Laying the Foundations for a Post-Oil Age Economy

Includes: DIA, IYR, OIL, QQQ, SPY
by: Jake Huneycutt

For years, Americans allowed themselves to be convinced by mis-truths parroted by politicians and the National Association of Realtors that an economy based on home building and sprawl could thrive permanently. Just like the deluded investors in the Roaring Twenties who convinced themselves that stocks could go up forever, people became convinced that home values could see dramatic appreciations in value for the rest of time, with no negative side effects.

However, the myth of American economic infallibility has been destroyed over the past two years. Now, Americans suddenly find themselves reexamining the situation. In truth, this might only be the beginning of America’s economic decline as this nation is not built to thrive in a resource constrained world.

You may believe I’m another doom and gloom prophet. Maybe I am in one sense as I believe the American economy is poorly equipped to deal with the challenges of the 21st century.

At the same time, I do believe there are solutions to our economic malaise and the longer we fail to deal with the underlying problems in our economic structure, the more we’ll fall behind the rest of the world. It’s just a matter of convincing people to change the way things work; which if history is any indication, is always difficult, but never impossible.

In 1776, Adam Smith wrote The Wealth of Nations, an economic treatise arguing in favor of “free market” principles and in opposition to the mercantilistic views that were dominant at the time.

Smith’s work has been quoted, misquoted, cited, and distorted numerous times in the 233 years since its publication. I have no intention of discussing the nuances of Smith’s views or providing detailed thoughts on his analysis in this piece; rather, I simply point to the one guiding principle behind Smith’s work: increasing economic efficiency.

That should be the ultimate goal, since greater economic efficiencies will result in greater wealth for the most people. While we have numerous economic problems right now, we have almost completely ignored one of the greatest inefficiencies in our society: sprawl.

The Sprawlipolitan Nightmare

If you’ve ever taken a look at maps from some of Europe’s greatest cities in the 18th and 19th centuries, you’ll notice the very thorough urban planning almost immediately. The great European cities that were at the center of world power were not haphazardly put together; nor were the early American cities. New York City and Baltimore are two examples of thriving American cities where one can still see a planned out design and structure.

However, the nature of American metropolitan planning changed dramatically after the 1950s. Suburbs began to sprawl dozens of miles outwards from major city cores with little coherence or thought-out design, eventually dramatically reducing American efficiency. The reasoning as to how sprawl creates inefficiencies is quite simple: greater distances between housing centers and work centers results in a greater use of resources. Greater uses of resources create economic inefficiency.

Due to our development patterns, we use more oil to travel to work, the grocery store, friends’ houses, and go out to the movies. We use more energy to power the infrastructure to build and sustain the sprawled out suburbs. In fact, the average American uses nearly twice as much energy as the average European.

However, if you believe it stops there, you’d be dead wrong. Sprawl raises our costs of living in many other ways that we don’t often think about. Sprawl means we have to pay more taxes to construct and maintain the road and highway system needed to service these suburbs. We pay more taxes for emergency services that are spread out over a larger area. We pay higher prices for goods as an indirect result of higher energy costs that drive prices upwards.

We may not notice these things on a day-to-day basis, but it stands to reason that sprawl imposes significant costs on a societal-wide scale that hinders America’s ability to compete with the rest of the world.

If that were not enough, sprawl has helped destroyed one of the things that previously defined America: a sense of community. Sprawled our suburbs isolate us and make it more difficult for us to develop close friendships with many people. It makes it more difficult to sustain major cultural institutions. It leaves us alienated from the world around us. If sprawl imposes very real economic costs on our society, it also creates significant quality-of-life issues and creates considerable constraints on the liveliness of our own culture, which was envied by everyone around us.

America’s Advantages

Fortunately, despite these major issues, America’s advantages have helped us overcome our disadvantages over the past half century. There are very few societies on Earth as free and open as ours and, undoubtedly, that has helped foster a spirit of creativity and ingenuity that has made the American economy the strongest in the world and has lured countless number of dreamers from foreign lands onto our shores.

We originated a system of public financial reporting (via the SEC Acts of 1933 and ’34) that has helped decrease the level of uncertainty for investors and has helped drive costs of capital down. It made America the safest country in the world to invest in and a haven for capital in the latter part of the 21st century.

The merits of that system should become clear when we see scandals involving highly secretive, private investment firms such as the one run by Bernie Madoff. Madoff was able to perpetrate his Ponzi scheme for decades largely because there was no significant public oversight. In a sense, our public reporting system is like an accounting version of “open source” software, and while there will be bugs in it occasionally, so long as it’s out in the open, people will find it, inform others, and try to correct the situation.

We are also a nation blessed with diverse and plentiful resources and we have a highly educated population. With the exception of China, there are not too many nations that could sustain themselves even in a worst-case scenario where all imports were cut off. We have agriculture, we have minerals, we have manufacturing, and just about anything else we could possibly need in a jam.

Despite these advantages, the rest of the world is catching up to us quickly. As tends to be the case throughout history, when one society has success, others try to mimic it. Inevitably many succeed. It’s no surprise that people in certain parts of the globe, notably Eastern Europe and China have admired America and have sought to learn from us. If we want to maintain our position in the world, it will be necessary to orient our economy towards the future and evidence suggests we are heading towards a resource-constrained world with higher and higher extraction costs. Minimizing energy usage, waste, and maximizing efficiency will be the keys to improving the quality of life.

Minimizing Energy and Resource Usage

If the problem is limited resources and increasingly higher costs of extraction, then the logical solution is to find ways to minimize usage of those resources. America’s great dilemma is that over the past 60 or 70 years, we have built our infrastructure based on the flawed assumption that cheap oil would be plentiful for the foreseeable future. That myth was briefly shattered in the 1970s, before America seemed to have revived the tall tale of eternally cheap oil once again in the ‘90s and ‘00s.

In the late ‘90s, motorists were able to find gasoline as cheap as 80 cents per gallon at one point. Even the greatest demand destruction event in most of our lifetimes was only able to beat the price back down to about $1.50 per gallon at the height of the market collapse in November ’08.

Given this, it’s probably safe to say we won’t be revisiting the heyday of the late ‘90s any time soon. At $50 - $60 per barrel, most of us believe that oil is relatively cheap. When you consider that oil can manage to stay that high despite extremely suppressed demand levels, it becomes clear just how costly our heavy usage of this fossil fuel has become and it’s only going to get worse as emerging economies such as China and India continue to increase their oil consumption.

At this point in time, the American economy might be facing a giant Catch-22. It can only thrive over the long-run with inexpensive oil. Yet, oil is only inexpensive when demand is suppressed in a depressionary or severe recessionary environment. The only real solution is to free ourselves from this paradigm and decrease our energy consumption. The question is, how do we best achieve that?

There are several areas where I believe the nation can begin to promote more efficient energy usage and my goal with this blog will largely be to explore many of these areas. My primary targets are:

  1. Expansion of public transportation and high-speed rail systems
  2. Transportation policies that reward the most efficient users
  3. Economic policies that promote upward, urban development

There are certainly other areas where we can decrease energy consumption and alternative energy technologies can allow us to reduce dependence on foreign oil, but I want to focus on the areas that I believe provide the most significant advantages that are often overlooked. In fact, many of the issues I wish to highlight deal with things that are simply taken for granted.

Disclosures: None