The negative effects of expensive energy grossly underestimated

[Letsbereal]

The negative effects of expensive energy and raw materials in an economy are substantially underestimated
16 February 2012, by Hans de Geus (RTLZ)
(Org. Only Dutch) http://www.rtl.nl/components/financien/rtlz/redactie/column/degeus/2012/articles/akzonobel-illustratief-voor-doodlopend-verdienmodel-bv-nederland.xml

google trans from Dutch - Commentator Hans de Geus illustrates this with reference to figures Akzo Nobel.


1 billion additional
Short facts about what the annual figures of AkzoNobel, the "cost of sales" took in one year increased from 8.7 to 9.7 billion euros. That also led to a loss in the 4th quarter. Largely, those costs are passed on, and goes one cut on organizational and IT. So at first glance nothing special, more expensive raw materials we already knew, and well that Akzo Nobel thus seems reasonable to collect. But for those who look further than his nose, this is an alarming message. Even if you do not work at Akzo.

Articulated Point
The figures of AkzoNobel are not isolated. We are at a break point in the economic history since the industrial revolution through the application of ever-cheaper energy has led to our current prosperity. See the following graph, derives from the unsurpassed energy bible of David McKay. These are the prices of different forms of energy, expressed in pounds by the year 2000, ie adjusted for inflation. At a glance you can see the real source of 2 centuries of unbridled economic growth, and why at this time to an end: the end of the fall in real energy prices around the year 2000.

Economic growth models
What does mainstream economics here anyway? Very little. Economic classic growth models, such as Solow, recognize the factors capital, labor and technological progress. Put more in production and growth will follow. Apparently assumed that natural resources such as energy and raw materials infinitely available. They are not, we now know, but behind that wall, most economists have not looked. *) "Limits to Growth" of the Club of Rome appeared in 1972. The conclusions even according to a newspaper like the Wall Street Journal still largely intact but the economic science must answer 40 years later still formulating. This makes sense, models are always based on linear movements; sudden break points, we can not model **)

Multiplier
Returning to the example of the annual results of Akzo Nobel in a qualitative sense you can imagine the effect on the economy if everyone is going to behave like them. Costs are passed on and they're cutting back internally. If Akzo model for the economy as a whole, this means fewer staff, fewer orders for outside suppliers. Follow higher unemployment, declining income, and yet cost more for a pot of paint. Everyone reacts to cut too, even less to spend, and so on. The opposite effect is actually of the Keynesian Multiplier that we remember from high school, with a spending boost of 1 Euro a disproportionate impact on economic growth.

Solution?
We are back in the situation of around 1700, before the Industrial Revolution and the use of fossil fuels: the economy runs against the Malthusian limits to natural resources. When in the form of adequate firewood - the woods nearby were empty cut, now in the form of raw materials and fossil energy. Like when we can only break through completely different to produce. How? That is the challenge for the coming decades. There are solutions: energy conservation, recycling of raw materials, a more local economy, renewable energy. And maybe we as a consumer or to a very different situation to get used (how does your life look like without the paint and coatings from Akzo Nobel for advanced cars, planes and cargo ships?). Anyway, the paradigm of eternal similar growth over the past 2 centuries we have temporarily forgotten.

Oil and the Netherlands BV
Unfortunately, Akzo Nobel pretty typical of the dependence of the Netherlands as a whole of raw materials, especially oil. Akzo burning oil not only as a source of energy, but also almost all the paint based on the feedstock oil. Netherlands has a relatively large chemical industry, agriculture and horticulture are also energy-intensive sectors. Our position as a trading and logistics main port, with aviation and shipping, of course, extremely sensitive to high energy costs. We are nicely done with it, given the structural break point in energy prices, and a cabinet that this huge economic risk completely overlooked.

[Letsbereal]

Presenting The Goldman Wall Of Worry, And The One Key Item Missing
19 February 2012, by Tyler Durden (Zero Hedge)
http://www.zerohedge.com/news/presenting-goldman-wall-worry-and-one-key-item-missing

Excerpt:

Oddly enough, one very crucial item missing is once again surging inflation courtesy of trillions in stealthy central banks reliquification, sending crude to the highest since May 2011, and the most expensive gas price in January on record.

That this has somehow failed to penetrate investors’ skulls shows just how erroneously transfixed the market is that Bernanke has inflation, or rather deflation, under control.

As WTI passes $105 in the next few hours, look for Op-Eds lamenting the hundreds of billions in lost purchasing power that have already more than offset the benefit from extended tax cuts.

Alas, as noted previously, the central bank tsunami is only just starting. Watch for inflation, and concerns thereof, to slowly seep into everything.

[Letsbereal]

Reminder:

Rickards: 2% public FED inflation target is fake – Real inflation target is 4%-6%

Listen to: Jim Rickards, Saturday, January 28, 2012 on KWN – AUDIO http://kingworldnews.com/kingworldnews/Broadcast/Entries/2012/1/28_Jim_Rickards.html

Also see:

Don't Be Fooled, Inflation Is Already Here http://forum.prisonplanet.com/index.php?topic=194775.msg1343470#msg1343470

[fred.greek]

A general factoid is that the US industrial farming system takes 10 calories of fossil fuel energy for every 1 calorie of food value that makes it to your plate. 

A gallon of gasoline contains around 36,000 food calories.  If the peak oil commentators are right then to produce 2,000 calories of food requires  the use of 20,000 calories of oil.  (55% of a gallon) 

[Letsbereal]

The oil and gas conundrum - Oil prices could derail the U.S. recovery
21 February 2012, by Irwin Kellner - Port Washington, N.Y. (MarketWatch)
http://www.marketwatch.com/story/the-oil-and-gas-conundrum-2012-02-21

When it comes to prices of oil and gasoline, the law of supply and demand does not seem to apply.

As I am sure everyone knows by now, crude oil prices are skyrocketing.

Since last September alone, the price of a barrel of oil consumed in the United States has soared by a thumping 34%.

As a consequence, prices of such petroleum-based products as heating oil and gasoline have jumped sharply in recent months,

with industry sources predicting that gasoline prices may surpass their previous peaks within the next few months — well before the driving season is in full swing.

Not surprisingly, these increases are threatening the nascent recovery just when it appeared to be gathering steam. To many, this is déjà vu all over again.

Two years ago, the recovery slowed because of a combination of Europe’s debt crisis, the waning effects of the previous year’s stimulus and weakness in the housing market.

Last year around this time, the economy got the wind knocked out of it by three unexpected developments: the harsh winter, turmoil in the Middle East and the earthquake and tsunami in Japan.

And while housing remained problematic, Europe’s debt problems morphed into a crisis of confidence in the euro.

Now, besides the lingering effects of housing and the euro, the recovery appears to be once again threatened by a jump in oil prices.

This is particularly ironic, since supplies are up while demand is down. On the supply side, there is no shortage of oil.

Industry people say there is plenty of oil in storage tanks, on ships waiting to be delivered and in pipelines both here and abroad.

As for demand, usage of heating oil is down because of the extremely mild winter experienced in the northeast quadrant of the U.S. This is the section of the country that uses the most heating oil.

Meanwhile, higher prices and the lingering effects of the recession have sent gasoline use down year-over-year for the past three years. People are driving less, as well as buying more fuel-efficient vehicles.


Oil prices hit multi-month high

The price of oil rises as tensions over Iran escalate further.

However, when it comes to household budgets, the rise in gasoline prices has more than offset the drop in usage.

Last year, motorists spent $4,000 at the pump, which amounted to 8% of household incomes — twice as much as the 4% they spent in 2002.

It figures to go even higher this year.

Like prices of many other commodities, including stocks, the price of oil many times reflects traders’ expectations of future events more than what is happening in the present.

And when they look ahead, traders are apparently pricing in a complete cessation of supplies from Iran, not to mention other stoppages because of a possible blockade of the Strait of Hormuz.

As for gasoline, traders expect tight supplies later this year because of anticipated refinery closings and the need to produce gasoline that meets air-pollution requirements.

Since oil is such an important commodity, used not only for heat and power but to generate electricity and as a feedstock in the production of plastics and clothing,

any combination of high prices and reduced supplies could produce a crude awakening, when it comes to the sustainability of the economic recovery.