Setting ourselves up for economic collapse

In January last year, while shadow chancellor, George Osborne said that the lesson of the credit crunch is that “the economy must never again be allowed to become so structurally unbalanced and poorly prepared for a downturn.” He was referring to our national over-reliance on the banking sector, which had made a few too many dodgy investments in the United States. But the credit crunch reveals that there is something else that our economy is disastrously reliant upon, and the Royal Mail shows that we are only ever becoming more reliant upon it.

The banking crisis was caused by banks having lent too much money to too many people who couldn’t afford to pay it back. But why couldn’t they afford to pay it back? Because all through 2007 the price of oil climbed relentlessly, breaking US$130 in the summer of 2008, just as everything was starting to collapse. In the good times, Americans had bought a house and his-n-hers SUVs on cheap mortgages and loans. They made hay while the gas was $2/gallon. In 2007 it hung around $3/gallon, and in summer 2008 it broke $4/gallon. People found themselves paying twice what they had planned for transport, and suddenly they couldn’t pay their mortgages and loans.

But the recession was more than just the banking crisis. It didn’t help borrowers that the high fuel costs were pushing up inflation and interest rates. But it also didn’t help that the fuel costs were beginning to destroy businesses and put people out of work. Partly that was because, to keep their cars running, people were tightening their belts and not spending on the luxuries.  But partly it was because a lot of businesses, just able to scrap by in the good times, were built on cheap transport, and when transport turned out not to be a cheap as planned, those businesses collapsed.

The banking crisis was just a symptom of a recession caused by a global economy that is over-reliant on an unstable resource. The bankers failed to see the crisis coming (or saw it but saw no reason to do anything about it). But anybody who was looking at oil prices saw it. Recessions follow oil shocks like day follows night.

Our economy is dangerously unbalanced and poorly prepared for the inevitable oil shocks to come, shocks which are becoming ever more frequent as we pass peak production and head into decline. Too many businesses and too many jobs are built on a needlessly wasteful use of road transport. The short-sighted business world seems to think that the recurring cost of outsourcing tasks to companies who will drive stuff around is better business than making a one-off investment in the infrastructure that will allow them to do things themselves — the now routine practice of hotels outsourcing laundry being one of the more absurd results of artificially low road transport costs.

This week I was followed on twitter by @EdgarsCoolWater, who advised that anybody who wants water should check their website, where they could order a delivery. I boasted that I already have water, for my house features the ingenious invention plumbing. Edgar replied that some people in London and the South East aren’t so lucky. I can only conclude that some businesses would rather pay a weekly charge for water to be driven to them than the one-off investment in running water.

This is as much a bubble as the banking bubble. Some time soon the oil price will spike, the diesel price will jump again, and Edgar will have to pass on his costs to customers. Businesses that are already operating on the edge of profitability will cut jobs and go under.

What’s George Osborne doing about that? Anything?

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7 responses to “Setting ourselves up for economic collapse

  1. The scary (perhaps exciting) thing will be seeing the large supermarkets being forced to put up prices and/or go out of business. They currently have very large numbers of lorries on the roads, transporting food and other goods to and from massive regional distribution centres. We should see a renaissance of local shops, as it becomes too expensive to transport goods (and customers) from any distance away.

    • I don’t mean to defend supermarkets here, but what is the difference between a supermarket getting their deliveries in, and a local shop getting their deliveries in? In fact, because of their economies of scale, supermarkets would probably have to put up their prices less than local shops. A few massive lorries delivering to a few supermarkets are more efficient than lots of vans delivering to lots of little shops. The problem is more that supermarkets are usually out of town, so you need a car to go there, do a massive weekly shop and bring it back home, adding the cost of a car to the cost of shopping, and adding congestion (which costs as well). However, those costs are externalised to you by the supermarket, whereas most are internalised by the local shop you can walk to. I’d love to be shown wrong on this though, I really like local shops!

  2. I can only conclude that some businesses would rather pay a weekly charge for water to be driven to them than the one-off investment in running water.

    The one-off investment they think they need to make (well, they they are avoiding needing to make) is for water softening and filtering. London and the SE is widely believed to have undrinkable water (presumably by people used to drinking bottled water shipped in from other places, or by people who have moved to the area). Personally I’m more than happy to drink tap water anywhere in the UK, and thus fail to understand this contention, but perhaps people who care about the taste of water might suggest changes to the treatment of drinking water that would encourage more people to think of London water as drinkable.

  3. Total’s view on future oil production;

    http://www.theoildrum.com/node/8001

    “When I was thinking about the highly technical and huge investments needed, it is sure that the time of cheap oil is finished and has been for some time. It is something which is absolutely obvious, and the low-cost cheap oil is only remaining in OPEC countries in the Middle East…there are all these more technical oils such as deepwater, extra heavy oil, arctic oil, which can be produced but only when the price is right, and which depends on the law of offer, supply and demand, due to which oil demand is very important”

    The breakeven costs chart is particularly interesting. Getting people to use less, and urgently, should be a priority.

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