Chances are you’ll see China or the Philippines written on the shirt collar.
The United States imports more than it exports. The trade deficit
reached a record $617.1 billion in 2005.
Consumer spending accounts for two-thirds of the nation’s economic
activity. That spending, though, left Americans’ savings rate—savings as
a percentage of after-tax income—at 1.2 percent in 2004, the lowest since
1934. That means an increase in gasoline prices hit most people really
hard in the wallet.
And don’t even think there will be adequate alternative fuel when we
finally run out of oil. We have got used to a type of lifestyle made easier
by cheap oil, and we assume that by the time oil runs out, oil companies
will have found some replacement. The reasoning goes this way, “We are
an innovative people by nature and we always come up with solutions to
the world’s difficult problems.”
Here’s my favorite solution to the problem as espoused by TV experts:
“We can use hybrid cars and hydrogen-powered machines.” I don’t buy
that, and so shouldn’t you. Remember, the previous oil shocks of 1973
and 1979 were man-made crises that had an easy answer—i.e., just pump
more oil supply to the market. Those crises were political to the extent
that Islamic governments in the Middle East were using their oil to score
a political point against the West.
In response, our government started buying oil in the open market and
keeping it in storage for a rainy day. The result was the creation of the US
Strategic Petroleum Reserve (SPR), which is managed by the Department
of Energy. SPR has storage tanks in Louisiana and Texas, but they can only
carry a maximum of 700 million barrels, enough to last us slightly more
than one month in case all other sources of supply are interrupted. We also
have a heating oil reserve in the Northeast—enough to last ten days.
Are you kidding me? That’s not enough in case of a serious long-term
supply problem.
Other countries are doing the same. China has just established an
emergency oil reserve that will store 100 to 150 million barrels by 2008,
enough to cover 30 days of refinery demand. By 2010, China expects that
it will have expanded its SPR capacity to 300 million barrels. That additional
Chinese demand for oil will put extra pressure on the world’s already
thin supply system.
The oil market pressures are also partly fundamentally driven. They
are market-inspired changes that we all appreciate as free marketers. But
10 INTRODUCTION