When the world sneezes...

The Financial Review

PUBLISHED: January 7, 2012

Anna Bernasek   New York

As street sweepers clean up after the revelry in Times Square, it’s time to think about what’s in store for America. An election campaign is under way, of course. But for the American economy a lot will depend on what happens elsewhere. Three major global trends are affecting the nation.

The carbon rush

Persistent high energy prices are driving the global frenzy to develop new carbon sources. In the US, there is a spectacular boom in oil and gas drilling as new technology – hydraulic fracturing, or “fracking” – opens up new resources.

Touching 38 out of the 50 states, a mining boom on this scale hasn’t occurred in generations. In the past year alone, the number of drilling rigs in the US rose by 313 to 2007, the highest level since the 1980s and four times greater than in the 1990s. Experts believe it is the start of a great new era in American oil and gas production.

James Hackett, chairman and CEO of one of the world’s largest oil and gas companies, Anadarko Petroleum, predicted late last year that North American oil production could double in the next 25 years.

Hackett has reason to be optimistic. In November, Anadarko announced what could turn out to be the single biggest oil and gas field discovered in the US. Based on preliminary findings, the company believes it has found between 500 million and 1.5 billion barrels of oil, natural gas liquids and natural gas in shale beneath the Wattenberg field in north-east Colorado. Only a few billion-barrel fields have ever been found in the US.

Like a good old-fashioned gold rush, the drilling boom is exciting investors and boosting local economies. In North Dakota, for instance, there’s no sign of the great recession. Unemployment is 3.5 per cent, compared with the national average of 8.6 per cent.

But there’s a dark side to the boom. Fracking threatens local water supplies, and growing oil supply undermines efforts to develop alternative energy sources and combat global warming.

And that may be more urgent than ever. According to the Global Carbon Project, emissions of carbon dioxide from fossil-fuel burning jumped almost 6 per cent in 2010. On a tonnage basis, that was the largest increase in carbon emissions ever recorded.

The debt wave

A wave of debt has washed over governments and consumers. With debt markets now global, one region’s problem affects everyone.

After the 2008 US financial crisis, debt problems now engulf Europe. Buoyed by cheap money, runaway property markets in China or elsewhere could be next to collapse.

In the US, consumers are still working off debt as the government struggles with record deficits. So far economic growth has been too slow to make a significant difference and, as the US muddles along, it remains vulnerable to what happens in Europe and China.

It seems Europe is all but certain to enter recession this year and growth in China is expected to slow as the housing boom cools.

In Europe, ill-conceived austerity measures could keep its economies mired in stagnation for years.

It’s much harder to assess the Chinese situation. Property price increases in China have been similar to those seen in Japan in the late 1980s and in the US in the late 1990s and early 2000s. In cities such as Shanghai and Beijing, house prices rose by more than 30 per cent a year.

In response, the Chinese government has introduced measures, including raising interest rates, to take some froth out of the market. Whether the housing bubble turns into a full-blown banking crisis or not, it adds to uncertainty and has the potential to create more volatility in global financial markets.

So while the US is digging itself out of its own debt crisis, the crisis in Europe and a potential crisis in China may only prolong America’s economic problems.

Social unrest

Scenes reminiscent of the Arab Spring are playing out around the world. Public protests have ignited in cities as diverse as Cairo and Oakland, California.

While there are different reasons why people around the world have taken to the streets – the latest Russian protests sparked by election fraud; the Occupy Wall Street protests focused on income inequality and a lack of economic opportunity – much of the unrest has something in common. Weak employment and stagnant wages fuel desire for systemic change.

Little serious effort has been made to address the concerns of protesters. Here and abroad a generation of young people is at risk of losing their chance at a middle-class life, suggesting we’re likely to see more unrest.

According to the International Labour Organisation, the change in the risk of social unrest in the past five years has been greatest in advanced countries, followed by the Middle East and then Africa.

In an open society such as the US, it’s possible for public demonstration to be channelled into constructive change. But social unrest is a dangerous and unpredictable force. And by the time a nation is faced with significant and prolonged social unrest, it’s a sure bet the government hasn’t done its job. Happy New Year!