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Kicking our Oil Addiction

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Oil and Economic Collapse—The Trillion Dollar per Year Question

December 1st 2008

Energy / Environment - Oil Barrels

By the time the dust settles and the numbers are collected for 2008, it will become crystal clear that a central reason we are at the point of economic collapse is our addiction to oil. In the first half of this year, while gasoline prices were soaring, the US economy lost $500 billion diverted to oil imports.

What does $500 billion really mean? That sum is as large as America’s basic defense budget and about 100 times the size of GM’s current assets? With $500 billion, Washington could purchase almost all property that slipped into foreclosure this year, or enough to make payments on all currently delinquent mortgages for the next 5 years? Many may quip, "But our economy is so big."

Compare our oil expense to the money America is spending on the war in Iraq or our funding of health care. There is a marked difference. Money we spend on our armed forces and on health care, for the most part, remains inside our economy. Indeed, many look at the war in Iraq as a giant wealth distribution system. The wealthy taxpayers are paying for the soldiers and for the factory workers that make the bullets, guns and bombs. Yes, there is a lot of waste, as well as direct investments overseas. But in principle most of the money stays on US shores. With oil, that is not the case. That $500B is gone, permanently bled out of our economy.

In the past, the nation has paid for such bleeding by creating concomitant growth. But this year, our oil expenses were almost double the growth in GDP. This means that none of the growth in the economy went to prosperity. All of it and more went to pay for our oil addition.

It is not a surprise that the collapse of the housing market coincided with record oil prices. Almost 20 years ago, a little known economist named Osama Bin Laden predicted that at $140 a barrel the market economy will collapse. Guess what: it did.

But that is not all. We are witnessing the largest wealth transfer in history. When our money leaves our economy it does not just go "poof." It lines the pockets of the oil producing countries. What do these countries do with trillions of petro-dollars collected each year?

Clearly, some is spent on pork belly projects like building a giant palm island in the Persian Gulf. A percentage sponsors pet terror organizations such as Hamas and Hezbollah via charitable donations to questionable foundations. But even after all these expenses, about 70 percent of oil revenues remain as retained profits. What do the oil producers do with all that money? They do what every monied organization does—invest the money. In other words, they buy assets. And as the world economy is slowing down, assets are getting cheaper to buy.

We can see a syndrome. As long as we have the oil liability on our books, as the price of oil goes up, our economy will stumble. As the economy slows down, the stock market bottoms, and our assets become less expensive to buy. Our cash-strapped companies then invite the owners of petrodollars to "help" with their liquidity problems. From that point, the distance between American ownership of the S&P 500 and petrodollar ownership of those companies is surprisingly short. It is all done openly and legally, sub-rosa or through overseas investment funds.

"But" many might say, "The price of oil is going down. We no longer need to worry." It seems that we need to look at this breakdown in oil price as a grace period. Yes, the price of oil has temporarily gone down—but only temporarily. There is no doubt that the long term trend is higher. The unprecedented economic stimuli we have seen in the last few months will eventually generate inflation that will once again cause oil prices to rise. Demand in China, although slowing, is still growing. The OPEC countries are as determined as ever to control supply. A geopolitical event in the Middle East might cause major oil disruption, including the potential blockage of the Strait of Hormuz. Our existing Western hemisphere sources of oil—Canada, Mexico, Venezuela and our own oil production—are steadily declining due to economic, political and geophysical reasons.

If we want to avoid major economical meltdown and the specter of a Third World War, we have to stop the bleeding. We need to create a cap on oil prices by opening the petroleum market to competition. Alcohol fuels, CNG, electric, hydrogen, the Open Fuel Standard, multi-fuel engines and many other alternatives—these are the competitors of petroleum. These will help us restore our economic independence.

Eyal Aronoff is an energy commentator and a member of Set America Free.


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