Most of us have heard the story of the farmer who bought a mule from a mule dealer. When he got it back to the farm he found that the animal would not obey any command: giddyap, whoa, gee or haw.  So he took it to the mule dealer and demanded his money back. "You just don’t know how to manage him," said the dealer, who promptly picked up a two-by-four and hit the mule over the head. "The first thing you’ve got to do," explained the dealer, "is to get his attention."

Apparently the attention of most Americans has finally been captured by the rising prices of gasoline, heating oil, food, natural gas, plastics, metals and most everyday commodities. Until now, the driving public has sucked up and paid up as gasoline prices rose through the $2.00 level, then through the $3.00 level and now through the $4.00 level, on the way to $5.00 per gallon; $6.00 gasoline no longer seems so distant or improbable.

The basic energy problem is that the world’s current supply of oil is approximately 87 million barrels per day (bpd) and the total global production of oil has peaked at about 85 million bpd. Of this amount the United States imports 10 million bpd against a domestic demand of 23 million bpd.

Brazil’s national oil company, Petrobras, has stirred hope that its new off-shore field discoveries, Tupi and Carioca, may be potential sources of enough new oil that  the U.S can be relieved of its dependency on mid-east oil. Estimated reserves from these two sources range from 8 to 33 billion barrels. These oil deposits, however, are 9,000 feet below the surface of the ocean. It will take many years and many dollars to retrieve this oil.

An often overlooked factor in the supply/demand equation is the increasing oil consumption by the mid- east companies themselves. The economies of Saudi Arabia, Oman, Egypt, Qatar, Bahrain, Kuwait and the United Arab Emirates have grown 7% annually since 2002. The average income for the citizens of these countries has reached $19,000, which is 3 times that of China.  Because all mid-east countries heavily subsidize the price of oil and gasoline, it is very likely that these countries with expanding economies and expanding personal income will consume much more – not less – oil in the future. A full one-third of oil their consumption now goes to produce electricity for air conditioning. Add this to the increased demand from China and India and there is no question that oil prices will continue to rise. The fundamental cause of higher energy prices is attributable to excess demand oversupply.
Look for $175/bbl by January 1, 2009.

Meanwhile, the United States has no coherent energy policy other than to:
>    shift 33% of its corn crop to ethanol production,
>    bar the importation of ethanol
>    subsidize domestic ethanol supply at the rate of 0.45¢ per gallon
>    prevent drilling in the Gulf of Mexico and coastal waters
>    prevent drilling in the Arctic National Wildlife Preserve (ANWR)
>    discourage the construction of new refinery faculties
>    block the construction of nuclear facilities
>    propose higher taxes on oil companies
>    propose "cap and swap" legislation which would add a tax to U.S. manufacturers based on carbon
emissions and redistribute the tax money to companies involved in alternative fuels as determined by
the federal government,
and, according to Rep. Maxine Waters (D-CA) threaten to nationalize the oil companies.

The other key factor that results in higher across-the-board prices is the debasement of the US dollar. The dollar has lost 7% of its value so far in 2008 alone and 40% of its value since 2001.

The root problem of the dollar’s decline is that the U.S. Treasury continues to print fiat currency at a rate 17%  greater than that of the same period in 2007. It is simply "no problem" to the U.S. Congress to issue a $170B "economic stimulus package" when all they need to do is to turn on the printing press. The estimated budget shortfall (overspending) in 2008 is $420B, excluding the $250B-$300B to support the Iraq and Afghanistan wars. The majority of Congress has "no problem" in passing a $350B Farm Bill which includes $35B in payments to farmers not to grow commodity crops – at a time when the world is experiencing a dire food shortage and US farmers’ profits are at an all-time high. Spend, spend, and spend.

Foreign holders of US petrodollars ($1.3 Trillion) now show signs of moving away from the dollar. Kuwait and Iran no longer accept dollars in payment for oil.  China, India, Saudi Arabia, Canada and other countries have now formed sovereign banks that will invest their petrodollars in assets other than US Treasury securities. The U.S. will be forced to raise taxes to cover budget deficits.

The government’s script is now to blame the problems on anything but the true cause:  the weather, hurricanes, terrorism, OPEC, Wall Street, etc., etc.  Voices in Congress even now are clamoring for a law to prevent the public from investing in commodity futures, as though investing in commodity futures is the cause of commodity inflation. Such a law will not prevent investors buying and selling commodity futures; it will drive this business offshore to London, Abu Dhabi,  Hong Kong, Tokyo and other financial centers around the world. Instead of trading in dollars, these transactions will be done in a replacement currency, and we could expect to see a greater decline in the value of the dollar.

The greatest problem the imperiled middle class now faces is to find a way to shelter what savings they may have left from forthcoming higher taxes and inflation which can only intensify until the breaking point – a depression – is reached.

I remain fascinated by the extraordinary parallel between Ayn Rand’s Atlas Shrugged and the path of the economic decline of the United States. Where is John Galt?

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
John Maynard Keynes