RR

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  15. By Benny BND Cole on April 26, 2010 at 1:37 pm

    Paul-
    Disco is king forever. I have heard a lot of wrong sentiments on this blog, but how could anyone ever attack disco?
    That said, I think we have a susatined bull market ahead in equities and property. Interest rates are low, and will stay low due to high global savings rates.
    Commodities prices may be going up–that’s a sign of strength, not weakness. And man develops new supplies or substitutes for expensive commodities. Inevitably.
    I hate, hate to play into Rufus’ hand, but look at demand and supply for corn. There was demand and high prices for corn (2008-9), more than ever before in US history, and corn farmers have answered–on about one-third the acreage planted in 1946.
    I still say corn ethanol is not the best idea, but it goes to show you what even mediocre policy can accomplish.
    The Internet speeds technical knowledge globally instantly, and there are more R&D centers today than ever before.
    In a decade, it seems likely we will see much better lithium batteries, meaning a 250-mile range car, or a PHEV that goes 60 miles on the battery, and then only do you burn fuel at 50 mpg.
    10 years ago no one had eheard of shale gas. Now there is a glut of shale gas, and improving extraction technques may mean ever cheaper shale gas in the future.
    The mismanagement of the US economy in the Bush years was nearly catastrophic. But I think we have learned our lessons for another generation. We will extract ourselves from the two open-ended wars,and not occupy another nation for a long, long time.
    Eevn the 1970s eventually ended.
    Boom, no doom.

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  16. By Laura on April 26, 2010 at 3:22 pm

    Even if we determined that we definitely have enough natural gas to fuel all of our needs for the next 50 years, it would be 5 years minimum before that would be massively scaled up. And we would be trying to scale it in the face of very high oil prices, which inflate prices for everything we need to use to scale it up. I am definitely in the “rough decade” camp.

    Robert,
    Do you feel it’s only a “rough decade” that we face, that maybe we may have scaled up by then? Or that it will be much longer?

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  17. By Rufus on April 26, 2010 at 3:37 pm

    Actually, Benny, there was Always plenty of corn in 2008. A bunch of people (Traders, and even some rookie ethanol plant owners – Verasun, for ex.) that didn’t know a corn cob from a combine saw the floods in the upper midwest, and thought the corn crop would be lost. Despite the fact that corn crops are Never lost from Spring floods. Corn crops are lost from Drought.

    Anyway, they ran the price up on trading hysteria (one DTN gal was even on CNBC talking about $12.00/bu corn,) and, then, the realization hit that the crop was going to be fine. We have one of these *100 yr floods* about every 15 years, and the crop is usually average to exceptional.

    Anyway, the 21st Century is going to be the Century of Biology. I wouldn’t be the least surprised to see this years crop outperform last year’s world record by another 700 Million bushels, and 5 bu/acre. 200 bu/acre average in the next 5, or 6 years seems imminently doable. Monsanto rules.

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  18. By Benny BND Cole on April 26, 2010 at 4:13 pm

    Okay, Rufus, I’ll agree with you, since you didn’t gratiutously bash disco.
    The role of speculators and manipulators in commodities markets is not fully understood. Some days, 17 barrels of oil trade on the NYMEX for every real barrel consumed, and this ratio has been rising.
    We have seen perennial crude gluts since 2008, and again there is more oil today than can be stored at Cushing. Iran is again renting oil tankers to store oil it cannot sell. OPEC has taken 4 mbd off the market–yet oil prices have risen in the last year. Even OPEC ministers say it is not supply and demand but speculators and manipulators who are raising the price of oil.
    Some say the NYMEX cannot be gamed–but any system can be gamed.
    Rufus, OT: Be wary of praising Monsanto. The crush any farmer who does not use their soy beans.

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  19. By Rufus on April 26, 2010 at 4:29 pm

    No they don’t.

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  20. By rrapier on April 26, 2010 at 4:38 pm

    Do you feel it’s only a “rough decade” that we face, that maybe we may have scaled up by then? Or that it will be much longer?

    That’s a complex question. I don’t think there is anything that can replace oil for any significant length of time. If we replaced oil with natural gas, it wouldn’t take long before we depleted our natural gas. Solar power or nuclear potentially could replace oil, presuming we have the ability to store the energy and effectively use it for transportation.

    So fundamentally I think the rough decade is one of transition, and on the other side is a society in which we use a lot less energy than we do now. It will be a society in which energy is much more expensive than it is now. So depending on you perspective, the “rough decade” could go well longer than a decade. What emerges on the other side will not resemble what we have now.

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  21. By Wendell Mercantile on April 26, 2010 at 5:00 pm

    “It will be a society in which energy is much more expensive than it is now.”

    RR~

    Unless we ever make the big breakthrough to practical fusion energy. Who knows if it will ever happen, but the potential is always there.

    “Despite the fact that corn crops are Never lost from Spring floods.”

    Rufus~

    Not quite true. The fields can be so wet for so long that ag equipment can’t get into them. No floods here last spring, but we had a very wet spring and there were some farmers who simply weren’t able to get into their fields in time to plant corn that would have ripened before the first frost. It wasn’t good for anything other than silage.

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  22. By Optimist on April 26, 2010 at 6:19 pm

    How do you recover from recession when oil prices are at recession-inducing levels?

    That sounds very scientific and all that, but what oil price is “recession-inducing”? And: “recession-inducing” to whom? Certainly not to oil exporting economies.

    As I’ve said before, I don’t think high oil prices is such a big problem. Volatile oil prices OTOH…

    So fundamentally I think the rough decade is one of transition, and on the other side is a society in which we use a lot less energy than we do now.

    Transition doesn’t happen without pain, unfortunately. I guess we all need motivation in order to follow through. Of course, powerful vested interests resisting change make for more severe pain…

    It will be a society in which energy is much more expensive than it is now.

    And that is a bad thing because…? If alternatives to oil will ever grow-up and be self-supporting, it will need high energy prices.

    What emerges on the other side will not resemble what we have now.

    That’s pessimistic speculation. We simply don’t know what the future looks like. It might be very different, or not that different.

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  23. By Rufus on April 26, 2010 at 7:12 pm

    Yeah, Wendell, but we still had the Biggest Yield in history.

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  24. By Rufus on April 26, 2010 at 7:42 pm

    Look, you can do 20 Million gpy of ethanol in virtually every county in the U.S. (using approx. 5% of their more marginal land, or forest) and never know the plants are there.

    That would be 60 Billion Gallons/Yr. Add in another 20 Billion gpy from corn, and cobs, and throw in some more fuel-efficient engines, and domestic oil, and it all works out. You can do the ethanol for about $2.75 at the pump, and use lignin for process energy in the biorefineries (with some left over for electrical generation, or other uses.)

    This is real easy stuff. But, we’ll probably have to hit “Crisis” Mode before we get’er done. The deal is complicated enough that a large amount of government involvement will be necessary to get the funding (loan guarantees, etc,) and programs to assure the biomass producers of a market for their product.

    These programs are being set up now (BCAP) but the loan guarantee program is very slow, and incapable of getting much done very fast. It won’t take long, though, once the American people understand what they’re up against.

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  25. By Wendell Mercantile on April 26, 2010 at 11:41 pm

    Look, you can do 20 Million gpy of ethanol in virtually every county in the U.S.

    Rufus~

    I must presume you’ve never seen Natrona or Carbon County, WY; or Tooele County, UT; or Kootenai County, ID; or Benton County, WA; or Ortero County, NM; or…I could go on. There’s a large number of counties west of the 100th Meridian where you won’t be raising enough corn, switchgrass, or cellulose to produce 20 mgy until you get on the west side of the Sierra Nevada.

    Of course, most of those same counties have a tremendous potential for methanol. ;-)

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  26. By paul-n on April 27, 2010 at 2:37 am

    Optimist, I am in agreement with your statement about volatile oil prices.  The swings seem to be enough to create uncertainty about investing in oil alternatives.

     

    That is why I’m an advocate an oil import tariff, such that the price (in the US) will remain high enough.

    The import duty could be set at {$120-current price}, so there is floor under the domestic price at $120, which would translate to about $/gal for gasoline.  The revenue could be used to fund alternative energies, or be applied to deficit, a tax cut, a tax rebate, etc etc.

    If this policy was in place for a term of say, five years, it would be enough to give certainty to the investors in ethanol, methanol and any other oil alternatives.  

    As for what the future looks like under an expensive gasoline scenario?  Well, probably less cars, smaller cars (on average) and more hybrids and electrics.  More expensive air travel, and at the end of the decade, there will still be talk about doing more rail, but probably not much progress.

    It would be interesting to see at what point the railroads would start doing electrification, again, a sustained high price gives a better background for making those decisions.

    While people can (rightly) complain about the prices being higher than necessary, it does put control in the hands of the US govt instead of OPEC.

    I guess it’s really a case of deciding to jump or wait to be pushed – I’d like to see jump, but I think it will be wait, and hope..

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  27. By Rufus on April 27, 2010 at 12:02 pm

    James Schlesinger said the American people have two modes: Complacency, and panic.

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  28. By paul-n on April 27, 2010 at 12:07 pm

    So which mode are the people (and the government) in right now?

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  29. By Rufus on April 27, 2010 at 1:50 pm

    I’d say we’re still in the “complacency” mode, wouldn’t you?

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  30. By paul-n on April 27, 2010 at 2:11 pm

    Well, yes, and no.

    I guess if you equate complacency to business as usual, then yes.

    There are of course, some people and companies who are not complacent, and are, for better or worse, trying to do things.

    But certainly, no one is in “panic” mode, though I think government was close to it when oil was at $147/barrel.

    Overall, though, I have to agree with the basis if the statement, we generally do accept things as they are until we can take it no longer.

    In the water supply industry, I have observed that very little gets done until there is a water crisis at hand, or that there is about to be one. 

    I do not know who made this quote, but it is along the same lines ” politicians will act reasonably, when they have no other choice”

     

     

     

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  31. By Kit P on April 27, 2010 at 7:15 pm

    Wendell can I assume that you know less
    about those places than Rufus?

     

    “Benton County, WA”

     

    No problem supplying a ‘20 Million
    gpy of ethanol’
    in Benton
    County, WA. Or Franklin County, WA where a friend from church grows
    corn among other things. Or Grant, Walla Walla, Grant, Yakima
    Counties in Washington Sate. Same for Morrow County in Oregon. The
    only shortage productive American farmers have is markets. There is
    no shortage of biomass to produce energy.

     

    My sail boat just happens to be in Benton
    County, WA. Next to a grain elevator that fills barges to send wheat
    to the world.

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  32. By od on April 27, 2010 at 8:25 pm

    What emerges on the other side will not resemble what we have now.

     

    So I take it you do not agree with Stuart Stanifordl, with the possibility of 4 billion cars in 2050? He made a pretty good case for it, imo. 

     

    Supposedly the new energy bill Kerry and T. Boone are trying to get passed will phase all heavy commercial trucks to natural gas. Too bad Reid turned it down to go after immigration first. Where are our priorities? Guess he needs votes, sigh.

     

     

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  33. By Wendell Mercantile on April 27, 2010 at 11:30 pm

    Kit P.

    I concede to you on Benton County, WA. ;-) I’ve only flown over it — sorry didn’t happen to notice your sailboat.

    But there won’t be 20 mgy from Tooele Co, UT or the two Wyoming counties I mentioned.

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  34. By Milan on April 28, 2010 at 10:44 am

    How do you recover from recession when oil prices are at recession-inducing levels?

    If we are smart, we will do so by putting more effort into the transition away from fossil fuels. They are only going to get harder to find, and we will do more damage to the climate the more of them we burn.

    The future necessarily lies with renewable forms of energy.

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  35. By Benny BND Cole on April 28, 2010 at 5:09 pm

    Not to kick a sleeping dog, but….

    April 27, 2010
    Source: Coskata Inc.

    Coskata Inc., a developer of platform technology for the production of biofuels and biochemicals from biomass and waste materials, today announced that it has closed a round of equity financing. French oil major TOTAL invested in the round and will have a seat on Coskata’s Board of Directors. The proceeds of the financing will support Coskata’s bio-ethanol commercialization activities while ensuring advancement of new product technologies. Also participating in the transaction were a number of Coskata’s prior investors, including Blackstone Cleantech Venture Partners, Khosla Ventures, Advanced Technology Ventures (ATV), Globespan Capital Partners, and Arancia.”

    This puzzles me. RR has a done excellent work in diagnosing Coskata. Yet here we have “sophisticated: investors pouring in money…and some, re-investing, such as Blackstone.

    Has Coskata improved something? Turned the corner on some technology? What gives?

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