My resolutions for 2009
Oil prices could hit $200 a barrel in the next few months. How the spike changes everything.
This spring, America hit a historic point. With average gas prices per gallon edging toward $4, America's notoriously profligate ways started to change fast. Americans are driving less, using mass transit more, buying fewer gas guzzlers, indeed shopping less wantonly in general, and lowering their previously unshakable confidence as consumers. Suddenly, Americans are acting differently; if not exactly like Swedes, then not quite like themselves, either. It's a shift that could change the world.
And there are more changes to come. So far the price shock has triggered the most obvious consumer shifts in the United States. Europeans, already greener, are also are buffered by a stronger currency, and Asians are protected from the spiking price of oil by subsidies that control the impact on gas prices at the pump. But if oil prices continue to rise, and the subsidy dam breaks, as seems likely, the energy revolution now transforming America will spread. "We sailed through $80 a barrel," notes energy authority Daniel Yergin, author of "The Prize: The Epic Quest for Oil, Money and Power" and chairman of Cambridge Energy Research Associates. "But that doesn't mean we'll sail through $200 a barrel. That sort of price would have enormous global consequences."
A year ago no one was talking about $200 oil, and now everyone in the markets is, for scary reasons. Oil prices climbed from $10 in 1999 to $95 last year without slowing the surging world economy, in large part because the markets believed the spike was at core driven by rising demand, particularly from India and China, which feeds growth. There was concern over supply, too, but nothing like the tumult prompted by the stranglehold OPEC imposed on the world in the 1970s, at least not until recent months. As the per-barrel price climbed over the last few months, with futures reaching $135 last week, the consensus began shifting to a new more gloomy view: that not only would long-term demand, led by China and India, continue to grow, but that the supply threats, including increasing conflict, falling investment, industry bottlenecks and downward estimates of big field reserves in major oil states—aren't going away any time soon. Now many (though not all) serious people take $200 oil—and the prospect of another '70s-style oil shock—seriously. Goldman Sachs warned that the $200 barrier could be hit within the next six to 24 months.
That's way too fast for comfort (or should be) even for those who welcome high gas prices as a way to induce energy conservation and fight global warming. Already skyrocketing oil prices are causing real pain for ordinary people, threatening global economic growth, and reviving the specter of inflation. The price pressure is now particularly acute in big emerging markets like China and India, which in recent years had become paragons of fiscal responsibility that tended to dampen global inflation by exporting cheap goods and services. Now they threaten to become exporters of inflation, particularly if energy price controls give way. Americans now making up for their losses at the gas pump by flocking to Wal-Mart for cheap Chinese goods would be out of luck. Make no mistake: $200 oil in 2009 would be a painful shock, not just a green tax on gas guzzlers.
Oil drives so much of the global economy, it's almost impossible to fully imagine the world of $200 oil. No question, the shock will force nations to go greener much faster than now, particularly by conserving energy and developing and adopting new non-fossil fuels. But none of this can happen full stop in six to 24 months. So the predictions tend to be gloomy: some analysts see a shift toward regional trade, and even a major reversal of globalization itself, as rising transport costs make it too expensive to ship many kinds of goods long distances. A major acceleration in the transfer of wealth that has, in the past five years, shifted trillions of petrodollars from oil consumers to producers would alter the world balance of power—including a boost for the troublesome oil autocrats of Iran, Venezuela and Russia. At $200 a barrel the proven oil reserves of the six Gulf nations alone would rise in value to $95 trillion, about twice the size of public equity markets, according to Morgan Stanley managing director Stephen Jen. That would make the Sovereign Wealth Funds of oil states market kingmakers. Western efforts to press more openness on these funds, many controlled by royal courts, would surely grow.
While some optimists believe the windfall could bring the Middle East into the modern world if it's smartly invested, that's a big if. Already many small states are struggling to wisely invest their oil windfall to date, and the corrupting curse of oil wealth is well known. Michael L. Ross, associate professor of political science at UCLA, notes that the percentage of the world's wars that take place in oil states is growing. The number of oil states is also rising—with Cambodia, East Timor and others joining the ranks—with more likely to follow as prices climb. Many of these newcomers are small, and ill equipped to cope with the corruption that often wastes the windfall.
No industry will be unaffected. Any company that moves goods or people needs oil. At $200 oil could make the long-predicted death of Detroit, or at least one of its Big Three, a reality. Airlines are vulnerable too. Skyrocketing jet fuel prompted American to announce it would cut flights due to the grounding of numerous older, less fuel-efficient planes. Air France-KLM recently warned that profits are likely to fall by a third this year, and CEO Jean-Cyril Spinetta suggests $200 oil would represent a far bigger shock than 9/11 or the SARS epidemic of 2003, which sent the airline industry into a tailspin. "It's more than a change, it's a revolution, a new industry, in fact," says Spinetta. "We would have a lot of bankruptcies very rapidly in Europe, the U.S., and Asia. And there will be restructuring of networks, cutting routes, cutting capacities." The effect of mergers and cutbacks may leave smaller cities from Tuscany to the American Midwest with ghost airports.
The oil-induced depression of the American consumer may be a harbinger of what's to come elsewhere. In the United States, consumer confidence is now at a 15-year low. Energy Department data show that $4-a-gallon gas is finally forcing Americans to cut back on driving; this year gas consumption in the country is expected to drop for the first time since 1991. No amount of "fiscal stimulus" looks likely to help: Citibank estimates that even if prices merely stay as they are, the year-on-year increase in the U.S. consumer-gas bill will siphon away the bulk of the $120 billion in expected tax rebates. As food and gas prices go up, spending on everything else will go down. No wonder big-box stores like Wal-Mart are having record quarters, and middle-market chains are suffering.
Expect these trends to hit Europe soon, too. Germans are actually beginning to slow down on the autobahn to save fuel, which has risen in price from 0.92 to 1.53 euros per liter since 2000 (a 66 percent increase). Analysts say that the more Europeans spend on gas, the less they will spend on furniture, clothing and white goods. Indeed sales in all those categories are already down. "It's going to feel like a global recession inside many companies," notes Citibank European equities economist Richard Reid. "We expect an increase in corporate failures, and a lot of M&A. You might well see flush emerging-markets firms [think Tata] swooping in to buy up ailing Western firms on the cheap."
With oil futures up 40 percent in just the last two months, the sense of an accelerating shock is already palpable in the United States. While American automakers were moving slowly toward smaller cars before the spike, sales of SUVs and pickups are now falling so fast, they appear to be caught flat-footed. "At $200, GM tanks," says energy expert Philip Verleger. "They just don't have time to fix their fleet." Ford CEO Alan Mullaly, warning two weeks ago that he no longer expects a return to profitability in 2009, said he believes the gas-price shift is permanent. Ford has slashed production of its F-series pickup trucks, an American best seller for 20 years. Meanwhile, Nissan unveiled a $115 million new plant outside Tokyo designed to build lithium-ion fuel cells to power a new generation of battery cars.
The individual decisions about what we'll drive, how often we'll fly and whether we'll upgrade our televisions as quickly are only part of the larger macroeconomic threat of higher oil prices. The threat has yet to be officially tallied; major financial institutions like Morgan Stanley have only just begun to seriously discuss the potential downgrades to the global economy should $200 oil become a reality. But already, it's clear that oil is catalyzing the threat of inflation in rich countries as well as poor. Inflation looks likely to be about 5 percent in the United States this summer, and about 3 percent in Europe. But in emerging economies, double-digit inflation could become the norm. "In America, it will feel like the opposite of the 1990s," says Morgan Stanley chief U.S. economist Richard Berner. "But if you think things won't be pleasant for industrial nations, think about developing economies, where people spend 50 percent of their income on food and fuel."
Indeed, there's concern that as higher oil prices force many Asian economies to reduce or even cut their generous fuel subsidies, growth will slow sharply, and there could be social unrest as the world's poorest become more desperate. The political ramifications of this (which already include moves away from free trade), combined with the ever-rising costs of doing business as usual, could force a retrenchment from globalization. "It's a harbinger of the reversal of globalization," says Jeff Rubin, chief economist for CIBC World Markets. "At $200 a barrel, you'll see transport costs rise so much that they will effectively reverse the trade liberalization of the last 30 years." He predicts that world trade will realign itself regionally, so that while Japan may continue to ship in goods from China, the United States will increasingly import from Latin America. "If you look at the period from 1973 to 1979 [when oil spiked] you'll find the same thing happened," he notes. "The share of imports to the U.S. from Latin America and the Caribbean rose by 6 percentage points. That was all about freight costs."
Regionalism won't stop at trade. There will be new financial and service hubs in energy-rich areas like Russia, Latin America and the Gulf. Sovereign Wealth Funds will continue to buy up big chunks of Western banks and blue-chip companies, as well as investing more broadly in a new range of countries and currencies (which is likely to make forex movements stronger and more unpredictable). The rise of the Sovereign Wealth Funds has already triggered a protectionist backlash, including U.S. moves to step up the vetting of foreign investors in American firms.
Worse conflicts are possible. "As areas like the Mideast and Africa, Russia and Venezuela continue to rise, you're going to see increasing energy greed, aggressive behaviors and neocolonial actions on the part of various countries," predicts Scott Nyquist, the head of McKinsey's energy practice. As Iran gets richer, Hizbullah might get stronger. China will clearly wield more might in Africa. Western ideas about civil society, the environment and women's rights could be displaced with new sets of values.
More blood will almost certainly be spilled. Oil wealth tends to wreak havoc on a nation's economy and politics, discouraging diversity, aggravating ethnic grievances and making it easier to fund insurgencies. Oil countries now host about a third of the world's civil wars, up from one fifth in 1992. "There's a vicious cycle, which you can see played out in places like Iraq and Nigeria, where conflict fuels higher prices, and higher prices in turn fuel conflict," says UCLA's Ross.
The lack of any spare capacity in the global pipeline makes it difficult to solve such situations with sanctions; taking any oil off the market would, at this point, merely ignite an already explosive situation. The megatrends fueling the global supply shortage tend to feed on one another. Higher prices fuel the growing tendency of oil states like Russia and Venezuela to re-nationalize fields. That often leads to lower output, due to the inefficiency of most state oil companies, notes Sanford Bernstein analyst Ben Dell. The publicly traded companies have to go where they can. As fields in peaceful places (Alaska, the North Sea) are tapped out, the hunt for new oil has moved into conflict zones (Nigeria and Angola) or geologically extreme territory (Siberia, the deep sea). And while higher prices are already driving down energy consumption in rich nations, that drop does not offset the booming demand in emerging markets.
Meanwhile, though numerous green technologies hold plenty of promise, none of them are going to save the day any time soon. "It's a false god," says Robin West, chairman of PFC Energy. "There will be step changes in technology, but people forget the scale of the oil business. Ethanol production was 5 billion gallons last year, with huge subsidies to farmers and rising food prices. But that's the size of one production platform off the coast of West Africa."
So, what's to be done? For starters, policy makers might stop grilling big oil companies about why prices are so high (since they now control only a small percent of known reserves, it's largely out of their hands), support smarter green initiatives (wind and solar credits rather than ethanol boondoggles) and stop pandering to voters with subsidies and gas-tax cuts that ignore the new reality—oil is a finite resource, more people want more of it, and the profligacy with which we've used it is going to change. "There's a fuel that's cheap, clean and readily available, and it's called conservation," says West. By some estimates, the world could save 25 percent of its oil usage with simple measures like driving the speed limit, turning off lights, and fully using the green technology we already have (hybrids, better insulation, etc, etc). While it's never been the inclination of rich nations—particularly America—to rein in consumption, it's a notion we'll undoubtedly become more comfortable with as energy prices rise. It happened in the 1970s. It will happen again—and if we're very lucky, it will become the important and lasting effect of $200 oil.
It is clear that high oil prices are hurting many economies—especially in the rich world. Goldman Sachs reckons consumers are handing over $1.8 trillion a year to oil producers. The wage-price spiral of the 1970s has been avoided, but the income shock is painful. Beset by scarce credit, falling asset prices and costly food, developed-country households are hardly well-equipped to foot the oil bill. America's emergency tax rebate, voted this year to help people cope with the credit crunch, has in effect been taken right away again.
Stuck for answers, politicians have been looking for scapegoats. Top of the list are the speculators profiting from other people's hardship. Some $260 billion is invested in commodity funds, 20 times the level of 2003. Surely all that hot money has supercharged the demand for oil? But that is plain wrong. Such speculators do not own real oil. Every barrel they buy in the futures markets they sell back again before the contract ends. That may raise the price of “paper barrels”, but not of the black stuff refiners turn into petrol. It is true that high futures prices could lead someone to hoard oil today in the hope of a higher price tomorrow. But inventories are not especially full just now and there are few signs of hoarding.
If the speculators are not to blame, what about the oil companies, which have failed to increase output in spite of record profits? Profiteering, say some. However, that accusation doesn't stand up to much scrutiny either. The oil price is set in a market. For Shell, Exxon et al to hoard oil underground would be to leave billions of dollars of investment languishing unused. Others fear that oil is pricey because it is running out. But there is little evidence to support the doctrine of “peak oil” in its extreme form. The Middle East still seems to contain a sea of the stuff. Even if new finds elsewhere have been rarer and less accessible than in the past, vast quantities of oil could now be profitably stripped from tar sands and shale.
The truth is more prosaic. Finding and developing new oil fields is an expensive and time-consuming business. The giant new fields in the deep water off Brazil are unlikely to produce oil for a decade or more. Furthermore, oil is perverse. When prices are low, oil-rich countries welcome the low-cost, high-tech and well-capitalised oil firms. When prices are high, countries like Russia and Venezuela kick them out again. Likewise the engineers, survey ships and seismic rigs that oil firms need to find and produce new deposits are expensive right now. The costs of finding oil have, temporarily, doubled precisely because everybody wants to give them work.
So the oil shock will take time to abate. Some greens may welcome that, seeing three-figure oil as a way of limiting greenhouse emissions. Conservation will indeed increase. But everything high prices achieve could be done better by sensible carbon taxes. As well as curbing oil use, high prices have put tar sands in business which create far more carbon dioxide than conventional oil. Profits are going to ugly oil-fed regimes, not Western exchequers. And the wild unpredictability of prices will blunt the effect of dear oil on people's behaviour.
From this perspective, governments should speed up the adjustment—or at least stop delaying it. Half the world's people are sheltered from fuel prices by subsidies—which, perversely, have boosted demand and mostly benefited the better off. Now countries like Indonesia, Taiwan and Sri Lanka have begun to realise that they can ill afford this. Cutting fuel taxes in the rich world makes no sense either (see article). There are better ways to return cash to struggling voters.
The 1970s showed how demand and supply, inelastic in the short run, eventually give rise to conservation and new production. When all those new fields are on-stream, when the SUVs have been sold and the boilers replaced, the downcycle will take hold. By then the slow-motion oil shock could have catalysed momentous change. Right now motorists have no substitute for oil. But it is no coincidence that car companies are suddenly accelerating their plans to sell electric hybrids that are far cheaper to run than petrol or diesel cars at these prices. The first two oil shocks banished oil from power generation. How fitting if the third finished the job and began to free transport from oil's century-long monopoly.
Shoes
Opt for over-the-calf ribbed business socks. You don't want to show any leg when seated. Don't get carried away with bold colors or patterns—keep it classic. And match the color of your socks with your suit, not your shoes.The Button-Down Collar
Very American. This is the least dressy collar choice; as such, you may want to look for a shirt cut from broadcloth (like the one shown here) rather than oxford cloth. You don't want a shirt that looks too casual for your business suit. This type of collar works best with medium-width ties.
The Straight-Point Collar
Always a safe choice. The collar's narrow stance means it tucks nicely into high-cut three-button suits. Good for narrow-to-skinny ties.
The most dashing, confident collar out there. Best with a medium-to-wide tie. And go for a traditional four-in-hand knot; it's okay for a bit of the tie to show around the collar. And with a smaller spread collar, you'll want to keep your tie knot on the tighter side.
1. Single-Button Standard (left)
The most common type of cuff, which you'll find on most moderately priced dress shirts. When fitting properly, it should reach the hinge of your wrist.
2. French (center)
The dressiest, most formal cuff choice. But you don't have to wear flashy cuff links and (after work) a tie with them. Try an open collar and more creative links.
3. Two-Button Barrel (right)
For the guy who wants a shirt with as much flair as his British- or Italian-made suit.
The suit's shoulders should hug yours. The shoulder pads should not protrude beyond your own shoulders.
2) Chest:You should be able to easily button the jacket without it straining. Conversely, there shouldn't be too much space between the button and your chest—no more than a fist's worth.
3) Length:
When your arms are hanging straight down, you should be able to cup your fingers under the sides of your suit jacket. However, these days, with shorter suits in style, some jackets reach only about an inch or two beyond the cuff of your suit sleeve.
Buttons
Think about the style of the suit you're buying. The first thing you need to consider is the number of buttons on the suit. This will determine a good deal about the cut and fit.
The three-button suit became the dominant look in the 1990s; it now seems to be the standard young man's choice. Instead of opting for one of those high-cut versions, look for one with a roll-over lapel—one in which you button the middle button, encouraging the soft lapel to roll over the top button.
A center vent is all-purpose; it is both modern and traditional. You can't go wrong.
Side vents are more European, a bit more suave. They also add a little more shape to your suit. A ventless jacket, by the way, is a definite no. It says you think it's still 1986.
A notch lapel—what you see on most business suits—is the standard. You're always safe with a notch lapel. Go for one on the narrow side, which will have a more modern, slimming effect.
A peak lapel is more old-school and elegant. And now it's enjoying a comeback with high-fashion and business crowds alike. It makes a statement. Just don't get them too wide—you don't want to look like a Sopranos extra.1. The Gray Suit
Think of it as the anchor of your business wardrobe—strong, elegant, and always appropriate, whether you're interviewing for your first job or addressing the shareholders at your last. A gray suit looks sharp and clean with a white, soft blue, or light pink shirt but is versatile enough that it'll go with just about anything. Any shade will do, but i recommend a medium gray, like the one this gentleman is wearing.
2. The Solid Navy Suit
3. The Solid Black Suit
It used to be that a black suit wasn't a safe choice for the office, but these days it's a staple. Just make sure yours is cut on the slim side and fits correctly. (However you feel about your job, you don't want to look like you work in a funeral home)4. The Pin-Striped Navy Suit
A cool classic that exudes confidence. You can anchor it with a solid shirt and tie or get adventurous—like the guy here, who's mixed it with a striped shirt and a striped tie. Just keep the components within one basic-color family and make sure that the stripes of the suit, shirt, and tie aren't too close in scale; one of the patterns should be bold and the other two more muted.
5. The Khaki Cotton Suit
A business wardrobe might consist mostly of dark suits, but spring and summer give you the chance to lighten up (literally). Do it in style with a khaki cotton suit. Pair it with a solid (blue, white, or pink) shirt and a dark tie for the office, then loosen it up (e.g., lose the tie and socks) for an evening out. 
