Crisis or Slowdown?

U.S. Energy Secretary Spencer Abraham announced recently that the country's energy problems were having a negative effect upon the U.S. economy. "This nation's last three recessions have all been tied to rising energy prices - and there is strong evidence the latest crisis is already having a negative effect," Abraham said.¹

The bad news was hailed by Democrats as a political ploy to create popular demand for Bush's tax-cut plan, as well as his proposal for oil drilling in the Alaskan Arctic National Wildlife Refuge.² So what is the truth? Are we facing an energy and an economic crisis or is this just a bump in the road being exploited by politicians to further an agenda? To sort out the truth from the rhetoric it is necessary to examine the broader picture.

The Energy Picture

First, let's examine the details of the current energy problems. The most obvious problem is the California electric shortages. The state has now experienced blackouts lasting up to four hours. Previous blackouts were only half that time. These energy-saving measures were ordered for many areas in Northern California, and for the first time reached as far south as San Diego. Nearly one million customers were affected - and we have yet to reach peak demand, which arrives with the summer heat. The blackouts were ordered because of higher demand levels caused by at least three factors: a warm snap, less power from the Northwest, and a transformer fire at a Southern California plant. Officials also blamed idled plants, which couldn't afford to buy the natural gas they needed to operate.³

California's problems are the result of a botched government deregulation and a failure to allow the building of new power plants. However, Energy Secretary Abraham has suggested that power shortages could spread to other areas as well. New York, the Midwest, the Southwest and the central U.S. could all face similar problems in the near future. White House spokesman Ari Fleischer said, "Everywhere you look across the energy grid there are problems."⁴

The energy problem does not stop with electricity; natural gas and crude oil prices are expected to remain high. Abraham said in a speech, "Americans across the nation are feeling the energy squeeze. Rising demand, tightening supplies, and aging power infrastructure, a decade of neglect from Washington; these are the trends that define America's emerging energy challenges."⁵

The OPEC oil cartel has announced its plan to cut production of oil in order to keep prices above $25 a barrel. The rationale for the cut was that the slowdown in the U.S. and Japanese economies would slow the demand for crude oil and hence OPEC intends to maintain higher prices by restricting the supply.⁶

As if that weren't bad enough, the recent explosion on Brazil's state-owned P-36 oil platform caused the 40-story high structure to sink into the Atlantic. The drilling platform was responsible for about six percent of Brazil's oil production, which will most certainly cut into oil supplies as well.⁷

The Bush administration, in addition to proposing increased domestic oil production, has also suggested the improvement of clean coal technology and the promotion of energy conservation measures. None of these proposals will be effective in the short term, leaving Americans to deal with shortages and high prices.

The Economic Picture

Pessimism has crept into the minds of economic analysts following the extended lows in the stock market. The Federal Reserve Board cut interest rates by a half-point for the third time since January, hoping to revitalize the sluggish economy. Bush is pushing his tax-cut plan, saying that it too would stimulate the economy. The average citizen could easily become confused by the shouting back and forth of those who predict a recession and those who cite the high rate of employment as a sign that the economy is still doing well. Who is telling the truth?

The current slowdown in the economy grew out of the economic manipulation that began more than two years ago. At that time Federal Reserve Chairman Alan Greenspan warned small investors to get out of the stock market because stock prices were over inflated. He set out to tame what he called "irrational exuberance" of the stock market by incrementally raising interest rates.⁸ The higher rates had their desired effect and reduced the borrowing that companies need for expansion. The rates also have a ripple effect into consumer borrowing and home and auto loans.

With elections dominating the scene throughout the year 2000, government reports about the health of the economy continued to paint a rosy picture, ignoring or covering up the truth that the decline had already begun. Neither Congress, the White House, nor the Fed would make the necessary policy changes to stop the decline for fear that the news would hit the media and discredit the Democratic campaign mantra that the economy was so great. The election campaign delayed the much-needed reform.

When the weakness of the global economy and rising energy costs are factored into the mix, it is no wonder that the economy began to falter. The second largest economy in the world, Japan, has never completely recovered from the Asian crisis of the late 90s. Japan and Europe have both lagged behind expectations and have relied heavily on the exuberance of the U.S. economy to provide markets for their products. If the U.S. falls into a full-blown recession, the global outlook will be gloomy as well.

Former British Prime Minister John Major told an IBM conference, "The health of your politics and your economy affects not just the U.S., but the world... In today's Internet economy, problems can't be dealt with in isolation."

He warned that policy makers shouldn't overlook developments in other countries when making decisions. He noted from his own experience, "When the Soviet Union fell, we cheered. But did we see all the implications? I think not. When West Germany and East Germany were united, it put out of work people in London, Paris, and Lisbon. We couldn't see the impact that recession would have. It accelerated demand for the euro before it was ready." ⁹

While the country is not officially in a recession, many of the key economic indicators show that consumers are tucking their money safely away in long-term investments, which means it won't be available to invest in the declining stock market. The full impact of the tax cuts may not be seen for up to four years, and it takes time for Federal Reserve monetary policies to turn the economy back in a positive direction. In the meantime, nervous consumers are likely to be cautious in spending, especially when the full effect of higher energy costs begin to show up in higher retail prices.

The Bush administration may be trying to exploit the bad news to achieve political goals, but for once the hype is leaning in the direction of truth instead of campaign propaganda. While there are no magic short cuts to recovery, the economy has not gone so far that it can't be reinvigorated. It is a time to act cautiously and pray for the leaders of our country to make wise decisions, because these decisions will affect us all.