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March 25, 2008

The Problem With Oil

We keep using more of it. The price keeps increasing. And the declining value of the dollar is making it even more expensive.

Aside from the environmental impact of extracting, refining, and burning oil, the financial impact of it is devastating. The US is practically giving itself away.

A lot of money is going to countries that don’t particularly share our values and interests – they just happen to be sitting on large deposits of the thing we’re addicted to. Combine that with the money that is flowing out to all the other nations that we have trade deficits with and basically we are selling the bricks of this house for firewood.

The irony of the situation is that the ingenuity and hard work of generations of Americans are being squandered away to support the oil (and other consumption) habit and transferring wealth to other nations, many of whom don’t have stellar records of achievement and don’t have much to offer in return. Yet they are buying up US assets at an unprecedented rate.

According to the US Bureau of Economic Analysis the net international investment position of the US went from 164.8 billion in 1976 to -2,540 billion (-2.54 trillion) in 2006. Roughly speaking we spent $2.7 trillion dollars more than we had.

Meanwhile, the US Energy Information Administration estimates that between 1955 and 2006 US importation of oil went from 880,000 to 12,278,000 barrels per day. That averages out to a 5.3% compounded annual increase. Even worse the price went from $1 per barrel in 1970 to $74 in 2006, and as of now we’re looking at the $110 range.

That means the US spent less than $1M per day for imported oil in 1970. But by 2006 it was spending $900M. Unless inflation has been running over 20% every year (it wasn’t), spending on oil is spiraling up. One look at this graph and it’s clear why the issue of sustainability is front and center now.

Aside from the slimmest chance of a miraculous breakthrough in technology, there really are no other options but to conserve massive amounts of energy and switch to environmentally sound sources.

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