Economy and Energy Disconnect

The stock market keeps reaching for record territory despite signs that things are not great for most Americans. We had high oil prices last summer driven by fears, we're told, during the Lebanon crisis. After the crisis passed, and gasoline prices conveniently dropped in time for the 2002 mid-term elections, oil managed to reach a low of $51/barrel in January. However, since January, we've been hearing different stories, including refinery problems, as the price of oil has jumped 50%. Here's the latest on oil and gasoline prices in an AP story carried by the San Diego Union Tribune:

Gas prices fell more than a cent overnight, and gas and oil futures closed mixed on Thursday as investors tried to decipher a confusing picture of domestic gasoline production.

Oil briefly hit $76 a barrel for the first time in 11 months.

Gas futures stalled a day after they rose 9 cents a gallon on a surprise decline in inventories....

Last year and the year before, high energy and oil prices were very much in the news but now, most days, there seems to be less coverage of an energy problem that is clearly not getting better. Here's a New York Times article on a report that just came out and the bleak picture painted by the article may, in fact, be somewhat sugar-coated:

Because the world’s population is growing and living standards are rising worldwide, energy consumption globally is expected to rise by more than 50 percent over the next 25 years. But finding supplies to match that growth is going to be increasingly tough, and will require vast new investments in coming decades.

The council’s report warns of “accumulating risks” to energy production, including rising geopolitical barriers, inflation in costs, dwindling petroleum engineers, and growing constraints on carbon dioxide emissions. Although it does not say so explicitly, the subtext of the council’s study suggests that high energy prices might be here to stay.

The study’s release comes as frustrations grow over high energy costs and questions are raised over the security of the nation’s energy supplies. Congress is currently considering a new law to boost the development of alternative fuels and increase vehicle fuel efficiency.

My concern is that despite the warnings, the energy sector may be painting too rosy a picture of getting energy supplies. There is also talk of big energy projects that in reality may not be adequate to sustain the kind of living conditions we've come to enjoy in recent decades. And there's a bit of deception going on. "Energy production," for example, is not the same as oil production and definitely not the same as the production of light sweet crude. We're already in a different era and we have too many people in business and government who want to continue business as usual. Switching to coal with all its pollution problems won't be a step forward without some major changes that are not even on the drawing boards. We need a major program to make sure we really do have an energy future.

But we also need to recognize that we're developing an economy that is dangerously close to relegating most Americans as irrelevant. The stock market goes up and yet the lives of most Americans are becoming more difficult and their concerns are not heard by many in Washington, particularly in the White House, though it may be the Supreme Court that is becoming a long term problem with real consequences for the lives of ordinary Americans.

With food and energy prices rising, mainstream economists are still pleased that inflation is under control and only rising at modest levels. Of course, some measures of inflation no longer include food and energy. Here's an AP story in The Washington Post that includes a less rosy picture near the end:

Bernanke defended the Fed's use of core inflation rather than the overall inflation figure, which includes energy and food. He said the core figure was a better gauge of underlying inflation trends and more useful in forecasting.

Private economists, however, said that explanation probably would offer little comfort to people struggling to pay their gas and grocery bills.

"There is a growing gap between how the Fed and investors see inflation and how the average American feels about it," said Mark Zandi, chief economist at Moody's Economy.com.

Amen.