The year everything changed

Ian Verrender
Sydney Morning Herald
July 5, 2008

The stormclouds are gathering. Our market has plunged below 5000 for the first time in two years, oil prices are soaring, America is in (unofficial) recession and the Reserve Bank is clearly worried about the home front.

After years of partying, many believe it's time for the inevitable hangover when gloom and doom replace the exuberant optimism that just a few months ago seemed as though it would never end.

But how much of this is just another cyclical downturn and how much of it is related to a more permanent shift?

I'm going to go out on a limb here with a couple of bold predictions. I think we are at a pivotal point in history; that we are witnessing the early stages of a massive shift in the global economy, in the balance of power and in the way we live.

Australia has become a barometer for these far-reaching changes. We are being pulled in opposite directions as we send vast quantities of resources off to China while a virus that started on Wall Street and spread across the US and Europe has infected our financial system.

In years to come, it's quite probable we will look back at 2008 as the year in which everything changed. And most of the changes being wrought upon us relate to energy, our use of it and its cost.

There are several powerful forces at work at the moment; some cyclical and some far more fundamental.

Let's look at the cyclical ones first. The worst credit squeeze in history is under way. Given it follows the biggest debt binge the world has ever seen, it's not surprising. On top of that we have a recession under way in the US.

On their own, those events are not particularly worrying. Markets and economies go up. And then they go down. What is worrying, however, is that in the early stages of a recession, Wall Street's biggest financial institutions already have been forced to go cap in hand to the Middle East and Asia for emergency funding.

And that's where we come to the more fundamental and permanent changes at work on the global economy.

What is happening in China and, to a lesser extent, India is akin to what occurred in North America in the 19th century. Back then, the balance of economic power shifted from the Old World to the New World. It's happening again now.

There are differences - vast differences - in this new shift. Unlike the rise of North America, China and India already have vast populations. And as these populations move rapidly from Third World to First World, they will demand more resources, to live the lifestyle we enjoy.

Until recently, both these nations were low-cost exporters, providing cheap manufactures to the West. In reality, their main export was low inflation as our clothing and electronic goods became ever cheaper.

Now they are becoming self-sufficient economies - similar to the US. Their own economies are fuelling their growth and they are becoming less reliant on exports.

Tom Albanese, the head of the mining giant Rio Tinto, doesn't exactly see eye to eye with BHP Billiton's chief executive Marius Kloppers on much.

But the one thing they do agree on is China. Both see continued strong economic growth for years, and even stronger growth in the appetite for metals.

Metals are one thing. The real change being wrought on us is in energy. And it is energy - or rather the cost of energy - that will determine our future.

It was energy that started the Industrial Revolution 200 years ago - when we first started burning hydrocarbons in the form of coal. And it was energy, in the form of oil, that sparked the transport revolution a century ago.

You'd have to be blind not to notice what is going on now. It's all over the news, it hits you in the hip pocket every time you pull in at the petrol pump.

Pfff, we've had oil price spikes before, I hear you say. But the oil price shocks of the 1970s were caused by an artificial restriction of supply. This time around, the spike is being driven by demand. And if you ask any seasoned oil explorer, even they now talk about peak oil being just a few years off.

Peak oil is the point where we are on the downhill run in known supplies. There is still oil out there. But it is in ever deeper water, in more politically unstable areas or in tar sands where the cost of extraction has been so high it has been uneconomic. Some of it will be developed, which will stabilise prices and perhaps even push prices temporarily lower. But supplies are finite and demand is soaring.

Think about our energy use in the West. Take an average Australian of a century ago and compare him or her with us in terms of our energy consumption. We've got electricity on tap, 24 hours a day. We ride around in fast fuel-guzzling cars. We leave home and land in Los Angeles in 16 hours.

Until recently, several billion Chinese lived as we did a century ago. Imagine their energy demands rising to our levels and you'll quickly figure oil prices aren't going to return to the levels of a year ago.

Add to that the damage we are doing to the environment in the form of greenhouse gas emissions and the extra costs of pricing that damage through carbon trading.

So is this the ultimate disaster scenario?

Not necessarily, according to a recent issue of The Economist. Higher oil prices make alternative energy sources more viable - biofuels, solar and wind power. And if money and expertise are invested in those areas, they will become more efficient, more economic and maybe, just maybe, lead to a bright future. But prepare for a lot of pain along the way.

This story was found at: http://business.smh.com.au/the-year-everything-changed-20080704-31u6.html