Nine years ago I was having a problem with the constant reporting that the world had hit Peak Oil, or was on the verge of it. Reporters were blaming many factors for oil’s soaring price; the large oil reserve discoveries were ending, and third-world countries’ new demand was growing for the quickly shrinking production of crude. Then too, there was the 500-pound gorilla that had entered the room, China. Oil that had gone begging for buyers just six years earlier at $10 a barrel was now selling for nearly five times that amount.
The loudest cheerleader for the coming end of the Oil Age had been our own T. Boone Pickens. He seemed to be appearing on the news almost nightly, warning us that the day of reckoning was nigh.
In the summer of 2005, the U.S. Senate held hearings on oil’s exorbitant prices and concluded that there was no real shortage of crude; the deregulation of the commodities market and the new dark and unregulated exchanges, they found, were primarily driving oil’s steeply climbing price. They missed one key point: Historically, falling, or extremely low key interest rates have always contributed to increased speculation.
Within two months of those Senate hearings, Hurricanes Katrina and Rita hit our Gulf Coast and took out 24 percent of the nation’s refining capability. For the first time in our history, gasoline shot up to $3 a gallon. That sent the auto industry into turmoil for months, until gasoline prices fell back into line.
Deregulated, Commodity Prices Skyrocket
Four months before the Senate released its conclusions on deregulated commodities markets, I was in a private meeting with GM CEO Rick Wagoner, Gary Cowger, president of GM; Bob Lutz, vice chair; Mark LaNeve, head of sales; and John Smith at their headquarters in Detroit. The first thing I told them was that they had a major problem coming their way. GM was on the verge of falling below 25 percent market share in the U.S. And if that happened, the media would start reporting that their corporation would likely end up in bankruptcy — and that could start a downward cycle that would turn the reporting into self-fulfilling prophecy.
Certainly the rising price of gasoline had already been forcing GM, (and others) to put ever larger incentives on its profitable truck and SUV lines, just to keep plants open. By then, although unreported, the automaker’s costs for raw materials for production were climbing rapidly, too.
After reading the Senate Report on speculation I started gathering numbers on oil, including production, export and importation by country. I could find neither any shortage of oil nor anyone’s orders for crude being turned down. By August of 2007, worldwide one could see oil production at near record highs; but one could also see the lower demand for it in falling shipments, not just of crude oil, but of gasoline, diesel and other refined fuels. The price of oil that day was just over $69 a barrel.
Demand for crude oil and refined fuels continued to fall for the next nine months — but, paradoxically, the price of oil skyrocketed, going from $69 a barrel to $148. I wrote about that disconnect in a five-part series for the Star-Telegram and a six-part series for BusinessWeek.
The Pre-Y2K Optimism Boom
Today, with even more data to study, one can easily see why the 1990s were a period in which our economy dramatically expanded; it shows not just in the jobs created and the rising wages, but also in how well the car industry fared in that period. Frankly, the average American family never had it better — and neither did Detroit. We forget that GM stock once sold for $90 a share, such was the faith in Detroit’s ability to make money back then. That decade saw falling prices, or at most minimal price increases, for oil, food and other critical commodities.
In the decade’s worst year of car sales, 1991, Americans bought only 12,539,000 vehicles. Sales had first started falling in 1988, when the Savings and Loan Scandals hit and so many large banks failed. Oil would rise to $40 a barrel because of the first war with Iraq; but its price would fall continuously during the next eight years, bottoming out at only $10 a barrel shortly after the Asian Financial Crisis of 1998. By February1999 gasoline cost 99 cents a gallon.
No wonder SUV and truck sales took off nationwide then. Ford was selling 1 million F Series trucks, matching combined Chevy Silverado and GMC Sierra sales. By 2000 new car sales in America had exceeded 17 million, and manufacturers needed almost zero incentives to lure buyers into showrooms.
Then we deregulated everything.
High Correlation Points to Causation
Two years ago I went to Index Mundi and pulled all of the major commodity prices by year. Then I calculated the price increases during the 10-year period before deregulation and the 10 years after deregulation.
Aviation fuel increased in the 90s from 68 cents a gallon to 86 cents, an increase of 26.4 percent. From January 1, 2001, to January 1, 2012, it jumped from 87 cents to $3.09, a 255.1 percent increase. Gas prices did rise 15 percent in the 90s, but in the next decade they too more than doubled, jumping by 239.7 percent.
Food costs, critical for retaining discretionary monies in family budgets, showed even greater jumps. Coffee prices actually fell by 14.9 percent in the 90s, but they jumped by 270.1 percent over the next decade. Corn fell by 9.1 percent before deregulation, then jumped by 189.3 percent in the next decade, while rice fell by 33.4 percent in the 90s, and went up by 193 percent after deregulation. Beef prices fell by 30.2 percent, then rose by 117.4 percent. Palm oil was down by 13.6 percent in the 90s, up by 423.1 percent the next decade.
Further, as noted, the automakers’ raw materials costs rose, too. Hot rolled steel prices fell during the boom years of the Nineties by 45.5 percent — then rose by 247.8 percent after deregulation. Copper prices fell by 21.6 percent before deregulation, then jumped by 351.1 percent after.
Some airlines went bankrupt, as did Detroit, and analysts placed the blame squarely on China’s rise and the American worker’s greed. But China’s expansion started 25 years ago, not 10; and middle-class wages had actually become stagnant. As I’ve pointed out in numerous columns, China’s importation of oil was rising slower than America’s demand for crude was falling.
The most troubling thing about all of these skyrocketing post-deregulation prices is the Federal Reserve’s stubborn insistence that there is no inflation. The commodities market proves that’s just wrong.
When Supply & Demand Works
The car market continues to recover and will likely top 16.3 million sales again this year; luxury car sales are leading that parade. And we should be thankful to be in Texas, because the booming energy prices spread real wealth throughout our state. That’s what saved our economy in the First and Second Energy Crises, and it keeps Texas from ever experiencing the worst of the downturns that the rest of the nation suffers in bad times.
Also, it’s good news that car sales in California rose by 9 percent in the second quarter, nearly double the national rate. And New York car dealers’ sales numbers continue to astonish many dealers in Texas.
But there was one commodity that completely bucked the trend after deregulation. Natural gas prices rose dramatically in the 90s but, except during two peak years in the following decade, actually fell by 67 percent from 2001 to 2012. Maybe that explains why natural gas promoters appeared on TV every night claiming the Oil Age was ending — they were trying to juice the price.
It’s a shame nobody called them on their bluff.