Reaching Limits in a Finite World
Off the keyboard of Gail Tverberg
Published on Our Finite World on May 6, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
We don’t usually think about it, but we live in a finite world. In other words, in theory we can count precisely how many atoms make up the earth. We can also theoretically count how many humans live on earth and how many of any other species live on earth at a particular point in time.
At some point, in a finite world, we start reaching limits. There are now about seven billion people in the world. We could probably add some more, but how many? What is it that limits our ability to add more people to the world we live in today?
Too Much Population “Morphs” to an Energy and Financial Limit
One obvious guess as to what might limit world population is the amount fresh water that is available. If we don’t have enough fresh water available, we can’t continue to expand population.
The amount of fresh water that is available can be changed, though, by adding desalination plants. There are many other ways of getting fresh water. To give an extreme example, the amount of fresh water available could be increased by melting ice in Antarctica and importing it by ship. Either of these solutions would require energy in an appropriate form—either to run the desalination plant, or to melt the ice and transport it by ship. Thus the fresh water shortage, at least for the foreseeable future, can be worked around if there is sufficient energy available of the right type.
The other not-so-minor detail is that the cost of desalination or of importing melted ice from Antarctica needs to be inexpensive enough that users of fresh water can afford it. In order for this to be the case, the cost of the appropriate type of energy must be extremely inexpensive.
We can think of other kinds of limits to population growth as well. For example, carbon dioxide limits. In theory, there are ways around carbon dioxide limits. For example, assuming current research projects are successful, we can build carbon capture and storage facilities and change our electricity generating plants so that the carbon dioxide that is emitted can be captured and stored underground.
Here, too, there are energy limits and cost limits. Carbon has a molecular weight of 12, while carbon dioxide has a molecular weight of 44. Because of this, if we create carbon dioxide from coal, the carbon dioxide we produce is much heavier and bulkier than the coal that we burned to make the electricity. It will take a lot of energy to store this gas underground in a suitable place. Thus, we have another problem that can be handled, if there is enough cheap energy of the right type available.
Almost any kind of obstacle to increased human population that we can think of has an energy-based work-around. Will people be so crowded that disease transmission will be a problem? There are workarounds: better water treatment plants and sewer treatment plants, especially in the poorer parts of the world; more immunizations; more and better hospitals; antibiotics for all those who need them. These solutions also require energy, as well as other inputs (which indirectly require energy as well). The difficulty is making them affordable for the people who need them.
If the problem is not enough food, perhaps because of degraded soil, there are energy-based workarounds as well. Food can be imported from a distance. More fertilizers and soil amendments (either made using fossil fuels, or transported using fossil fuels) may be used. Irrigation, which uses either diesel fuel or electricity to pump water may be used to pump water to too dry areas, to increase food production per acre. In some cases, artificial soil can be created, and plants grown in a green house—again requiring much energy. The issue again gets to be whether consumers can afford the food produced using this more energy-intensive procedure.
The Problem With Degraded Resource Supplies
Degraded resource supplies occasionally run out—for example, an aquifer may run dry. A more common situation, though, is that resources become progressively more expensive to extract as we approach limits. We tend to extract the easiest to extract (and thus cheapest-to extract) resources first. These resources are the highest quality ones, in the easiest to access locations. We then move on to more expensive to extract resources. A similar pattern applies to many types of resources, including ore used in making metals, oil, gas, coal, and uranium.
When we analyze resources of a given type, say uranium, we find that there are always more resources available. The problem is that they are increasingly expensive to extract because the ore is of lower concentration, or is located in a harder to reach area, or there is some other problem involved.
We have illustrated this situation in Figure 1, as a triangle with a dotted line at the bottom, because of the uncertain cut-off regarding how much is available. The cut-off is really a price cut-off. At some point, the resource becomes too expensive for customers to afford products made with it.
FIGURE 1 – Triangle of Available Resources
Figure 1. Triangle of available resources, with dotted line indicating uncertain financial cut-off.A company starts from the top of this triangle, extracting whatever resource is involved. A company can “see” a little way ahead, as it looks down toward the bottom of the triangle. The company will report reserves which are continually increasing because the width of the triangle keeps getting wider, even though these reserves are of lower quality and can only be extracted in a more energy-intensive way. The question then becomes whether customers can really afford products made with these expensive-to-extract resources.
The Broader Energy Picture
Energy is pretty amazing. Energy is what allows work of any kind to be done, from making a clay pot by hand, to baking a cake, to creating a carbon capture and storage facility. Humans by themselves are able to produce some energy, because of the food we eat. But we are also able to leverage the energy that our own bodies produce with energy from other sources, such as from burning biomass. We learned to burn biomass a very long time ago, over 1,000,000 year ago.
If humans were like other large primates, there would be only 100,000 or 200,000 of us, rather than 7 billion of us. We would live in an area to which we are biologically adapted, most likely a very warm part of Africa. Humans’ population is much higher, because once we learned to control fire, we were able to settle areas of the world that would otherwise be too cold or dry to live in, and we were able to increase population densities through energy-related techniques we developed.
One thing we learned to do was cook part of our food supply. This had many advantages. Unlike apes, we no longer needed to spend literally half of our day chewing. This freed up time for other activities, like tool-making, hunting, and clothing making. It also allowed the human body to evolve in a way that allowed a bigger brain and smaller digestive organs. Gradually we used our improved brain to develop other techniques such as making heat-tempered stone tools, which were sharper than other stone tools, and teaching dogs to help us with hunting for food. All of these approaches to using external energy allowed humans to leverage our own puny energy supply from food with energy supply from other sources and gain an advantage over other animals.
Human prosperity was able to increase and population was able to grow as we learned to use increasing amounts of energy from outside sources. Energy sources we gained control over included domesticated plants and animals, facilitating agriculture. World population by the year 1 C. E. reached 200 million, or over 1,000 times the population level before the leveraging impact of external energy supplies began enabling greater human world population.
Fossil fuel (coal, oil and natural gas) use became common after about 1800 C. E., and population grew very quickly. In fact, when population is graphed, it looks like it went straight up starting when fossil fuels were added.
FIGURE 2 – World Population
Figure 2. World population based on data from “Atlas of World History,” McEvedy and Jones, Penguin Reference Books, 1978 and Wikipedia-World Population.Use of fossil fuels did not grow by themselves. Their use was facilitated by the development of improved technology, which provided the vehicle for their use. Increased debt also facilitated fossil fuel use, because it allowed potential buyers to afford the new products being developed, and provided companies doing energy extraction funds for their work.
Our ability to do physical work using human labor is quite limited. For example, if we want to dig a well for water, the depth that humans can dig without the assistance of a machine intended for this purpose is only about 20 feet. With mechanical drilling equipment, typically powered by oil, we can quickly and cheaply dig a well many hundreds of feet deep.
As another example, if we want to transport goods a long distance without external energy, we can only push a cart at the speed at which we can walk. Oil or another other modern fuel allows inexpensive long-distance transport of goods.
Adding energy use changes costs. There is a two-way tug on costs:
1. Costs are typically reduced when fossil fuel energy or electricity from any source can be substituted for human energy. This allows greater leverage of the energy of the remaining humans doing the “work”.
2. Costs tend to increase, as the cost of the energy source in (1) increases. Such an increase in costs occurs as we approach limits of a finite world, partly because extraction is from more depleted resources (farther down in the resource triangle shown in Figure 1), and partly because we reach increased problems with pollution, such as the BP Deepwater Horizon well blowout in 2010. The cost of mitigating pollution problems also adds to energy costs.
Up until about the year 2000, this tug of war had a favorable outcome. An increased amount of fossil fuel energy was substituted for human energy, leading to lower costs. As mentioned previously, improved technology and additional debt enabling this substitution played a role as well.
In recent years, the tug of war has started to go the other direction. The cost, particularly for oil energy, has tended to rise far more rapidly than costs in general (Figure 3). This has produced many dislocations within the economy, making countries that use a lot of oil less competitive in the world marketplace and reducing economic growth rates, especially among countries no longer able to complete. The higher cost of oil products reduces disposable income of citizen, leading to recession and to deficit spending by governments.
FIGURE 3 – World Oil Price in Current $
Figure 3. Brent-equivalent oil price in current $, based on data from BP 2012 Statistical Review of World Energy.In future years, we can expect that two way tug on costs will increasingly be lead to higher costs, because of greater impact of limits of a finite world. This will tend to send economies increasingly into recession.
Our financial system has been built assuming that economic growth will continue indefinitely. There is significant risk that the recessionary influences of high oil costs will bring down the current economy. We know from a recent analysis by Peter Turchin and Sergey Nefedov (Secular Cycles, Princeton University Press, 2009) that historically, when civilizations collapsed, they did so for financial reasons, as the cost of government became too great for citizens to fund with tax revenue. There would seem to be a significant risk that today’s economy will reach the same end.
Why didn’t others recognize this issue?
Reaching limits of a finite world is a subject that does not easily fit into any one subject area, so the subject tends to be missed by researchers concentrating on one field of study.
The closest fit came in the analysis The Limits to Growth (Donella Meadows et al, Universe books, 1972). This analysis came very close, but did not quite hit the nail on the head because it missed the connection of debt to limits to growth. (The model was of course not expected to be complete.) More recent analyses along this line to miss the debt connection as well, pushing the likely date of collapse forward.
There is much confusion about the question of what limits, such as oil limits, mean. Many people believe that rising oil reserves (which are a given when the problem is ever-more expensive to extract oil, as illustrated in Figure 1) mean that our oil problems are solved. Our problem is not a lack of oil reserves; our problem is that the selling price needs to keep rising, to cover the rising costs of extraction and to cover government dependence on tax revenues. This increase in selling price makes oil ever less affordable, which is our real problem.
Even when oil price drops, this is not necessarily a good sign. It may mean that some oil extraction companies will no longer be able to afford to add new wells, because production will not be sufficiently profitable at the new lower price. It may also mean that some oil exporting nations will
not be able to get enough tax revenue from oil operations to fund programs (food subsidies, for example) that prevent revolt.
Reaching limits in a finite world is a scary issue. The book Limits to Growth was not well received when it was published. Governments have tried their best to avoid the issue. No president or prime minister wants to announce, “We have a problem that we have no way to solve.”
Why might I be able to shed light on the real impact of finite world limits?
My background is as a casualty actuary, doing financial forecasting for insurance companies. Thus, I started with somewhat of a financial background, but did not have the usual “brainwashing” that comes when a person has studied the economy from the perspective of today’s economists. My background gave me a great deal of experience hunting for publicly available databases, making graphs, doing analyses, and explaining the results to lay audience.
I got interested in the issue of oil limits and what impact they might have when read the book, The Empty Tank: Oil, Gas, Hot Air, and the Coming Global Financial Catastrophe (Jeremy Leggett, Random House, 2005). His view comes from the “peak oil” view, which is close to my view, but not quite the same.
When I read Leggett’s book, it hit a responsive chord because I had had first hand experience with the impact that high oil prices had on insurance companies in the 1973-1974 period. In 1973, I was the actuary for a small insurance company that ultimately went bankrupt, at least partly because of the indirect impact of higher oil prices. Reporting to the president of the company, I got to see up close what kind of havoc high oil prices could cause in the financial world.
After I read Leggett’s book, I started researching the issue on my own. I wrote an article for insurance executives in early 2006 and an article for actuaries in early 2007. In March 2007, I decided to take early retirement, and work on the issue full time.
I set up my blog site, OurFiniteWorld.com in March 2007. I soon was asked to help with the website TheOilDrum.com, where I wrote under the name, “Gail the Actuary,” and made many contacts with others interested in the issue of limited oil supply.
To make a long story short, over the past several years, I have made many contacts with researchers who have discovered at least part of the story of oil limits and energy limits. Through my blog posts, I also received much valuable input, including suggestions from readers regarding academic books that might be helpful.
My work is now being published in the academic world as well. I wrote a paper, “Oil Supply Limits and the Continuing Financial Crisis,” published in the journal Energy in January 2012. It has so far been cited by 10. I was also a co-author of “An analysis of China’s coal supply and its impact on China’s future economic growth” (Energy Policy, June 2013). My most recent publication is an article called, “Financial Issues Affecting Energy Security” in the soon-to-be published book, Energy Security and Development–The Changing Global Context, (B. S. Reddy and S. Ulgiati Eds., Cambridge Scholars Publishing, 2013).
The Week in Doom May 5, 2013
From the Keyboard of Surly1
Originally published on the Doomstead Diner on May 5, 2013
Discuss this article here in the Diner Forum.
Given the various vectors of Doom for which we at the diner keep track, and the relative noise made in each one of those vectors, it occured to me to stand up a semi-regular summary called “This Week In Doom,” in which we survey the big breaking issues in the Wide World of Doom. Think of it as “The Wide World of Sports” for doom; certainly not all inclusive, and invested with a particularly Surly point of view.
First on the docket is Fukushima, the gift that keeps on giving. Even Charlie Pierce, Esquire’s redoubtable political blogger, felt obliged to weigh in on the subject.
Gray and silver storage tanks filled with radioactive wastewater are sprawling over the grounds of the Fukushima Daiichi plant.
Remember Fukushima? That was our Environmental Tipping Point two years ago, when a tsunami caused a catastrophic event at a Japanese nuclear power plant, a triple meltdown that resulted in, among other things, all kinds of noxious debris continuing to wash up in Alaska, in Hawaii and, just the other day, in California, Perhaps to celebrate the arrival of this dubious flotsam to the continental 48, we discover that the Fukushima disaster is not yet done poisoning things.
Groundwater is pouring into the plant’s ravaged reactor buildings at a rate of almost 75 gallons a minute. It becomes highly contaminated there, before being pumped out to keep from swamping a critical cooling system. A small army of workers has struggled to contain the continuous flow of radioactive wastewater, relying on hulking gray and silver storage tanks sprawling over 42 acres of parking lots and lawns. The tanks hold the equivalent of 112 Olympic-size pools. But even they are not enough to handle the tons of strontium-laced water at the plant – a reflection of the scale of the 2011 disaster and, in critics’ view, ad hoc decision making by the company that runs the plant and the regulators who oversee it. In a sign of the sheer size of the problem, the operator of the plant, Tokyo Electric Power Company, or Tepco, plans to chop down a small forest on its southern edge to make room for hundreds more tanks, a task that became more urgent when underground pits built to handle the overflow sprang leaks in recent weeks.
Surely in the wake of such an accident, people the world over would clamor for a time out and a fundamental rethink of nuclear 60 year old reactor designs at the very least, let alone the viability of nuclear as a fuel source, yes? That Big Think that we were supposed to have either hasn’t occurred, or has been sotto voce:
WASHINGTON — All 104 nuclear power reactors now in operation in the United States have a safety problem that cannot be fixed and they should be replaced with newer technology, the former chairman of the Nuclear Regulatory Commission said on Monday. Shutting them all down at once is not practical, he said, but he supports phasing them out rather than trying to extend their lives.
The position of the former chairman, Gregory B. Jaczko, is not unusual in that various anti-nuclear groups take the same stance. But it is highly unusual for a former head of the nuclear commission to so bluntly criticize an industry whose safety he was previously in charge of ensuring.
Asked why he did not make these points when he was chairman, Dr. Jaczko said in an interview after his remarks, “I didn’t really come to it until recently.”
Perhaps that was after the checks quit clearing. Charlie Pierce brings the point home:
How anyone, even the most profit-hungry plutocrat on the planet, can look at what is still happening at Fukushima two years later and determine that financial concerns remain in any way relevant to the discussion of what has to be done about a steadily spiraling catastrophe — I mean, chopping down a forest to build more storage tanks is Plan A? Really? Where do they build the next hundred tanks? Downtown Osaka?
Deeply reassuring to know we have our best investigative minds on the subject.
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Speaking of our best minds, and closer to home, those in charge of ferreting out answer to the Boston Bombing have extended their investigation to corral three more seriously judgment-impaired college students. Pierce again:
Three college friends of Boston Marathon bombing suspect Dzhokhar Tsarnaev are under arrest, suspected of removing items from his dorm room after the April 15 attack, sources said Wednesday. Two of the pals were detained April 20 on immigration charges and a third has now been taken into custody, sources said. They are expected to face obstruction of justice charges, the sources said.
Even by the standards of college buddies, this is remarkably stupid behavior, and my opinion of it will remain that until I see some evidence as to why we should now not expand our list of shorthand references to the people involved in this awful crime from Murderous Dipshits 1 and 2, to Murderous Dipshits 1 and 2 Plus Accessorial Dipshit 3 through 5.
NPR did a pretty spirited report read by Corey Flintoff that purports to investigate the Boston Bombing… in Southern Russia.
The search for the motivations of the alleged Boston Marathon bombers stretches from New England to Central Asia, but a lot of attention has been focused on Dagestan.
The mostly Muslim republic is located in the southernmost part of Russia, and it’s been the battleground in a low-level insurgency that takes lives nearly every day.
One of the suspects, Tamerlan Tsarnaev, traveled to Dagestan twice in recent years, and investigators want to know whether that experience led him toward a radical and violent form of Islam.
Tamerlan Tsarnaev’s parents and other relatives lived in the republic’s capital, Makhachkala, a city of nearly 600,000 that sprawls along the Caspian Sea. The city backs up against the North Caucasus, the blue-green mountains that have made places like Dagestan and neighboring Chechnya havens for bandits and rebels for centuries…
Which you are free to read at your leisure. My response when listening was that, like CNN, Howard Kurtz, et al, NPR will dutifully keep “catapulting the propaganda” that there is an Islamic connection, the better to help fuel the next neocon cry for the next useless neocon war, as always fought with the blood of the children of the working class. They are working overtime to affix an Islamist motivation to this crime; wherein you probably have Dylan Klebold in a ballcap and without the long coat.
Also rapidly disappearing down the Tsarniev memory hole is the allegation that Tamerlan became sour on the US after the Golden Gloves Changed elegibility rules on him.
Tamerlan Tsarnaev, right, lost at the Golden Gloves championships in 2009. A year later, a new citizenship rule blocked him from competing again for a title.
The cocksure fighter, a flamboyant dresser partial to white fur and snakeskin, had been looking forward to redeeming the loss he suffered the previous year in the first round, when the judges awarded his opponent the decision, drawing boos from spectators who considered Mr. Tsarnaev dominant.
From one year to the next, though, the tournament rules had changed, disqualifying legal permanent residents — not only Mr. Tsarnaev, who was Soviet-born of Chechen and Dagestani heritage, but several other New England contenders, too. His aspirations frustrated, he dropped out of boxing competition entirely, and his life veered in a completely different direction.
Mr. Tsarnaev portrayed his quitting as a reflection of the sport’s incompatibility with his growing devotion to Islam. But as dozens of interviews with friends, acquaintances and relatives from Cambridge, Mass., to Dagestan showed, that devotion, and the suspected radicalization that accompanied it, was a path he followed most avidly only after his more secular dreams were dashed in 2010 and he was left adrift.
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As it happened, Golden Gloves of America was just then changing its policy. It used to permit legal immigrants to compete in its national tournament three out of every four years, barring them only during Olympic qualifying years, James Beasley, the executive director, said. But it decided in 2010 that the policy was confusing and moved to end all participation by noncitizens in the Tournament of Champions.
So Mr. Tsarnaev, New England heavyweight champion for the second year in a row, was stymied. The immigrant champions in three other weight classes in New England were blocked from advancing, too, Mr. Russo said.
Mr. Tsarnaev was devastated. He was not getting any younger. And he was more than a year away from being even eligible to apply for American citizenship.
Neighbors and some close to the brothers doubt that they were “radicalized” in Dagestan. It could be that Tamerlan, at least, was radicalized by that most American of institutions: a change in the rules of the game.
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And closer to home—much closer, for me, we have some archaeological “proof” that Jamestown settlers turned to cannibalism during the difficult “Starving Time” endured by the first wave of Jamestown colonists.
"The evidence is absolutely consistent with dismemberment and de-fleshing of this body" - Doug Owsley, forensic anthropologist
Newly discovered human bones prove the first permanent English settlers in North America turned to cannibalism over the cruel winter of 1609-10, US researchers have said.
Scientists found unusual cuts consistent with butchering for meat on human bones dumped in a rubbish pit.
The four-century-old skull and tibia of a teenage girl in James Fort, Virginia, were excavated from the dump last year.
James Fort, founded in 1607, was the earliest part of the Jamestown colony.
Researchers fashioned a three-dimension replica of the girl's face.
The original colony survived, though starvation depleted its ranks to 60 people.
The Starving Time was one of the most horrific periods of early colonial history. The James Fort settlers were under siege from the indigenous Indian population and had insufficient food to last the winter.
First they ate their horses, then dogs, cats, rats, mice and snakes. Some, to satisfy their cruel hunger, ate the leather of their shoes.
Which goes to show nothing so much as what human beings will resort to do when sheer survival is at stake. It is reasonable to assume that the cultural prohibition against consuming human flesh was as strong among 17th century British colonist as it is among us today. Another cautionary tale for those of us who have watched and read Cormac McCarthy’s “The Road” and/or seen the film, when considering the near-term implications of what Full Doom might look like for those of us not ensconced in some Federally constructed and provisioned underground bunker.
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In an article posted by JoeP in the forum and reposted on my news channel, biologist Paul Ehrlich
Believe(s) that we are on a straightforward course to a collapse of our civilization.” He cited signs, such as diminishing returns from natural resources, that he said were recognizable from studying the collapse of other civilizations throughout history.
Paul Ehrlich
Reasons for that are baked into our DNA, says Ehrlich:
“We’re a small-group animal, both genetically and culturally. We have evolved to relate to groups of somewhere between 50 and 150 people,” he said. “And now suddenly we’re trying to live in a group not of 150 or 100 people, but of seven billion people, somewhat over seven billion people at the moment, and that is presenting us with a whole array of problems.”
Those problems include an inability to recognize gradual, large-scale changes in our environment as dangerous.
“Another thing that’s related to that, that’s presenting us with a whole array of problems, is that most of our evolution going on now is cultural evolution,” Ehrlich went on. “And the problem is cultural evolution has not gone on at the same rate in every area of human endeavor. Where has it gone on most rapidly? It’s gone on most rapidly in the area of technology.”
He cited signs, such as diminishing returns from natural resources, that he said were recognizable from studying the collapse of other civilizations throughout history.
It will come as no surprise to readers of the Diner Blog and forum that technology has outstripped our capacity for judgment and our moral dimension. As discussed elsewhere in the Forum, the nominal group size of a viable community is about 150. Something to consider as we track the various vectors of doom.
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Sources:
http://www.esquire.com/blogs/politics/The_Ongoing__Fukushima_Disaster#ixzz2SFtnZDHs
http://www.npr.org/2013/05/01/180108357/investigating-the-boston-bombing-in-southern-russia
http://www.bbc.co.uk/news/world-us-canada-22362831
http://vtdigger.org/2013/05/01/biologist-paul-ehrlich-gives-dire-prediction-for-global-civilization/
Reaching Oil Limits – New Paradigms are Needed
Off the keyboard of Gail Tverberg
Published on Our Finite World on April 30, 2013
Discuss this article at the Epicurean Delights Table inside the Diner
I have written in recent posts that oil limits are more complex than what many have imagined. They aren’t just a lack of a liquid fuel; they are inability to compete in a global economy that is based on use of cheaper fuel (coal) and a lower standard of living. Oil prices that are too low for oil exporting nations are a problem, just as oil prices that are too high are a problem for oil importing nations.
Debt limits are also closely tied to oil supply limits. It is actually debt limits, such as those we seem to be reaching right now, that may bring the whole system to a screeching stop. (See my posts How Resource Limits Lead to Financial Collapse, How Oil Exporters Reach Financial Collapse, Peak Oil Demand is Already a Huge Problem, and Low Oil Prices Lead to Economic Peak Oil.)
We have many Main Street Media (MSM) paradigms that mischaracterize our current predicament. But we also have what I would call Green paradigms, that aren’t really right either, because they don’t recognize the true state of our predicament. What we need now is new set of paradigms. Let’s look at a few common beliefs.
Inadequate Oil Supply Paradigm
As I stated above, indications that oil supply is a problem are confusing. MSM seems to believe, “If the US can be oil independent, our oil supply problems are solved.” If a person believes the goofy models our economists have put together, this is perhaps true, but this is not true in the real world.
Without a huge, huge increase in US oil production (far more than is being proposed), being “oil independent” simply means that we are unable to compete in the world market for buying oil exports. US oil consumption ends up dropping, and we end up on the edge of recession, or actually in recession. Oil exports instead go to the countries that have lower manufacturing costs (that is, use oil more sparingly). See Figure 1 below. In fact, even some of the oil products that are created by US refineries end up going to users in other countries, because it is businesses in other countries that are making many of today’s goods, and it is these businesses and the workers they hire who can afford to buy products like gasoline for their cars or diesel for their irrigation pumps.
Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.
The Green version of this paradigm seems to be, “If world oil supply is rising, everything is fine.” This is related to the idea that our problem is “peak oil” production caused by geological depletion, and if we haven’t hit peak oil production, everything is more or less OK. In fact, the limit we are reaching is an economic limit, that comes far before world oil supply begins to decline for geological reasons. See my post, Low Oil Prices Lead to Economic Peak Oil.
The real paradigm is, “Limited oil supply leads to financial collapse.” This is true for both oil exporters and for oil importer. For oil importers, the problem occurs because they cannot import enough oil, and oil is needed for critical parts of the economy. The belief by economists that substitution will take place is not happening in the quantity and at the price level (very low) that it needs to happen at, to keep the economy expanding as it has in the past.
Limited oil supply first leads to high oil prices, as it did in the 2004 to 2008 period; then it leads to government financial distress, as governments try to deal with less employment and lower tax revenue. By the time oil prices start falling because of the poor condition of oil importers, we are well on our way down the slippery slope to financial collapse.
Growth Paradigm
The MSM version of this paradigm is, “Growth can be expected to continue forever.” A corollary to this is, “The economy can be expected to return to robust growth, soon.”
In a finite world, this paradigm is obviously untrue. At some point, we start reaching limits of various kinds, such as fresh water limits and the inability to extract an adequate supply of oil cheaply.
Economists base their models on the assumption that the economy only needs labor and capital; it doesn’t need specific resources such as fresh water and energy of the proper type. Unfortunately, substitutability among resources is not very good, and price is all-important. In the real world, growth slows as resources become more expensive to extract.
The Green version of the growth paradigm seems to be, “We can have a steady state economy forever.” Unfortunately, this is just as untrue as the “Growth can be expected to continue to forever.” Even to maintain a steady state economy requires far more cheap-to-extract oil resources than the earth really has. (US shale oil resources, which are the new hope for oil growth, can only grow if oil prices are sufficiently high.)
We are very dependent on fossil fuels for making our food supply possible and for our ability to make metals in reasonable quantity. Fossil fuels are also necessary for making concrete and glass in reasonable quantities, and for making modern renewable energy, such as hydroelectric dams, wind turbines, and PV panels. We cannot keep 7 billion people alive without fossil fuels. Perhaps the quantity of fossil fuels consumed can be temporarily reduced from current levels, but with continued population growth, any savings will be quickly offset by additional mouths to feed and by the desire of the poorest segment of the population to have the living standards of the richest.
Unfortunately, the correct version of the paradigm seems to be, “Overshoot and collapse is to be expected.” This is what happens in nature, whenever any species discovers a way to way to increase its energy (food) supply. Yeast, when added to grape juice will multiply, until the yeast have consumed the available sugars and turned them to alcohol. They then die.
The same pattern has happened over and over with historical civilizations. They learned to use a new approach that allowed them to increase food supply (such as clearing land of trees and farming the land, or adding irrigation to an area), but eventually population caught up. Research shows that before collapse, they reached financial limits much as we are reaching now. The symptoms, both then and now, were increasingly great wage disparity between the rich and the working class, and governments that needed ever-higher taxes to fund their operations.
Eventually a Crisis period hit these historical civilizations, typically lasting 20 to 50 years. Workers rebelled against the higher taxes, and more government changes took place. Governments fought wars to get more resources, with many killed in battle. Epidemics became more of a problem, because of the weakened condition of workers who could no longer afford an adequate diet. Eventually the population was greatly reduced, sometimes to zero. A new civilization did not rise again for many years.
Figure 2. One possible future path of future real (that is, inflation-adjusted) GDP, under an overshoot and collapse scenario.
It seems to me that unfortunately overshoot and collapse is the model to expect. It is not a model anyone would like to have happen, so there is great opposition when the idea is suggested. Overshoot and collapse is very similar to the model described in the 1972 book Limits to Growth by Donella Meadows and others.
Role of Economics, Science, and Technology Paradigm
The MSM paradigm seems to be, “Economics and the businesses that make up the economy can solve all problems.” Growth will continue. New technology will solve all problems. We don’t need religion any more, because we now understand what makes people happy: More stuff! As long as the economy can give people more stuff, people will be satisfied and happy. Economics even can allow us to find “green” solutions that will solve environmental problems with win-win solutions (assuming you believe MSM).
The Green version of the paradigm seems to be, “Science and technology can solve all problems, and can properly alert us to future problems.” Again, we don’t need religion, because here we can put our faith in science to solve all of our problems.
I am not sure the Green version of the paradigm is any more accurate than the MSM media version. Science is not good at figuring out turning points. It is very easy to miss interactions that are outside the realm of science, and more in the realm of economics–for example, the fact high-priced oil is not an adequate substitute for cheap-to-extract oil, and it is the lack of cheap oil that is causing a major portion of today’s problem.
It is also very easy to put together climate change models that are based on far too high assumptions of the amount of fossil fuels that will be burned in the future, because economic interactions are missed. If debt collapse brings down the economy, it will bring down all fossil fuels at once, meaning that the vast majority of what we think of as reserves today will stay in the ground forever. A debt collapse will also affect renewables, by cutting off production of new renewables, and by making maintenance of existing systems more difficult.
The real paradigm should be, “Neither science and technology, nor economics can solve the problems of humans. We have instincts similar to those of other species to reproduce in far greater numbers than needed for survival, and to utilize all resources available to us. This leads us toward overshoot and collapse scenarios, even though we have great knowledge.“
Because of our propensity toward overshoot and collapse scenarios, humans have a real need for a “moral compass” to tell us what is right and wrong. If there is no longer enough food to go around, how do we decide which family members should get it? Is it OK to start a civil war, if there are not enough resources to go around? There is also a need to deal with our many personal disappointments, such as finding that the advanced degrees we worked so hard on will have little use in the future, and that life expectancies are much lower. Perhaps there is still a need for religion, even though many have abandoned the idea. The “story line” of religions may not sound exactly reasonable, but if a particular religion can provide reasonable guidance on how to handle today’s problems, it may still be helpful.
Climate Change Paradigm
The MSM view of climate change seems to vary with the country. In the US, the view seems to be that it is not too important, and that it can be adapted to. Perhaps the models are not right. In Europe, there is more belief that the models are right, and that local cutbacks in fossil fuel consumption will reduce world CO2 production.
The Green view of climate change seems to be, “Of course climate change models are 100% right. We should rationally be able to solve the problem.” There is only the minor detail that humans (like other species) have a basic instinct to use energy resources at their disposal to allow more of their offspring to live and to allow themselves personally to live longer.
Unfortunately, a more realistic view is that climate change may indeed be happening, and may indeed by caused by human actions, but (1) we are already on the edge of collapse. Moving collapse ahead by a few months will not solve the climate change problem, and (2) collapse itself is an even worse problem than climate change to deal with. By the time rising ocean levels become a problem, population is likely to be low enough that the remaining population can move to higher ground, and agriculture can move to where the climate is more hospitable.
Climate change may indeed cause population to drop even more than it would if our only problem were overshoot and collapse. But because the cause is related to human instincts (having more offspring than needed to replace oneself and the drive to use energy supplies that are available), changing the underlying behavior is extremely difficult.
Over the eons, the earth has been cycling from one climate state to another, with one species after another being the dominant species. Perhaps natural balances are such that the time has now come that humans’ turn as the dominant species is over. The earth is now ready to cycle to a state where some other species is dominant, perhaps a type of plant that can use high carbon dioxide levels. If this is the case, this is another disappointment that we will need to deal with.
Nature of Our Problem Paradigm
The MSM’s paradigm seems to be, “Our problem is getting the economy back to growth.” Or, perhaps, “Our problem is preventing climate change.“
In a way, the MSM paradigm of “Our problem is getting the economy back to growth,” has some truth to it. We are slipping into financial collapse, and in a sense, getting the economy back to growth would be a solution to the problem.
The underlying problem, however, is that oil supply is getting more and more expensive to extract. This means that an increasing share of resources must be devoted to oil extraction, and to other necessary activities (such as desalinating water because we are reaching fresh water limits as well). As a result, the rest of the world’s economy is getting squeezed back. See my post Our Investment Sinkhole Problem. Squeezing the world’s economy creates great problems for all of the debt outstanding. The likely outcome is widespread debt defaults, and collapse of the world economy as we know it.
The Green paradigm seems to be, “We have a liquid fuel supply problem.“ If we can solve this with other liquid fuels, or with electricity, we will be fine. Many Greens also emphasize the climate change problem, so their big issue is finding electric solutions for the liquid fuel supply problems. There is also an emphasis on local food production, especially with respect to perishable foods.
Unfortunately, the real problem seems to be, “We are facing a financial collapse scenario that is likely to wreak havoc on all energy sources at once.” Using less oil products may be helpful for a while, but in the long term, we are dealing with an issue of major system collapses. Using less of a particular product “works” as long as the supply chain for that product is still intact, including the existence of all of the factories needed to make the product, and the existence of trained workers to operate the factories. Banks also need to remain open. World trade needs to continue as well, if we are to keep our supply chains operating. The real danger is that supply chains for many essential services, including fresh water, sewage disposal, medicines, grain production, road repair, and electricity transmission repair will be interrupted. As a result, we will need to find local solutions for all of them.
The situation we are facing is not at all good. While we can do a little, it will be very challenging to build a new system that does not use fossil fuels. In the past, when the world did not use fossil fuels, the population was much lower than today–one billion or less.
Also, in the past, we started simple, and gradually added complexity to solve the problems that arose. This time around, we need to do the reverse. We already have very complex systems, that are too difficult to maintain for the long term. What we need instead is simpler systems that can be maintained with local materials. This is not a direction in which science and technology is used to working.
Creating new systems that require only local resources (and a few other resources, if transport can be arranged) will be a real challenge. Areas of the world that have never adopted modern technology would seem to have the bast chance of making such a change.
Importance of Tomorrow Paradigm
MSM seems to assume that we can save and plan for tomorrow. Greens have a similar view.
Perhaps, given the changes that are happening, we need to change our focus more toward to day, and less toward tomorrow. How can we make today the best day possible? What are the good things we can appreciate about today? Are there simple things we can enjoy today, like sunshine, and fresh air, and our children?
We have come to believe that we can and will fix all of the problems of tomorrow. Perhaps we can; but perhaps we cannot. Maybe we need to simply take each day as it comes, and solve that day’s problems as best as we can. That may be all we can reasonably accomplish.
Low Oil Prices Lead to Economic Peak Oil
Off the keyboard of Gail Tverberg
Published on Our Finite World on April 21, 2013
Discuss this article at the Energy Table inside the Diner
We have all heard the story about oil supply supposedly rising and falling for geological reasons. But what if the story is a little different from this–oil production rises and falls for economic reasons? If this is the issue, it doesn’t really matter how much oil is in the ground. What matters is if economic conditions are “right” for continued and rising extraction. I have shown in previous posts that oil prices that are too high are a problem for oil importers while oil prices that are too low are a problem for oil exporters. As a result, oil prices need to be in a Goldilocks zone, or we have serious problems, of one sort or another.
As long as the price of oil keeps rising, there is at least some chance the amount of oil extracted each year will keep rising, because more oil resources will become economic to extract. The real problem arises when oil price falls back from a price level it has held, as it has done recently, and as it did back in July 2008. Then there is a real chance that investment will become non-economic, and because of this, oil production will fall.
Figure 1. World crude oil price and production, based on monthly EIA data.The corresponding price in late April is approximately $100 barrel, so is even lower yet.Oil prices play multiple roles:
- High oil prices encourage extraction from more difficult locations, because the higher cost covers the additional extraction costs.
- High oil prices allow exporters to have adequate money to pacify their populations, even if their oil exports have been declining, as they have been for many exporters.
- High oil prices allow funds for investment in new oil fields, as old ones deplete.
- High oil prices tend to put oil importing countries into recession, because it raises the costs of goods and services produced, without raising the salaries of the workers. In fact, there is evidence that high oil prices lower wages (both directly and through lower workforce participation).
- High oil prices make countries that use large amounts of oil less competitive with countries that use less fuel in general, and less oil in particular.
When oil prices decline, it is evidence that Items 4 and 5 above are outweighing Items 1, 2, and 3. This tips the scale in the direction of a fall in oil production.
Debt also affects oil prices. As long as investors have faith that businesses can make money, despite high oil prices, they will continue to borrow to expand their businesses. This additional debt helps drive up demand for goods and services of all kinds, including oil, so oil prices rise. Also, if consumers are able to borrow increasing amounts of money, this also drives up demand for goods that use oil, such as cars. But once the debt bubble bursts, it is easy for oil prices fall very far, very fast, as they did in 2008.
If we look at the 2008 situation, oil limits were very much behind the overall problem, even though most people do not recognize this connection. It was the fact that oil limits eventually led to credit limits that caused the system (including oil prices) to crash as it did. High oil prices led to debt defaults and bank write offs, and eventually led to a huge credit contraction in economies of the developed world. This credit contraction affected not just oil demand, but demand for other energy products as well.
The problems of the 2008 period were never really solved: the lack of growth in world oil supply remains, and this lack of growth in world oil supply continues to hold back world economic growth, particularly in developed countries. We recently have not been feeling the effects as much, because with deficit spending, the problems have largely moved from the private sector to the government sector.
The situation remains a tinderbox, however. The financial situation is propped up by ultra-low interest rates, continued government deficit spending, and Quantitative Easing. In a finite world, debt growth cannot continue indefinitely. But if debt growth permanently stops, and switches to contraction, we would end up in an even worse financial mess than in 2008. In fact, such a change would very likely to would lead to a contraction of “Limits to Growth” proportions.
In this post, I will explain some of these issues further.
The Rise and Fall of Oil Prices in 2008
Figure 2. World crude oil production and Brent oil prices, based on monthly EIA data, with different scale for oil production.If we look at world oil production and price between January 1998 and July 2008 on an X-Y graph, we see that as long as oil demand stayed below 71 million barrels a day, oil price stayed low (Figure 3, below). But once demand started to push above that level, oil price started to rise rapidly, with little increase in production. It was as if a brick wall on oil supply had been hit. No matter how much the oil price rose, virtually no more production was available.
Figure 3. X-Y graph of world of monthly world oil production and price data, based on the EIA data shown in Figures 1 and 2.If we look at an X-Y graph of the non-OPEC portion of oil supply, we see that the situation was even worse for the non-OPEC portion (Figure 4, below). The amount of oil that could be produced at a given price had actually begun to fall back. While in 2003 and 2004, non-OPEC had been able to produce 42 million barrels a day for only $30 barrel, by 2008, non-OPEC could not reach 42 million barrels a day, no matter how high the price. It looked as though non-OPEC had hit “peak oil” production. Geological limits appeared to have the upper hand.
Figure 4. X-Y graph of world of non-OPEC world oil production and price data, based on EIA data.Fortunately, during this period OPEC was able to raise its production somewhat, in response to higher prices, as illustrated in Figure 5, below. Between July 2007 and July 2008, it was able to raise oil production by 2.1 million barrels a day, in response to a $56 dollar a barrel increase in price in a one-year time-period. (The small increase in response to a huge price rise suggests that OPEC’s spare capacity was not nearly as great as claimed, however.)
Figure 5. X-Y Graph of OPEC oil production and price, based on EIA data.What brought about the collapse in oil prices in July 2008? I believe it was ultimately a financial limit that was reached that eventually worked its way to the credit markets. Once the credit markets were affected, individuals and businesses were not able to borrow as much, and it was this lack of credit that cut back demand for many types of products, including oil.
The way this cutback in credit came about was as follows: Oil prices had been rising for a very long time–since about 2003, affecting the inflation rate in food and fuel prices. The Federal Reserve Open Market Committee tried (unsuccessfully) to get oil prices down by raising target interest rates. I describe this in an article published in the journal Energy called, “Oil Supply Limits and the Continuing Financial Crisis,” available here or here. The combination of high oil prices and higher interest rates led to falling housing prices starting in 2006 (big oops for the Federal Reserve), and debt defaults, particularly among the most vulnerable (those with sub-price mortgages). As early as 2007, large banks had large debt write-offs, lowering their appetite for more debt of questionable quality. Total US household mortgage debt reached its maximum point on June 30, 2008, and began to fall the following quarter.
Figure 6. US Mortgage Debt Outstanding, based on Federal Reserve Z1 Report.By July 2008, the financial problems of consumers in response to high oil prices and falling housing prices had transferred to other credit markets as well. Revolving credit outstanding (mostly credit card debt), hit a maximum in July 2008, and has not recovered (Figure 7 below). (July 2008 is exactly the same month as oil prices began to fall!) Non-revolving credit, such as auto loans, hit a maximum in the same month.
Figure 7. US Revolving Debt Outstanding (mostly credit card debt) based on monthly data of the Federal Reserve.Credit issues kept getting worse. The Federal takeover of Fannie Mae and Freddie Mac took place in September 2008, as did the bankruptcy of Lehman Brothers. By late 2008, cutbacks in credit had spread to businesses including all sectors of the energy industry. I wrote an article on December 1, 2008, documenting that credit issues led to lower prices not only for oil, but for coal, natural gas, nuclear, and renewables as well.
The reason why a cutback in credit availability is a problem is because it is very difficult to buy a new car or home, or to finance a new business operation, if credit isn’t available. In fact, the amount a business or family can spend depends on the sum of their income during a period, plus the amount of additional debt they take on during that period. If the amount of debt outstanding is going down, then, for example, old credit card debt is being paid down faster than new credit card is being added, and the amount currently spent is lower.
The Federal Government tried to fix the situation by running larger deficits (Figure 8), starting the very next quarter after oil prices hit a peak and started declining.
Figure 8. US Federal Debt, from Federal Reserve Z-1 Report. (Excludes debt owed to Social Security and other Federal programs.)Oil prices rose again starting in 2009 as demand outside the US, Europe, and Japan continued to grow. By 2011, high oil prices were back. The economies of US, Europe and Japan did not bounce back to the kind of economic growth most expected, because at high oil prices, their products were not competitive in a world marketplace that relied on an energy mix that was slanted more toward coal (which is cheaper), and also offered lower wages.
In 2013, world oil supply is still constrained.
It is easy to get the idea from news reports that everything is rosy, but the story presented to us is painted to look much better than it really is. Production from existing sites is constantly depleting. In order to replace declining production, huge investment must be made in new productive capacity. It is as if oil producers must keep running, just to stay in place.
Part of the problem is that the cost of new capacity keeps escalating. I have called this the Investment Sinkhole Problem. The Financial Times describes the problem as Energy: More Buck, Less Bang.
Cash flow has historically financed much investment. Now we read, Energy Industry Struggling to Generate Free Cash Flow.
Many naive people believe Saudi Arabia’s stories about their “productive capacity” of 12.5 million barrels a day, but their maximum crude and condensate production in recent years has been only been 10,040,000, according to the EIA. Their recent production has been only a little over 9 million barrels a day in recent months, according to OPEC Monthly Oil Market Report.
Iraq is supposed to be the great hope for future oil production, yet it increasingly seems to be stumbling toward civil war.
Russia is now the largest oil producer in the world, with a little over 10.0 million barrels a day of crude and condensate production. According to a Russian analyst,”Gas condensate production is the real driver behind the [recent] growth. Crude oil output is falling and organic growth currently is impossible.”
Figure 9. US crude oil production, based on EIA data. 2012 data estimated based on partial year data. Tight oil split is author’s estimate based on state distribution of oil supply increases.Admittedly, tight oil production has ramped up quickly. But it is an expensive technology, that requires a high oil price, and lots upfront investment. There is evidence that such oil is concentrated in “sweet spots” and these get tapped out quickly. In North Dakota, the earliest area for US tight oil extraction, rig count is down from 203 at the beginning of June, 2012, to 176 at April 19, 2013, according to Baker Hughes. Lynn Helms, Director of the North Dakota Department of Mineral Services gave this explanation, “Rapidly escalating costs have consumed capital spending budgets faster than many companies anticipated and uncertainty surrounding future federal policies on hydraulic fracturing is impacting capital investment decisions.” Meanwhile, North Dakota oil production has recently been flat–perhaps because of weather; perhaps because of other issues as well.
The ramp-up in US crude oil production amounted to 812,000 barrels a day in 2012–very small in comparison to world crude oil needs. World oil production, shown in Figures 1 and 2, is barely affected. In a world with 7 billion people, most of whom would like vehicles, the amount of oil supply being added is tiny.
In 2013, the financial problems of the United States, the Euro-zone, and Japan haven’t gone away.
Current high oil prices make the big oil-importing countries less competitive. It is hard to compete with countries with lower average fuel costs, thanks a mix that it much heavier on coal, and lighter on oil. A graph of oil consumption shows that oil is increasingly going to the Rest of the World, rather than the US, EU, and Japan (Figure 10).
Figure 10. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.The countries that see little growth in oil consumption are the same ones struggling with low economic growth. Low economic growth makes debt very difficult to repay. Governments are tempted to add more debt, to try to fix their problems.
Tackling government debt problems in 2013 tends to bring recession back.
The big problem when oil prices rise is that workers’ discretionary income is squeezed, because their wages don’t rise at the same time. This problem can somewhat be offset by deficit spending of governments for programs to help the unemployed, and for stimulus.
Once taxes are raised, or benefits are cut, the old problem of lower discretionary income for workers reappears. Thus, the recession that governments so cleverly found a way around previously, re-emerges.
In 2005, there was a very sharp impact to oil prices when high oil prices indirectly affected the credit system. This time, a big issue is rising government taxes and lower benefits. These are staggered in their implementation, so the effect feeds in more slowly. Greece and Spain started their cut-backs early. The US raised Social Security taxes by 2% of wages, as of January 1, 2013. Later it added sequester cuts. All of these effects feed in slowly, and add up.
With respect to debt, in 2013 we are rapidly approaching the time when this time truly is different.
There has been a great deal in the press about a mistake Rienhart and Rogoff recently made in their book, This Time Is Different. I think Rienhart and Rogoff, as well as economists in general, have missed an issue that is much more basic: In a finite world, debt, like anything else, cannot keep growing. The economy (whether economists realize it or not) depends on physical resources, and these are in limited supply. One piece of evidence with respect to the limited supply of oil is the fact that the cost of its extraction keeps rising. This means that fewer resources are available to be used for making other goods and services.
I show in my paper, Oil Supply Limits and the Continuing Financial Crisis, that lower economic growth rates make debt harder to repay. Reinhart and Rogoff seem to confirm this relationship works in practice. In their NBER paper, “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises,” they make the observation, “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.”(They did not seem to understand why, though!)
The 2007-2009 recession partially brought the level of debt down, outside the government sector. Government debt has been ramping up rapidly because tax revenues are down and benefits are up (Figure 8).
Figure 11. US Debt by Sector, based on Federal Reserve Z.1 data. (Amounts shown exclude government debt that is not publicly held.)Government debt helps take the place of “missing” debt from other sectors (at least in theory). Now government debt is above acceptable levels. US debt is around 100% of GDP, and growing each quarter.
Without rapid economic growth, only a small portion of the debt that remains can be repaid. If increases in taxes/cutback in benefits leave more without work, a new round of debt defaults can be expected. Student loans are particularly at risk. Business loans maybe a problem as well, especially in discretionary industries. Government debt is likely to be a problem, especially for states and municipalities. Banks may again have financial problems, especially if they have exposure to debt from other countries, or student loans.
I am not certain what will happen to the huge amount of US government debt, if Quantitative Easing ever stops. The same might be said of the debt of all of the other countries doing quantitative easing. Who will buy the debt? And at what interest rate? If the interest rate rises, there will be a huge problem, because suddenly loans of all types will have higher interest rates. Governments will need higher taxes yet, to pay their debts. It will be hard to sell cars with higher interest rates on debt. Home prices will likely drop, because fewer people can afford to buy homes with higher interest rates.
I showed in Reaching Debt Limits what a big difference increases in household debt can make to per capita income (Figure 12).
Figure 12. Per capita wages (excluding government wages) similar to Figure 5. Also, the sum of per capita wages and the increase in household debt, also on a per-capita basis, and also increased to 2012$ level using the CPI-Urban. Amounts from US BEA Table 2.1 and Federal Reserve Z1 Report.If debt starts long-term contraction, we will truly have a mess on our hands. Businesses will have a hard time investing. Individuals will have a hard time buying big-ticket items, like cars, furniture, and houses. Demand for all types of goods and services will fall. I showed in my post Why Malthus Got His Forecast Wrong that increasing debt was what allowed rapid growth in fossil fuel use. If debt stops growing and starts shrinking, we will get to see the reverse of this phenomenon.
What is Ahead?
Lower oil prices indicate that demand is declining. (The cost of extraction is not lower!) Lower oil demand seems to be related to poorer earnings reports for the first quarter of 2013, which in turn is at least partly related to the increase in US Social Security taxes withheld, starting January 1, 2013. Nothing will necessarily happen quickly, but by next quarter’s earnings reports, some of the “sequester” cuts will be added to the cuts. Businesses with poor earnings are likely to lay off workers, and those workers will file for unemployment benefits. Gradually, we will see increasing evidence of recession.
It is not clear that this time will necessarily lead to the “all time” switch to long-term debt contraction, but it will bring us one step closer, at least in US, and probably in Europe and Japan as well. Oil supply may not drop very much, very quickly. If we are lucky, demand will bounce back and bring prices back up, as in 2009-2010. But with all of the debt problems around the world, it is possible that a contagion will begin, and defaults in one country will spread to other countries. This is what is truly frightening.
Diners on the Spaceship Earth
Off the keyboard of RE
Published on the Doomstead Diner on April 23, 2013
Discuss this article at the Energy Table inside the Diner
Of all the charts and graphs which can be pulled up off the net to demonstrate that the Peak Oil corner has been turned, none do it more effectively than the Total FSoA Gasoline Sales History chart published by the EIA at the top of this article.
Retail Gasoline sales to J6P essentially fell off a cliff beginning in 2005, actually well before the collapse of Bear Stearns and Lehman Brothers and the implosion of the Subprime Mortgage Market, all today seen as watershed moments in the ongoing collapse of Industrial Civilization. Today in 2013, retail gasoline sales are 50%, HALF what they were at the Peak of Happy Motoring in 2005. That is roughly 8 years of time, an average rate of decline of around 6% per year. Assuming no other trend line changes, retail gasoline demand in 2021 would hit ZERO. This all while total population size (if you believe the stats) continues to INCREASE, which can only mean a lower per capita usage of energy through this period.
It may not take that long of course if the Dollar crashes, or it might take longer if some sort of “plateau” effect takes place as portions of the world economy are triaged off the Oil Jones, but there is no evidence to support the idea said demand will ever Rebound, or that if it did rebound that Gasoline could be produced in sufficient quantity at cheap enough price to supply that demand.
Oil production at all the main “Legacy” fields such as the North Slope here in Alaska is in decline, with the persistent Myth promulgated in the MSM that Horizontal Drilling and Fracking will produce enough to replace the lost production from the conventional Oil fields. If that were really true, the Oil companies would have been ramping up this production to keep the demand up and keep the game going, but the fact of the matter is that said companies are shutting down Refineries here and in Europe because the demand isn’t there to justify their existence. The only reason they can still show a “profit” is because the price is so high, and the few people with money/credit left are Bankrupting themselves to keep buying it. Eventually there won’t be enough of them left either to keep 1/2 the number of refineries open, at which point it shrinks again to 1/4. Then 1/8 etc until finally there isn’t enough tax revenue coming in to keep maintaining the roads and bridges, and Open Gas Stations can only be found in a few small Ringfenced local economies. No more Happy Motoring for ANYBODY after that, drive a few miles outside a Major Metro there will be no Open Gas Station around to fill up your Jag or Maserati, even if you are a Filthy Rich Pigman.
The other Myth promulgated is that besides Fracking producing enough liquid fuels to replace the lost production from fields like the North Slope and Ghanwar, Happy Motoring will transition off the ICE and move to EVs, battery powered vehicles running on Electricity. The problems with that idea are abundant, overall the battery technology is itself very dependent on fossil fuels for extraction and refinement of the Rare Earth Metals used in the more durable rechargeables, and the Electric Grid as it stands is decaying and having major issues with Demand Destruction as well. As more McMansions get abandoned because the ex-Suburbanites can’t pay the Mortgage, the revenue stream to the Local Power Company drops off the map. They keep cutting back on Staff, maintenance is deferred, breakdowns and blackouts become more common. What do you DO if you have driven your EV to the next county over to visit Granma and her Lights are OUT, so you can’t charge up the Prius to drive back home? Are you going to wait for the Solar PV Panel on the Roof of said Prius to recharge the batteries? Maybe with REALLY sunny days in a Week or Two the PV panels could generate enough electricity to get you halfway home.
It’s pretty obvious why there is so much Demand Destruction in Gasoline consumption now here in the FSoA, one only has to look at the UE figures and the size of the Employed workforce to see the reason for it. Although the BLS persistently massages the UE figures by dropping people off the stats, the actual number of working age people gainfully employed continues to drop, all while the total population continues to increase. Although we do use copious amounts of gasoline to drive around willy-nilly for no good reason, in REALITY the major use of the automobile is to get J6P to and fro his workplace in the Morning and Evening Rush Hour. The Billions of Gallons of Gas wasted by J6P sitting in Rush Hour Traffic Jams for the last 50 years here in the FSoA is impossible to calculate, but those gallons were a HUGE portion of the demand for Gasoline in the Car based economy developed here in the post-WWII era. Fewer people employed means fewer people driving to work, less gas consumed. Old Retired Boomers & Silents don’t usually consume that much gas, besides a few who cruise their Bugout Machines around the country to visit Grandkids. They mostly sit home these days and get into arguments on Internet Message Boards and Blogs like the Doomstead Diner. LOL. Consumptive still of Electricity, but it doesn’t use much Gas.
The effect is of course synergistic, since so much of the economy is based on people driving around willy-nilly, as fewer people do this, more jobs are lost. Now it’s not just Retired Silents hanging out at home getting into arguments on the Internet, UE GenXers and even Millenials are doing it too! Nobody has REASON to leave the house, they don’t have JOBS to go to! The only reason to leave is to go to Walmart to pick up Food for the Week, or even MONTH if you really wanna conserve on Gas usage. In most cases also, people are not SOOOO far from their local Walmart they can’t ride a bike pulling a trailer to pick up Groceries using their JPMC SNAP cards either. That crew represents near 50M people in the FSoA now, close to 15% of the whole population NOT using any gasoline at all!
Right beneath everyone’s NOSE, the effects of Peak Oil have been ongoing in earnest since 2005. Really of course they began long before that in the late 60s and 70s, evidenced by the Political Turmoil in those years as well as the Oil Embargos by OPEC, not to mention the closing of the Gold Window by Nixon in 1971 and the ever increasing Debt load taken on in the intervening years to mask the effects, at least here in the FSoA.
Now however since the problem has gone GLOBAL rather than LOCAL, the old tricks of Masking resource depletion with Debt Issuance is no longer working too well. There are no “Credit Worthy” customers anywhere on the whole GLOBE left now, and there are no SOLVENT Banks or Sovereigns left who can lend to anybody either! Anybody who thinks the Chinese or Germans are really solvent needs a wake up call, neither of them are. They just have positive account balances measured in debt other Insolvent countries “owe” them. Will the FSoA EVER pay back the $2T in USTs held by the Chinese? With WHAT? They don’t even need J6P as SLAVES, they got 1.3B of their own Slaves to Feed & Clothe here.
So inexorably and in rather RAPID time here we see the economic system collapsing in tandem with the Energy extraction and Distribuition system, which really TOOK OFF in the late 1800s with the development of the Railroads and then Standard Oil under the aegis of John D. Rockefeller. EVERYTHING in the Industrial Economy since that time was based on a seemingly ENDLESS supply of Cheap Energy in 1880, but what in fact was a quite LIMITED supply which enabled a huge Population EXPLOSION of Homo Sapiens, which just ended up CONSUMING said energy all that much faster. I remember reading as a 2nd Grader in Brasil out of a textbook that we had a “500 Year” supply of Oil, which perhaps we did at the population size and per capita consumption of the era, but the Exponential Function took care of that problem in 50 years. It is plain OBVIOUS as a Pimple on your Nose that we are running short on the Cheap Energy necessary to run the Industrial Lifestyle. Every last economy tied to this system is in some stage of Collapse now, barely 8 years since Gasoline demand started to Crater here in the FSoA. All due respect to John Michael Greer, that is NOT a “Slow Catabolic Collapse”, it is a fucking HEAD ON COLLISION with REALITY.
What can you DO about this problem? It is not going away here, and Goobermint cannot really solve the problem, at least on a Global Basis they can’t. Locally it may be solved for a while by the Big Ass Military stealing resources from some places to keep Happy Motoring going here in the FSoA for another day, week, month or year, but that strategy gets ever less effective all the time as the Costs for running such Wars grow ever Greater, while the resources captured are ever less productive. When the War Machine cannot feed ITSELF, it collapses on the Grand Scale and this is still a bit down the line, though perhaps not as far as some people believe.
The best you can do is to find others who understand these problems and who see the Writing on the Wall, and plan together with them a new Life in the Post Industrial Economy, such as it may evolve here in the future. Here on the Diner, this is what we DO on a daily basis as we hash out TEOTWAWKI. Such discussions formed the Genesis of our SUN Project, for Sustaining Universal Needs, and we invite all others to join with us as we plan for a BETTER TOMORROW. Only through Cooperation and Selflessness can anyone make it through the shitstorm coming down the pipe here. NOBODY will survive going it alone, not even up here in the Bush of Alaska, not in the Yukon Territory either. Such strategies only might preserve your life for a bit, they won’t resolve the problem of making the society of Homo Sapiens compatible with the rest of Life on Earth. It is up to us to remake ourselves to be in harmony with the Spaceship Earth, and to do this TOGETHER. That is what it MEANS to be a DINER ON SPACESHIP EARTH.
THIS IS ALL WE HAVE. WE MAKE IT WORK, OR WE GO THE WAY OF THE DINOSAUR.
RE
Peak Oil Demand Destruction
Off the keyboard of Gail Tverberg
Published on Our Finite World on April 11, 2013
Discuss this article at the Energy Table inside the Diner
We in the United States, the Euro-zone, and Japan are already past peak oil demand. Oil demand has to do with how much oil we can afford. Many of the developed nations are not able to outbid the developing nations when it comes to the world’s limited oil supply. A chart of oil consumption shows that oil consumption peaked for the combination of the United States, EU-27, and Japan in 2005 (Figure 1).
Figure 1. Oil consumption by part of the world, based on EIA data. 2012 world consumption data estimated based on world “all liquids” production amounts.We can see an even more pronounced version of this pattern if we look at the oil consumption of the five countries known as the PIIGS in Europe: Portugal, Italy, Ireland, Greece, and Spain. All of these countries have had serious declines in oil consumption in recent years, as high oil prices have impeded their economies.
Figure 2. Oil consumption for Portugal, Italy, Ireland, Greece, and Spain, based on EIA data.Oil consumption for the PIIGS in total hit its highest level in 2004, before the decline began. Peak oil consumption by country varied a bit: Portugal, 2002; Italy, declining since 1995; Ireland, peak in 2007; Spain, peak in 2007; Greece, peak in 2006.
Peak demand is very much related to jobs. Peak oil demand occurs when a country is not competitive in the world market-place, and because of this, loses industry and jobs. One reason this happens is because the country’s energy cost structure is not competitive in the world market-place. With the run-up in oil prices starting about 2003, oil is by far the most expensive of the traditional energy sources we have available today. Countries that use a large percentage of oil in their energy mix can be expected to have a hard time competing, because of oil’s higher cost.
Figure 3. Oil consumption as percentage of energy consumption for selected countries, based on BP’s 2012 Statistical Review of World Energy.Anything else that is done which raises costs for businesses will also have an impact. This would include “carbon taxes,” if competitors do not have them, and if there is no tariff on imported goods to reflect carbon inputs.
High-cost renewables can also have an adverse impact, regardless of whether the cost is borne by businesses, consumers or the government.
- If the cost is borne by businesses, those businesses must raise their prices to keep the same profit margins, and because of this become less competitive.
- If the cost is borne by consumers, those consumers will cut back on discretionary expenditures, in order to balance their budgets. This is likely to mean a cutback in demand for discretionary goods by local consumers.
- If the government bears the cost, it still must pass the cost back to businesses or consumers, and thus reduce competitiveness because of higher tax costs.
This importance of competitiveness holds, no matter how worthy a given approach is. If costs were “externalized” before, and are now borne by the local system, it makes the local system less competitive. For example, putting in proper pollution controls will make local industry less competitive, if the competition is Chinese industry, acting without such controls.
One issue in competitiveness is wage levels. Wages in turn are related to standards of living. In a global economy, countries with higher wage levels for workers, and higher benefit levels for workers (such as health insurance and pensions) will be at a competitive disadvantage. Countries that use coal as their prime source of energy will be at an advantage, because workers’ wages will tend to “go farther” in heating their homes and buying electricity.
Countries that are warm in the winter will be at a competitive advantage, because homes don’t have to be built as sturdily, and don’t have to be heated in winter. Workers can commute by bicycle even in the coldest weather.
Energy usage (all types combined, not just oil) is far higher in cold countries than it is in warm wet countries. Countries that extract oil also tend to be high users of energy.
Figure 4. Per capita energy consumption for selected countries for the year 2010, based on EIA data.The difference in per capita energy usage among the various countries is truly astounding. For example, Bangladesh’s per capita energy consumption is slightly less than 2% of US energy consumption. This difference in energy consumption means that salaries can be much lower, and thus products made in Bangladesh can be much cheaper, than those made in the United States. This is part of our competitiveness problem, even apart from the energy mix problem mentioned earlier.
In my view, globalization brought on many of our current problems. Perhaps globalization could not be avoided, but we should have foreseen the problems. We could have put tariffs in place to make a more level playing field. See my post, Twelve Reasons Why Globalization is a Huge Problem.
Inadequate world oil supply isn’t exactly the problem. The issue is far more that the price of oil extraction is rising. The price of oil extraction is rising for a variety of reasons, an important one being that we extracted the easy to extract oil first, and what is left is more expensive to extract. Another issue is that oil exporters now have large populations that need to be kept fed and clothed, so they don’t revolt. This is a separate issue, that raises costs, even above the direct cost of extraction. There is no reason to believe that these costs will level off or fall, no matter how much oil the US produces using high-priced methods, such as fracking.
When oil prices rise, wages don’t rise at the same time. In fact, in the US there is evidence that wages stagnate when oil prices are high, partly because fewer are employed, and partly because the wages of those employed flatten.
Figure 5. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban.The countries that are most affected by rising oil prices are the countries that use oil to the greatest extent in their mix of energy products. In Figure 3, that would be the PIIGS. The rest of the US, EU-27, and Japan would be next in line.
When oil prices rise, consumers need to balance their budgets. The price of oil products and food rises, so they cut back on discretionary items. Their smaller purchases of discretionary goods and services means that workers in discretionary sectors get laid off.
Businesses find that the price of oil used in manufacturing and shipping their products has risen. If they raise the sales price of the goods to reflect their higher costs, it means that fewer people can afford their products. This too, leads to cutbacks in sales, and layoffs of workers. Sometimes businesses decide to outsource production to a cheaper country, or use more automation, as a way of mitigating the cost increases that higher oil prices add, but automation or outsourcing also tends to reduce US wages.
The net effect of all of these changes is that there are fewer workers with jobs in the countries with high oil usage. This reduces the demand for oil in the high oil usage countries, both from business owners making goods and from the consumers who might use gasoline to drive their cars. This price mechanism is part of what leads to the oil consumption shift we see in Figure 1.
We are dealing with is close to a zero-sum game, when it comes to oil supply. The amount of oil that is extracted from the ground is almost constant (very slightly increasing for the world in total). If prices stayed at the low level they were in the past (say $20 barrel), there would not be enough to go around. Instead, higher prices redistribute oil to countries that can use it manufacture goods at low overall cost. Workers in factories making these goods are then able to afford to buy goods that use oil, such as a motor scooter.
Citigroup recently released a report titled, “Global Oil Demand Growth, – the End is Nigh.” Its subtitle says,
The substitution of natural gas for oil combined with increasing fuel economy means oil demand is approaching a tipping point.
This is out-and-out baloney, for a number of reasons:
1. There are way too many of “them” compared to the number of “us,” for energy efficiency to make even a dent in our problem.
2. When we look at past oil consumption, changes in vehicle energy efficiency did not make a big difference.
3. Substituting natural gas for oil still leaves cost levels for the US, Europe, and Japan very high, compared to those for the rest of the world, where little energy is used.
4. There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers until they reach a different limit of some sort.
Let’s look at these issues separately.
There are way too many of “them” relative to us, for energy efficiency to even make a dent in our problem.
If we look at world population, this is what we see:
Figure 6. World population split between US, EU-27, and Japan, and the Rest of the World.Using a ruler, we could probably make fairly reasonable projections of future population for each of these groups.
If we look at per capita oil consumption for the two groups separately, there is a huge disparity:
Figure 7. Per capita oil consumption separately for the group US, EU-27, plus Japan, and for the rest of the world, based on BP’s 2102 Statistical Review of World Energy, and population statistics from EIA (since 1980) and Angus Maddison data. (earlier dates).Per capita oil consumption for the EU, US, and Japan group peaked in 1973–a very long time ago. In recent years, it has been drifting down fairly rapidly, just to keep up with a slight per capita rise in oil consumption of the Rest of the World. Even with recent changes, per capita oil consumption of the EU, US and Japan group is more than 4.5 times that of the rest of the world.
If cars were made more efficient, more people could afford them. The market for cars is unbelievably huge, compared to today’s market, if costs could be brought down. Furthermore, gasoline accounts for less than half of US oil consumption. Even if efficiency were improved to allow cars to use half as much fuel, it would save a little less than one-fourth of current oil consumption. How far would this oil go in satisfying the needs of 6 billion other people–and growing every year?
When we look at past oil consumption, changes in vehicle energy efficiency did not make a big difference.
If we look at per capita oil consumption in the US, split between gasoline and other oil products, we see that the big drop in oil consumption came from the drop in other oil products–that is the commercial and industrial part of US oil consumption.
Figure 8. US per capita consumption of oil products, split between gasoline and other. Total consumption from BP’s 2012 Statistical Review of World Energy. Gasoline consumption from EIA. (Amounts include biofuels.) Difference by subtraction.The amount of fuel used for gasoline has stayed in the 10 to 12 barrels a year per capita band, since 1970, in spite of huge improvements in vehicle efficiency.
I recently wrote a post called Why is US Oil Consumption Lower? Better Gasoline Mileage? In it, I looked at the decrease in US oil consumption between 2005 and 2012. I concluded that the majority of the decrease in consumption was due to a drop in commercial use. Only 7% was due to an improvement in miles per gallon for gasoline powered vehicles.
Substituting natural gas for oil still leaves the US (as well as Europe and Japan) very high priced, compared to the rest of the world, that doesn’t use much energy.
Living in the US, Europe or Japan, it is hard to get an idea of the cost structure of the rest of the world. We are so far above the cost structure of the rest of the world that substituting natural gas for oil would do little to fix the situation.
Figure 9. Photo of an auto-rickshaw I took while visiting India in October 2012. A total of 10 of us (including driver) traveled for several miles in a three-seated version of one of these. Those of us on the edges held on tightly to the frame, because there was not room for all of us.We can also debate how much substitution of natural gas will actually do, and in what timeframe. In the US, natural gas is temporarily very cheap. But it costs more to extract shale gas than the market currently pays, in many areas. Also, a recently University of Texas study showed that Barnett Shale was past peak production, if prices do not rise.
There are really separate markets in many parts of the globe. Our market is collapsing because of high price. Perhaps increased efficiency and natural gas substitution will help low-cost producers, until they reach a different limit of some sort.
When a country is not competitive, it is not just oil consumption that drops, but consumption of other energy products as well. If we look at the per capita energy consumption of the US, EU-27, and Japan combined, we see that non-oil energy consumption per capita reached its peak in 2004, and is now declining (Figure 10, below). If consumers are too poor to buy oil products, they are also too poor to buy products made with other types of energy.
Figure 10. Per capita consumption for the sum of the EU-27, US, and Japan, based on BP’s 2012 Statistical Review of World Energy.The Rest of the World followed a very different pattern of energy consumption. Non-oil consumption soared, on a per capita basis. Oil consumption also increased on a per capita basis.
Figure 11. Per capita energy consumption for the Rest of the World, based on BP’s 2012 Statistical Review of World Energy.More detailed data shows that the big increase in non-oil consumption was a huge rise in coal consumption, after China was admitted to the World Trade Organization in December 2001.
How does peak oil demand work out in the end?
I would argue that lack of competitiveness in world markets is a limit that the US, EU-27 and Japan are hitting right now, but at slightly different rates. EU-27 now seems to be ahead in the race to the bottom, partly because its combined currency. I wrote a post in March 2012 called Why High Oil Prices Are Now Affecting Europe More Than the US, explaining the situation.
It seems to me, though, that a big piece of the problem with lack of competitiveness gets transferred to the governments of the affected countries. This happens because collection of tax revenue lags, because not enough people are working, and those who are working are earning lower wages. At the same time increased payouts are needed to stimulate the economy, and to provide benefits to the many without jobs.
Governments increase their debt to meet the revenue shortfall. They reduce interest rates to record-low levels, to stimulate the economy. They also use Quantitative Easing, or “printing money” to try to lower long-term interest rates, and to try to make their exports more competitive. Unfortunately, these actions do not solve the basic structural problem of high and rising world oil prices, and the fact that these rising prices make their economies increasingly less competitive in the world marketplace.
One possible way I see of the current situation working out is that the total energy consumption (including all types of energy products, not just oil) of the EU, US and Japan will continue to fall, as high-priced oil continues to erode our competitive position in the world marketplace.
Figure 12. One view of future energy consumption for the EU-27, US, and Japan. Historical is based on BP’s 2012 Statistical Review of World Energy.The slope of the decline is based on the type of decline experienced by the Former Soviet Union, in the years immediately following its collapse. This pattern might reflect a combination of different patterns for different countries. Greece and Spain, for example might continue to fall quite quickly. The US might lag the EU in the speed at which problems take place. The likely path seems downward, because any action taken to fix the government gap between income and expense can be expected to have a recessionary impact, and thus have an adverse impact on energy consumption.
The Rest of the World is now growing rapidly, but at some point they will start reaching limits. One of these limits will be lack of an export market. Another will be lack of spare parts, because businesses in the US, Europe and Japan are failing for financial reasons. Some of these limits will relate to pollution and lack of fresh water. The effect of these limits will also be to raise costs. For example, a shortage of water can be worked around through desalination, but this raises costs. Lack of spare parts can be worked around by building a new plant to make the spare part. Pollution problems can be mitigated by pollution controls, but these add costs. These higher costs, when passed on to consumers will also lead to a cutback in demand for discretionary goods, and the same kinds of problems experienced in oil exporting nations. Thus, these countries will also have “Peak Demand” problems, because of rising prices, related to limits they are reaching.
I don’t know exactly how soon the Rest of the World will hit limits, but given the interconnectedness of the world system, it would seem to be within the next few years. Figure 13 shows one estimate of how this may occur.
Figure 13. One view of energy consumption for the Rest of the World. Historical data are based on BP’s 2012 Statistical Review of World Energy.Here again, individual countries may do better than others. Countries with little connectedness to the world system (for example, countries in central Africa) may have fewer problems than others. Of course, their energy consumption (of the type measured by the EIA or BP) is very low now. They may use cow dung and fallen branches for fuel, but these are not counted in international data.
Figure 14, below, shows the sum of the amounts from Figures 12 and 13. Thus, it gives one estimate of future world energy consumption based on Peak Demand considerations.
Figure 14. One view of future energy consumption for the world as a whole. History is based on BP’s 2012 Statistical Review of World Energy.If there is a silver lining to all of this, it is that world CO2 emissions are likely to start falling quite rapidly, because of Peak Oil Demand. World CO2 emissions could quite possibly drop below 20% of current levels before 2050. In the scenario I show, energy consumption drops faster than forecasts such as those put out by the Energy Watch Group. Such forecasts do not take into account financial considerations, so are likely overstated.
The downside of Peak Oil Demand is that the world we live in will be very much changed. Population levels will likely drop, indirectly because of serious recession, job loss, and cutbacks in government benefits. The financial system will need to be completely revised, because debt financing will make sense much less often than today. In fact, in a shrinking world economy, money can no longer act as a store of value. There no doubt will be some people who survive and prosper, but their lives will likely be very different from what they are today.
Peak Oil: All Going to Plan
Off the keyboard of Jason Heppenstall
Published on 22 Billion Energy Slaves on April 1, 2013
Something wicked this way comes? Lightning strikes Cyprus.
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
- Global liquids (excluding ethanol etc.) plateauing and supply remaining constrained despite growing demand
- Which in turn led to a huge hike in oil prices that has stayed with us
- Thus causing a permanent state of close to zero growth or shrinkage in the major industrialised nations
- And a shortage of food in much of the Middle East, leading to riots and revolutions
- Followed by a desperate scramble for unconventional fossil fuels, such as shale gas, tight oil and deep sea oil
How Resource Limits Lead to Financial Collapse
Off the keyboard of Gail Tverberg
Published on Our Finite World on March 29, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
Resource limits are invisible, so most people don’t realize that we could possibility be approaching them. In fact, my analysis indicates resource limits are really financial limits, and in fact, we seem to be approaching those limits right now.
Many analysts discussing resource limits are talking about a very different concern than I am talking about. Many from the “peak oil” community say that what we should worry about is a decline in world oil supply. In my view, the danger is quite different: The real danger is financial collapse, coming much earlier than a decline in oil supply. This collapse is related to high oil price, and also to higher costs for other resources as we approach limits (for example, desalination of water where water supply is a problem, and higher natural gas prices in much of the world).
The financial collapse is related to Energy Return on Energy Invested (EROEI) that is already too low. I don’t see any particular EROEI target as being a threshold–the calculations for individual energy sources are not on a system-wide basis, so are not always helpful. The issue is not precisely low EROEI. Instead, the issue is the loss of cheap fossil fuel energy to subsidize the rest of society.
If an energy source, such as oil back when the cost was $20 or $30 barrel, can produce a large amount of energy in the form it is needed with low inputs, it is likely to be a very profitable endeavor. Governments can tax it heavily (with severance taxes, royalties, rental for drilling rights, and other fees that are not necessarily called taxes). In many oil exporting countries, these oil-based revenues provide a large share of government revenues. The availability of cheap energy also allows inexpensive roads, bridges, pipelines, and schools to be built.
As we move to energy that requires more expensive inputs for extraction (such as the current $90+ barrel oil), these benefits are lost. The cost of roads, bridges, and pipelines escalates. It is this loss of a subsidy from cheap fossil fuels that is significant part of what moves us toward financial collapse.
Renewable energy generally does not solve this problem. In fact, it can exacerbate the problem, because the cost of its inputs tend to be high and very “front-ended,” leading to a need for subsidies. What is really needed is a way to replace lost tax revenue, and a way to bring down the high cost of new bridges and roads–that is a way to get back to the cost structure we had when oil (and other fossil fuels) could be extracted cheaply.
The Way Resource Extraction Reaches Financial Limits
Figure 1. Illustration of why resource limits are very hard to seeWhen a company decides to extract a resource such as oil, gold, or fresh water, it looks for the least expensive source available. After many years of extraction, the least expensive sources become depleted, and the company must move on to more expensive resources. It always looks like there are plenty of resources left; they are just increasingly expensive to extract. Eventually an extraction limit is reached; this limit is a price limit.
As easy to extract resources become more depleted, it becomes necessary to invest more resources of every type in extraction (for example, manpower, oil, natural gas, fresh water), in order to extract a similar amount of the resource. I have called this the Investment Sinkhole problem.
The need to use greater resources in the process of resource extraction leaves fewer resources available for other purposes. Prices adjust to reflect this out of balance. If there is no substitute available for the resource that is reaching limits, the economy adjusts by contracting to match the amount of resource that is available at an affordable price. Some economists might call the situation “reduced demand at high price”. What the situation looks like, in terms most of us are used to using, is recession or depression.
Part of the confusion is that many people completely miss the fact that there is a close connection between cheap energy supply of the exact type needed (for example, gasoline for cars, diesel for trucks, electricity for many factory applications) and the ability of the world economy to make goods and services.
If the price of energy of the type a particular manufacturer or service provider uses increases (say gasoline or diesel or natural gas or electricity), that manufacturer or service provider in the short term has no choice but to pay the increased price, because there is no substitute for energy of the right type. If the manufacturer or service provider tries to pass these higher costs on to its customers, there is likely to be a cutback in demand, leading to a need for layoffs. Alternatively, with longer lead time, the company may be able to find a way around the problem of increased costs, by using more automation, or by outsourcing production to a country where costs are cheaper. Any of these responses leads to reduced US employment and recessionary impacts.
What History Says about Prior Collapses
Until fossil fuels came into widespread use, civilizations regularly grew until they reached limits of some sort, and then collapsed. There are many books looking at this issue. David Montgomery, in Dirt: The Erosion of Civilizations talks about the role soil erosion and soil degradation play in bringing civilizations down. Sing Chew, in The Recurring Dark Ages, talks about how ecological stress, deforestation, and climate change have led to long periods of collapse and low economic activity. Joseph Tainter, in The Collapse of Complex Societies, talks about how increasingly complex solutions to the problems of the day lead to ever-higher administrative costs that eventually become too expensive to afford.
Peter Turchin and Surgey Nefedov in the book Secular Cycles take more of an analytical approach. They look at how cycles actually played out, based on financial and other detailed records of the day. Their analysis considered eight economies, the earliest of which began in 350 B. C. E.. The pattern they found looks disturbingly like the pattern that the world has been going through since the widespread use of fossil fuels began about 1800: A civilization starts its existence when a new resource becomes available, for example by deforesting land to be used for agriculture (or in our case, finding ways fossil fuels could be used). A civilization experiences Growth for 100+ years as the population is able to grow with the new resource available to it.
Eventually the civilization reaches a Stagflation period. This happens when the civilization starts reaching limits. Population is much higher, the size of the governing class is much larger, and feedbacks like erosion and soil depletion start to play a role. In my view, Stagflation period began for the United States around 1970, when US oil production began to fall.
Turchin and Nefedov found that during the Stagflation period, population growth slows and wages stop rising. Wage disparity increases, and debt grows. The cost of food and other resources becomes more variable, and begins to spike. The level of required taxes grows, as the number of government administrators grows and as armies increase in size. (Joseph Tainter refers to this growth in government services as a product of increased complexity.)
Eventually, after 50 or 60 years, a Crisis Phase begins, when it is no longer possible to raise taxes enough to cover all of the governmental costs. In this period, wages of commoners drop to such a low level that nutrition declines, leading to epidemics and a higher death rate. Commoners often revolt, leading to government collapses. Wars for resources are sometimes fought. The Crisis Phase lasts a variable length of time, typically 20 to 50 years, with the length of time seeming to be shorter in the more recent cycles analyzed. There is considerable die-off from illness and warfare in the Crisis Phase.
It seems to me that the United States, most of Europe, and Japan are now very close to the point where they will enter the Crisis Phase of a similar cycle.
The Nature of the Financial Predicament We Are Reaching
At the beginning of this post, I mentioned that rising investment costs lead to what I call an investment sinkhole problem, as we extract fuels and ores that require increasingly expensive inputs near the bottom of Figure 1. An examples might be tight oil, that is extracted using “fracking”. While we hear much about the hoped-for higher supply, we don’t hear that the newer types of oil are available only because oil prices are high. They can’t be expected to bring oil prices down. An investment sinkhole means that our dollar of investment doesn’t go as far; it is precisely the opposite of increased productivity.
When we were still far from reaching resource limits, efficiency improvements could more than make up for the loss of efficiency that comes from the Investment Sinkhole effect. But as we get closer to limits, the situation is reversed. Efficiency improvements are outweighed by the ratcheting up of extraction costs, because of the Investment Sinkhole effect. This means that instead of increased wealth being added to the system by efficiency improvements over time, we find the Sinkhole effect predominates. The common worker needs to spend an increasing proportion of his paycheck on necessities, leaving less for discretionary items. The result is recession, or very slow economic growth.
When the Investment Sinkhole problem starts to predominate, financial models suddenly don’t work very. Central banks react by cutting interest rates, in an attempt to stimulate economic growth. They also try to stimulate the economy by Quantitative Easing. This adds more money to the economy, and attempts to reduce longer-term interest rates. Of course, if the problem is really structural, there is no bounce-back to economic growth. The temporary fix becomes a bridge to nowhere.
A Long-Term View of our Financial Problems
In the previous section, we talked about our immediate problems. But what about our longer-term problems?
Figure 2. Author’s view of how various limits might work together to produce different symptoms, of the type seen by Turchin and Nefedov.Today’s financial system is based on the assumption that individuals and businesses can make and keep financial promises. This system worked well, when resource prices were flat or declining, as was the case prior to 2000. It was possible for businesses and governments to take out loans under the expectation of continued prosperity, and for individuals to buy houses and cars under the expectation that they would continue to have jobs, so that they could continue to make auto loan or mortgage payments.
The situation changes dramatically, if the long-term expectation is for oil prices and other commodity prices to keep ratcheting upward. We don’t really have substitutes for oil and other commodities, so if we want to keep obtaining them, we need to pay the ever-higher cost. Even devices such as more efficient cars are affected by higher prices, because they too, use fossil fuels in their construction, and depend on ever more expensive technology.
In a period when commodity prices are ratcheting upward, businesses find it increasingly difficult to forecast whether new facilities will continue to be economic 10, 20 or 40 years. Businesses find that customers gradually have less discretionary income, instead of more, so it becomes increasingly difficult for these customers to afford the products which are being sold. This makes business planning much more difficult.
If a bank makes a long-term loan, it needs to include a much larger provision for the expected cost of loan write-offs. These higher loan write-off provisions causes interest rates to rise, making long-term loans unaffordable for many (or most) people and businesses. Governments are hugely affected as well.
Without access to cheap loans, and with resource prices (especially oil, but sometimes desalinated water instead of well water, and natural gas) ratcheting upward, business failures rise. This leads to more layoffs, and more defaults on mortgages and auto loans. Interest rates on these can be expected to rise as well.
All of these effects mean that debt-financing becomes much less attractive. Debt defaults, such we have just seen in Cyprus and Greece, become more common. This is not a temporary passing phase; it is a permanent long-term situation, caused by the ratcheting up of oil and other commodity prices, as resource extraction becomes more expensive.
In such an environment, the amount of goods and services available tends to decline over time. Continued economic growth changes to continued economic contraction. If governments issue fiat money, it declines in value over time as well. (Money is sometimes defined as a “store of value,” but this becomes less possible.) One way this decline could occur is if those holding money have an expectation for continued inflation. Alternatively, money can be subject to an automatic downward adjustment that reduces its value on a monthly or annual basis.
With such a system, individuals discover that if they have money, the best strategy is to spend it immediately, rather than to try to save for retirement or some distant goal. Investments in stock markets, or in stocks of new companies, are likely to decline.
Without the availability of debt at a reasonable cost, businesses find it much more difficult to expand or to begin from scratch. New businesses tend to be small ones, that can finance their own operations by bootstrapping–that is, self-financing by using the profits on early sales to pay for materials needed for later sales, and hopefully for a little expansion as well.
All of these issues mean that if there is a financial collapse, picking ourselves up afterward will be quite difficult. Our current financial system would need substantial modification to work in such a system. The size of the current financial sector would likely shrink dramatically.
If the various countries of the world set up different financial systems to deal with the new realities, connecting them into a world system is likely to be difficult. Political stability is likely to be lower in a system such as this. How does one arrange long-term contracts, when there is a very real possibility that the government of the country that is party to an agreement may have collapsed, prior to the end of the contract?
What Brings the Whole System Down?
It is easy to think of a long list of things that might bring the system down. In fact, there are so many contenders that if any one of them starts the collapse, it seems likely others will push it on its way.
Clearly one of the issues is the wide gap between US Federal Government revenue and government expenditures.
Figure 3. US Federal Government Receipts and Expenditures (including Social Security, etc.) based on Table 3.2 of the US Bureau of Economic Analysis.If the US government (or the government of any of the many countries who are having difficulty balancing their budgets) tries to raise taxes or cut benefits, to get revenue and expense back in line, the outcome is likely to be more recession and more layoffs. Debt defaults are likely to rise, putting banks into financial difficulty. There will then be a need for more bank bailouts, and a rerun of the problems we saw in 2008, but with governments in poorer financial condition to solve these problems.
Another possible way the system could be brought down is by rising interest rates for governments, perhaps because of all of the failures elsewhere around the globe. Rising interest rates will mean that a government’s budget is even more unbalanced than it was before, because the higher interest rates translate to higher government expenses.
These higher government interest rates would quickly be reflected in other interest rates, such as mortgage interest rates and interest on corporate loans. Sale of homes would drop dramatically, as interest rates rise. Prices of homes would likely drop as well. Business investment would drop dramatically. Much of the “stimulus” that the government has put in place would disappear. We likely would be headed back into major recession.
A third possibility relates to the Quantitative Easing that has been done recently, and the artificially low interest rates that have resulted, even for longer-term loans. Investors who have to contend with these low interest rates will try to find ways around them, and in the process, create bubbles in asset prices. These bubbles invariably burst, with bad outcomes. For example, the WSJ recently published an article titled, “Investors pile into housing, this time as landlords.” Of course, when something goes wrong (like mis-estimating returns, or oil prices rising higher, leading to more pressure on renters’ ability to pay), the same investors are likely to pile right back out, puncturing the new bubble. Commercial investors rushing out will pull down property values, leading to yet more mortgage defaults as homeowners again find their loans “underwater”.
A fourth possibility is that oil prices will ratchet upward again. Alternatively, natural gas may rise from its current artificially low price level in the US, to more like European or Japanese levels. Either of these would lead to more financial pressures on citizens, and more debt defaults. Banks would likely again be in difficulty, needing bail outs.
A fifth possibility is that the Euro ceases to be a currency. Alternatively, some of the debtor nations could drop out of the Euro, allowing the Euro to rise for remaining nations, thus putting the remaining nations in a worse position for selling their exports. In either of these scenarios, the European crisis could be exported to the US, partly as reduced demand for our goods, and partly through exposure of banks to European defaults.
A sixth possibility is the effects of ObamaCare will destabilize an already weak economy, as businesses attempt to circumvent its effects by substituting more part-time workers for full-time workers.
A seventh possibility is that pensions start running into real financial difficulty, because of artificially low interest rates. The US government may be called in to bail out pension funds, or the Pension Benefit Guaranty Corporation, at high cost.
An eighth possibility is that states start leaving the United States, because they feel that they would be better off on their own, as taxes and mandatory programs (such as ObamaCare) become increasingly difficult to deal with.
What does the shape of the decline look like?
Many people who base their views on geological depletion of oil expect that the decline will be somewhat slow, matching geological decline. I don’t think geological decline rates will have much to do with the shape of the decline, except for perhaps setting an upper bound as to how well things might, in theory, work out.
The big question in my mind is how well the international financial system will hold together. There is a close corollary question: How successful will be at replacing it on a timely basis if it does fall apart? My concern is that if banks are suddenly closed, businesses of all types will fail. This could include companies extracting oil as well as companies selling electric power and companies providing fresh water.
If there are long-term problems with the financial system, international trade is likely to be greatly reduced. Businesses making trades are likely to want greater assurances that they will actually be paid than is the case today. This could take the form of bilateral trade with trusted partners, or “I’ll ship you Product A if you will ship me Product B,” as a form of barter.
A slowdown in world trade could have dramatic repercussions quickly with respect to our ability to keep basic services in good repair, because we are now dependent on international trade for replacement parts of products we use every day (such as cars and trucks). Nearly everything that is manufactured today incorporates raw materials from around the world, and uses machines that depend on parts from around the world.
Another question is whether there will be huge political disruptions. If banks are closed, someone usually is blamed. We have seen many ways these political disruptions can take place. Some examples might include Syria, Egypt, the Former Soviet Union, and Greece.
One scenario I can imagine is that some parts of a country are subject to more disruption than others. In one part of the country, banks may be closed, while in another part, states may be able to reopen closed banks. Or electricity outages may occur following a storm, and never be repaired, while other locations nearby are doing fairly well. There may be political riots, but these are often located in areas where politicians are located, not in other areas.
Perhaps it is just as well that we don’t know exactly what the decline will look like. Not knowing gives us some chance for optimism.
Money & Wealth: Part I
Off the keyboard of Monsta666
Discuss this article at the Economics Table inside the Diner
Main article
When talking about collapse issues one of the most prominent yet most commonly misunderstood areas comes with our basic understanding of what wealth and money really is. Both are seemingly simple matters yet upon closer inspection we find that are many nuances and subtleties in this story that people often miss. This misconception can even be extended to economists or people in finance that are well versed in money matters.
Indeed it is the complexity of money and all the financial products that derive from it with things such as bonds, stocks or other investment vehicles that can make us easily forget what wealth is really about. In fact it is this distraction through complexity that makes us commonly believe that wealth and money are one of the same things. It is useful to really grasp what wealth is lest we fall into a trap that many people, including the iluminati, who base much of their wealth in abstract financial instruments.
To understand wealth first we must realise that money only acts as a medium of exchange and by itself is not wealth. In addition to being a medium of exchange, money also acts as a means of measuring the relative value between various goods and services. This means of relative valuation while somewhat abstract is essential in any economy as the means of measuring relative values between goods/services becomes too complex without the use of money (for more information on this topic please refer to the Energy-Money Equilibrium series). These issues of valuation only become more prominent in international trade. Despite these obvious advantages all forms of money from fiat to even gold based currencies do not hold any intrinsic value by themselves. In other words we only place value in money because we can exchange items of value for it. In essence the value of money comes largely from the trust and faith that we have placed in it. This is even truer for fiat based currencies that cannot be redeemed for gold. If money cannot be exchanged for goods or services then any notional value money they have will disappear. For example if one was placed with a $1,000,000 and 1000 gold bars in a desert those forms of money would be of little use. You could not eat, drink or keep cool with this money and so without trade money would be utterly worthless perhaps even a burden and liability due to its weight and the danger it would pose against thieves by simply possessing them. From this simple example we can see that money has no value by itself and therefore cannot be counted as actual wealth. While this example may seem a bit silly the mechanics of money becoming worthless through hyperinflation work in the same dynamics.
However as noted money derives its value by the fact it can be exchanged for items of value so what we can say about money is that it is a claim on wealth. If we extend this claim concept a little bit further we can say that since debt is a claim on future income (money) then what debt really is a claim to a claim to wealth. That maybe a bit of convoluted way of expressing debt but if we wish to distil this last expression we can simply say that debt and money are both claims on the underlying wealth of an economy.
This all sounds nice and rather straightforward but it begs the question of what wealth actually is? Wealth can simply be expressed as the actual assets that a person owns for example a house, SUV, iPhone or other tangible items are all forms of wealth. As a side-note wealth is a measure of stock while money or income is measure of flow. This point while seemingly innocuous now will be an important concept to grasp as we progress further in this topic. As you see these tangible items – the items that society values – is the true wealth of an economy and the only role that money plays (which intrinsically has no value by itself) is it allows and facilitates the transfer of wealth between various agents in an economic system.
The other role money does play is it acts as a store of wealth so if we wish to store money then the money should be able to be exchanged at a later date for the same amount of wealth as if traded that day. At least this is what “sound money” should do. As we know due to the effects of inflation this proves not to be the case. However it is this issue of money acting as a store of wealth which leads to the first source of confusion between money and wealth. The means of wealth storage via money results in wealth being measured in monetary terms. The issue of measuring wealth through monetary values then leads to the point of determining how things are valued in the first place.
In modern economics the value or utility of any given item comes from the exchange value it has in a market. In other words the wealth of any item is only determined or realised once it has a value in the market which it can be sold for. While this may not seem like an issue, at least on first glance, this issue of exchange value does pose a problem. This is because there is a difference between exchange value (the value an item gets in the market) and use value (the value an item has to an individual or society). To illustrate the difference and problems posed by these differences of worth it is best to consider the age old concept of the diamond and water paradox. While water is a requirement for life and therefore has a high use value to people its exchange value is very low while a diamond; which is not needed at all for life and therefore has no or little use value has a high exchange value.
This is a curious development that comes from how our economic system places value on items. So what accounts for the difference? The reasons are actually quite easy to explain: water while highly useful has generally been abundant and easy to extract so even though its use value is high its exchange value has been low due to its abundance and easy extraction. Since the opposite is true for diamonds (it is rare and harder to extract) its exchange value has been high even though its actual use value is considerably lower.
The large discrepancy between use and exchange values generally occurs for many vital commodities such as food, air and most significantly energy resources. These differences in values have become more pronounced in recent years due to the abundances of energy in the last 200 years of the industrial revolution that have made not only energy cheap (from an exchange value standpoint) but have also made other resources such as food and water cheap as energy acts as an enabler of all other resources. For this reason energy can be regarded as the master resource. As a result of this phenomena it is likely we have grossly underestimated the wealth we have accumulated or perhaps in other cases (such as in fossil fuel depletion) we have grossly underestimated the wealth we have liquidated by only focussing on the exchange value of items and not their use value.
While this point may still seem to be of only academic interest it should be noted these very issues do tend to crop up in times of deprivation and economic dislocation when items in high demand are not bought as people do not have the means to pay the exchange or “going” rates. As a result while the use value of items such as food are still high; perhaps even higher in desperate times (people are more malnourished during these times) since people do not have the means to pay for the goods the exchange value will tend to be lower than in normal times. This leads to the paradoxical situation where the farmer produces a “surplus” of food even though there are millions of people malnourished or even starving. As a result of this “surplus” less food is produced (to cut losses from “overproduction”) which only further exacerbates the situation as there is even less food to go around. These issues can be extended to modern day equivalents when many lands in Africa maybe very fertile yet the amount of wealth is not as high as one would first believe as the exchange value or income ultimately determines the value and wealth of the land. It does not matter how much the people want food, the only thing that matters economically is what people are able to pay for the said food. On the other hand due to the flaws of this exchange value mechanism it can observed that an overweight person from a developed country will gain more utility (in a pure economic sense) from this food than a starving person because they can pay the exchange value and so wealth will transfer to this person as it delivers the greatest amount of utility from an economic standpoint even though the use value is obviously less. This issue is clearly not the best outcome from a social or moral standpoint and this example is a chief reminder of the flaws of the value system used in modern economics.
On this topic of land, the other important point can be made about wealth. That is fundamentally all wealth that we see in the planet comes from either the ecosystem of the Earth or the energy from the sun. Normally from a purely economic perspective we consider wealth as items such as factories, cars, roads or other items that have economic value. While such statements are indeed valid and can be correctly deemed as forms of wealth it is important to note that all these sources of wealth ultimately come from the Earth as they all require resource inputs such as oil, metals etc. to be formed. Therefore from this we can say the economic system that we live in today is actually part of the larger ecosystem and all the wealth we accumulate in the economy derives from the underlying ecosystem we live in.
As a result of this we can easily deduce that for the overall wealth of the human economy to grow it must come at the expense of the natural ecosystems wealth. Since all wealth comes from the Earth or the products from the sun’s energy (which is applicable to many forms of agriculture) it is not technically correct to say man creates wealth rather he merely extracts it from existing resources in the ecosystem.
This relationship between resource extraction and wealth extraction is quite obvious to see in the primary economy when resources are extracted directly from the ecosystems to provide goods of economic value but it can seem even with this wealth extraction concept recognised one may still envision the possibility of wealth creation through the transformation of a resource. To offer an example of this possible wealth creation let us consider the information sector which at its base claims to create wealth by using cheap resource inputs from metals and transforms these input into high value products such as computers and smart phones. While this process does appear to create extra wealth – at least on first glance – it should be noted that the process of manufacturing these products is highly energy intensive. First to build a typical computer or smart phone requires the resources that are scattered across the globe and as result requires large energy inputs to make these long supply lines viable as the video below clearly suggests:
Furthermore the energy use in manufacturing the product in the factory is also very energy intensive and requires very precise conditions (such as dust free rooms) to be maintained. In fact on a weight to weight basis computer manufacturing is around 10 times more energy intensive than the manufacturing or a car.[1]This high energy consumption all stems from the second law of thermodynamics (to read more information on this topic please refer to the Energy: Part II article). In addition to these facts another general pattern can be observed; that is the more complex any given technology becomes the larger the amount of supporting infrastructure is required to build and maintain the technology. This support infrastructure does not just come from physical items such as longer supplier chains or more sophisticated factories but also in the form of higher education and training required for the workers to operate in these environments. These embodied energy costs while not directly related to the construction of the item itself are considerable and will pose a larger energy cost to society in general. This will be an even bigger issue in a declining net energy environment which is likely to be the case in the coming decades.
As noted earlier the exchange value of vital resources such as energy do not capture the true use value of this resource. To understand why this is the case for energy we need to consider how much energy is embodied in the various forms of fossil fuel energy. For example the energy extracted from one barrel of oil is equivalent to around 7 years of labour[2]while the burning of one short ton of coal delivers around three times the amount of energy as a barrel of oil all at a lower cost.[3]While the exchange value in these cases is around $108.50 for the barrel and around $64.96 for coal (at the time of writing) the amount of use value in terms economic output far exceeds their exchange value[4][5] It is this arbitrage between exchange and use value that has been main reason for the explosive amount of economic growth we have seen in the last two centuries during the industrial age.
If the true use value of these fossil fuels plus the associated external costs (due to pollution) were accounted for then it is likely the amount of wealth created through this process would be considerably less. Furthermore as noted earlier all this wealth creation comes at the expense of fossil fuel depletion which is really the destruction of stocks of wealth. If we subtract the true losses of wealth from fossil fuel depletion coupled with the smaller addition of wealth created by capturing the true costs then it is likely no wealth has actually been created in this process. It is also important to note that once these resources are burned they are gone so it really a onetime deal and these stocks act like an endowment from nature.
As a result of this it is actually not appropriate to count the burning of fossil fuels as a form of income because really the burning of fossil fuels is a liquidation of stocks of wealth which is a one time deal. To give an analogy it would be like selling your home and then counting the proceeds as part of your yearly income. Such a thought sounds silly but if we consider how many nations count the burning/selling of this resource as part of their GDP (which is a measure of income) it becomes apparent how flawed our accounting system for measuring income and wealth is.
In any case what we can say with a good degree of confidence is that any wealth generated from this endeavour will come at the expense of a reduction in wealth in the natural ecosystem. For wealth to be created in the economy either resources or energy inputs must be consumed from the ecosystem. Now this is not to say this wealth extraction process is always unsustainable because in many instances, at least theoretically, it can be sustainable. This sustainability can arise because our ecosystem is not a completely closed system as it receives energy from the sun. As a result of this solar energy land can regenerate and create new wealth in the ecosystem. Indeed for much of human history wealth primarily came from the solar energy of the sun and wealth was obtained into the economy on a “pay-as-you-go” basis from wealth created from photosynthesis. It is only in the last 250 years that significant sources of energy came from the drawdown of fossil fuels and it is this drawdown that was responsible for the large amount of economic growth in the industrial age.
While it is possible in some circumstances for the human economy to grow for a time it should be noted that growth is only really sustainable if the resources extracted from the ecosystem do not exceed the capacity of the Earth to regenerate new resources and empty various sinks of pollution. Unfortunately in the world we live in today our current rates of consumption of resources exceed the world’s regenerative capacity and as a result many vital resources such as topsoil, water tables, fish stocks and animals are all experiencing declines.[6][7][8][9]In addition the amount of pollution emitted exceeds the capacity of the Earth’s sinks to absorb these waste products and as result the pH in oceans are altering which has an adverse effect on various ocean fauna.[10]In addition oceans accumulate increasing concentrations of pollutants and the atmosphere grows warmer due to C02 emissions. And this is all occurring at current rates of consumption; if we wish to pursue more economic growth and increase the wealth of the human economy even further then it must come at the cost of further degradation of the environment. If continued then it is likely these set of actions will lead to resource collapse (ecosystem bankruptcy?) and uncontrolled climate change.
Another important aspect to consider in this wealth story is that of profit. The normal definition for profit is that the supplier of a good or service must sell at a higher price than they took to produce the good/service. If we consider this from a wealth prospective then this means the cost of procuring the resource must be less than what the transformed resource will sell at the market. In other words the costs of the good/service should be less than the exchange value that it will sell for. However since we are only dealing with the exchange value and do not account for the use value then it is likely the actual profit from wealth standpoint is less than what we would get from an exchange or monetary standpoint. What’s more if all external costs such as pollution and environmental degradation (environmental costs should include the costs for removal of fossil fuels) are fully accounted for then it is likely that there would be no profit at all in various economic transactions (in certain cases it could be even a negative profit). In fact to obtain a real profit it is likely that a combination of three things must happen. Either the external costs are omitted or resources and/or labour must be exploited. By exploitation the price paid to procure these resources or labour must be below their true use value for wealth to accumulate. It is my personal belief that it is a combination of exploitation and unaccounted costs that allows nearly all economic transactions to produce a profit on paper.
Summary
Wealth and money are two fundamentally different concepts and the confusion between the two terms mainly arises from the fact we use money as a store of wealth. As a result of this all wealth is measured in monetary terms. However as money has no actual intrinsic value by itself then its value only comes from the fact it can be exchanged for items of value. It is this fact that means all items of wealth is only measured by their exchange value and not their use value. As a result of this money cannot capture the true value of wealth as not all values are accounted for.
As a result we cannot accurately account for the loss of wealth due to depletion of various resources and this issue is only compounded by the fact all external costs are rarely accounted for. If all these factors were factored in then it is likely the amount of profit or actual real wealth accumulated through our economy is a lot less than we imagined and could even be negative considering the declining quality of resources that we are now extracting.
Finally it should be noted that since money is only a claim on wealth and is not a source of wealth by itself then it follows that if the money supply increases faster than the underlying wealth in the economy then the result will be inflation (if the opposite occurs then we get deflation). It is this dynamic of changing money supply relative to overall wealth that will be explored in the next part of this money and wealth primer.
Further reading
Energy-Money Equilibrium (RE)
Economics and Moral Philosophy (feasta)
References:
[1] = The monster footprint of digital technology (Low-tech Magazine)
[2] = What is a Human Being Worth (in Terms of Energy)? (The Oil Drum: Europe)
[3] = What is the average heat (Btu) content of U.S. coal? (EIA)
[4] = BBC News Market Data: Commodities (BBC)
[5] = Coal News and Markets (EIA)
[6] = What If the World’s Soil Runs Out? (TIME Magazine)
[7] = Chapter 3: Emerging Water Shortages: Falling Water Tables (Earth Policy Institute)
[8] = World fish stocks declining faster than feared (Financial Times: google title name for link)
[9] = THE EXTINCTION CRISIS (Biological Diversity)
[10] = How will ocean acidification affect marine life? (Ocean Acidification)
Our Energy Predicament in Charts
Off the keyboard of Gail Tverberg
Published on Our Finite World on March11,2013
Discuss this article at the Epicurean Delights Table inside the Diner
A friend asked me to put together a presentation on our energy predicament. I am not certain all of the charts in this post will go into it, but I thought others might be interested in a not-so-difficult version of the story of the energy predicament we are reaching.
My friend also asked what characteristics a new fuel would need to have to solve our energy predicament. Because of this, I have included a section at the end on this subject, rather than the traditional, “How do we respond?” section. Given the timing involved, and the combination of limits we are reaching, it is not clear that a fuel suitable for mitigation is really feasible, however.
ENERGY BASICS
Energy makes the world go around
Figure 1. Source: Jewish World Review
Energy literally makes the world turn on its axis and rotate around the sun.
Energy is what allows us to transform a set of raw materials into a finished product.
Figure 2. Energy is what allows us to transform raw materials into finished products. (Figure by author.)Energy is also what allows an us to transport goods (or ourselves) from one location to another. Services of any type require energy–for example, energy to light an office building, energy to create a computer, and human energy to make the computer operate. Without energy of many types, we wouldn’t have an economy.
Increased energy use is associated with increasing prosperity.
Figure 3. World growth in energy use, oil use, and GDP (three-year averages). Oil and energy use based on BP’s 2012 Statistical Review of World Energy. GDP growth based on USDA Economic Research data.Energy use and oil use have risen more or less in tandem with GDP increases. Oil is expensive and in short supply, so its increases have tended to be somewhat smaller than total energy increases. This happens because businesses are constantly seeking ways to substitute away from oil use.
Figure 4. China’s energy consumption by source, based on BP’s Statistical Review of World Energy data.China is an example of a country with very high growth in energy use. China’s energy use started growing rapidly immediately after it joined the World Trade Organization in December 2001. China’s energy use is mostly coal.
Figure 5. Per capita oil consumption in countries with recent bank bailouts, based on data of the US Energy Information Administration.European countries with bank bailouts show declining oil consumption.
Increased fuel use is also associated with rising population growth.
Figure 6. World population from US Census Bureau, overlaid with fossil fuel use (red) by Vaclav Smil from Energy Transitions: History, Requirements, Prospects.On Figure 6 above, the fuel use and population growth rise very rapidly, after fossil fuels were added about 1800. In fact, the lines overlay each other, so it is not possible to see both. Adding fossil fuels allowed much better food supply, sanitation, and medical care, all leading to huge population growth.
Figure 7. World Population 1860 to 2011, based on EIA data.World population is still growing rapidly, especially outside of the developed countries. The countries with the most population growth (blue) are only now beginning to obtain goods and services that the developed world takes for granted, like better medical services, cars, and electricity for every home. Their fuel use is growing rapidly.
There are huge differences in kinds of energy.
Figure 8. Illustration of a few kinds of energy (images from Wikipedia or Power Point clip art).This chart illustrates a few of the kinds of energy available. Each has its particular uses. Businesses will substitute a cheaper source of energy whenever they can. Businesses especially seek ways to substitute away from human energy, since it is the most expensive type. One approach is automation. This substitutes machines (running on electricity or oil) for human labor. Another approach is outsourcing the manufacturing of goods to countries that have lower-cost labor.
One factor that limits fuel switching from oil to electricity is the amount of machinery currently using oil. Robert Hirsch says
Worldwide machinery operating on oil is valued at $50 to $100 trillion (Automobiles, airplanes, tractors, trucks, ships, buses, etc.)
There is also a huge investment in roads, bridges, refineries, and pipelines. Past transitions have taken more than 30 years, because it usually makes economic sense to wait for current machinery to reach the end of its economic life before replacing it.
LIMITS WE ARE REACHING
Unfortunately, we live in a finite world. At some point we start reaching limits.
Figure 9. Humans at this point are winning the competition with other species for resources.One limit we are reaching is how many people the world will support, without unduly affecting other species. There are now over 7 billion humans on earth, compared to fewer than 200,000 gorillas and chimpanzees, which are also primates.
The natural order is set up so that each species–including humans–reproduces in far greater numbers than is needed to replace itself. Natural selection chooses which of the many organisms will survive. With the benefit of fossil fuel energy, humans (as well as their cows, pigs, goats, chickens, dogs and cats) have been able to survive in far greater numbers than other species. In fact, paleobiologists tell us that the Sixth Mass Extinction has begun, thanks to humans. At some point, interdependencies are disturbed, and we can expect more population collapses.
Figure 10. Air pollution in Taiwan, from Wikipedia.
Another limit is pollution of many types. This image is of air pollution, but there is also water pollution and CO2 pollution. Even what we think of as renewable energy often poses pollution challenges. For example, battery recycling/disposal can pose pollution challenges. Mining of rare earth minerals, used in electric cars, wind turbines, and many high tech devices is often cited as being very polluting in China.
Another limit is declining soil quality. In the natural order, soil is not disturbed by plowing, and the nutrients animals use are recycled back into the soil, after they use them.
As we disturb this natural order, we find erosion reduces top-soil depth. The amount of organic matter in the soil is reduced, making crops less drought-resistant. Nutrients such as phosphorous and potassium are often depleted, and need to be added as soil amendments, requiring fossil fuel transport. Soils often suffer from salinity related to irrigation. Nitrogen levels also become depleted.
It is possible to mitigate these problems using fossil fuels. However, we discover that our ability to feed 7 billion people becomes increasingly dependent on continued fossil fuel use. If we increase biofuel production, this tends to make the situation worse. Techniques such as regrading of hills to improve rainwater absorption can help the situation, but this too requires energy.
Another limit is imposed by the Second Law of Thermodynamics. Entropy happens. Things fall apart. All of the “stuff” humans have produced (including roads, bridges, pipelines, electricity transmission equipment, cars, and computers) keeps degrading, and eventually needs to be replaced. If we intend to continue to have roads, we need to keep repairing them and building new ones. Using current technology, this requires an increasing amount of fossil fuel energy.
Figure 11. Declining resource quality image by author.Another limit arises because we extract the cheapest, easiest to extract resources first. (Figure 11) As a result, at some point, the cost of extraction rises, because the cheap resources have already been depleted. Outside observers don’t necessarily notice a difference as the quality of resources drops over time; it always looks as if there is an increasing quantity of reserves available as we move down the resource triangle.
Unfortunately, the apparently increased resources are not really comparable to what was already extracted. The resources lower down in the resource triangle, such as oil and gas that requires “fracking” to extract, require the use of increased energy resources. The speed of extraction is often remarkably slower–light oil flows like milk, while heavy oil can be the consistency of peanut butter. Extracting oil using fracking has been compared to getting oil from the pores of a concrete driveway.
Another example is fresh water. Initially we take it from a local stream, or from a shallow well, where little energy (and cost) is required to obtain it. As this resource depletes, we seek other sources–deeper wells, or water piped from afar, or desalination. All of these approaches use much more energy. If the world’s total energy supply is not growing rapidly, using more energy for water supply is likely to mean less energy is available for other uses. I discuss this issue in Our Investment Sinkhole Problem.
OIL LIMITS
Figure 12. US crude oil production, based on EIA data. 2012 data estimated based on partial year data. Tight oil split is author’s estimate based on state distribution of oil supply increases.An example of how resource depletion can work is illustrated with US oil supply. US oil production (blue) suddenly began to decline in 1970, despite the oil industry’s best efforts to extract more. By scrambling around quickly, it was possible to add more oil production from Alaska (red), but this soon declined as well.
It wasn’t until oil prices rose in the late 2000s that it made economic sense to use technology which had been developed much earlier to extract tight oil. Tight oil is expensive oil to extract. How much production will rise from current levels depends to a significant extent on how much oil prices are able to increase in the future. The higher that oil prices rise, the greater the recessionary impact that can be expected, but the more oil that can be produced.
Figure 13. World crude oil production based on EIA data. *2012 estimated based on data through October.World oil supply is now about level, except for the small increase added by US and Canadian oil supply. (Figure 13) One concern with world oil supply as flat as it is, is that at some point, world oil supply will suddenly take a nosedive, just as US oil production did.
Figure 13. Oil consumption by area, based on BP’s 2012 Statistical Report. FSU is Former Soviet Union.Another concern is that the developing world will get the majority of the world oil supply, leaving little for historically large users (Figure 13). US, Europe, and Japan experienced severe recession in the 2007-2009 period, and still are seeing economic headwinds, at the same time that countries that were able to obtain the oil continued to experience economic growth.
I think of our current situation as being like that of a host who gives a party for 10 people. There is enough food to go around, but just barely. The host decides to invite another 50 people to the party. Surprise! Suddenly there is a shortfall. Globalization has its downside!
Figure 15. World oil supply and price, both based on BP’s 2012 Statistical Review of World Energy data. Updates to 2012$ added based on EIA price and supply data and BLS CPI urban.A third concern is that oil prices will disrupt economies of oil importing nations. Oil prices rose sharply after US oil production dropped in the 1970s. They began rising rapidly again about 2003, as the world became more globalized. In addition, oil resources became increasingly expensive to extract. There is little possibility now that oil prices can decline for long without a drop in oil production.
Oil price spikes lead to recession. Economist James Hamilton has shown that ten out of the most recent 11 US recession were associated with oil price spikes. When oil prices rise, food prices tend to rise at the same time. Consumers cut back on discretionary spending, because fuel for commuting and the price of food are necessities. This cutback in spending leads to layoffs in the discretionary sector and recession.
Figure 15. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban.High oil prices also seem to lead to depressed wages. (Figure 15. Here, I am dividing total wages for all non-government employees or by the total US population, and then taking this average wage, and adjusting if for inflation.) This is the effect we would expect, if the major substitution caused by high oil prices is a loss of human employment. This shift tends to occur because human energy is very expensive, and because wages tend to be a big share of a company’s costs.
Figure 16. Illustration by author of ways oil price rise could squeeze wages. Amounts illustrative, not based on averages.Figure 16 shows an illustration of the effect that happens. If oil prices rise, the cost of making goods and transporting them to their destination rises. If the sales prices of goods doesn’t rise, a business’ profits will shrink. (Before and after the oil price rise shown in black box). The company will consider low profits unacceptable.
The company has several ways of fixing its lower profit. Wages tend to be one of the company’s largest costs, so these are a likely target. One approach is automation. This may slightly raise electricity costs, but it will lower wage costs, and raise profits. Another approach is outsourcing production to a low-cost country like China. This will lower wage costs and probably other costs, leading to higher profit for the company.
A third approach is what I call “making a smaller batch.” It involves closing unprofitable offices, or flying fewer jets, so that the quantity produced matches the new lower demand for the product, given the higher required sales’ price, now that the oil price is higher. Any of these approaches reduces the amount of wages paid to US employees.
HOW DOES THIS CONCLUDE?
A person could argue that any of the limits could eventually bring the system down. The pressure on wages is particularly a problem, since a further rise in oil prices would seem likely to lead to more job loss, and further pressure on wages of those who keep their jobs. The large amount of debt outstanding is another issue of concern.
Figure 17. Author’s view of how various limits might work together to produce different symptoms.My personal view is that the most likely scenario is that the various limits will work together to produce secondary effects, and it is the secondary effects that are likely to bring society down. These secondary effects are Financial (wealth disparity, debt defaults, inability to collect enough taxes), Political (not enough taxes, uprising by the lower classes, government collapse) and Disease Susceptibility (inadequate food, medicine, and sanitation due to inadequate wages and government cutbacks).
These effects are similar to ones experienced in the past when economies started reaching resource limits, based on the research of Peter Turchin and Sergey Nefedov reported in the book Secular Cycles. In the past, societies seemed to go through about 300 year cycles. The first was Growth, lasting over 100 years. The second was Stagflation, lasting perhaps 50 or 60 years. This third was Crisis, with population decline, lasting up to 50 years (but perhaps a much shorter time). The fourth was Depression/ Intercycle.
If we estimate that today’s complete cycle started in 1800 with the use of coal, and the Stagflation period started about 1970 with the decline in US oil production, then we now seem to be nearing the Crisis stage. Of course, each situation is different. This is the first time we are reaching resource limits on a world-wide basis.
Figure 18. Government receipts divided by private industry wages, and government expenditures divided by private industry wage, based on BEA data.There is considerable evidence that we are already reaching the situation where governments are encountering financial distress of the type shown in Figure 17. With wages being depressing in recent years (Figure 15), it is difficult to collect as much taxes as required. At the same time, expenses are elevated to handle the many issues that arise (such as payments to the unemployed, subsidies for alternative energy, and the higher costs of road repairs due to higher asphalt costs). The big gap between revenue and expense makes it hard to fix our current financial predicament, and increases the likelihood of political problems.
REQUIREMENTS FOR A FUEL TO FIX OUR CURRENT PREDICAMENT
Is it possible to fix our current situation? To really fix the situation, we would need to reproduce the situation we had in the post-World War II period–when energy was cheap, and growing very rapidly. Economists have observed that historically, the cost of energy was very low. Given the importance of energy, its low price was an important feature, not a bug. It is what allowed society to have plenty of energy for growth, at minimal cost.
In order for a new alternative fuel to truly fix our current predicament, it would need the following characteristics:
- Abundant – Available in huge quantities, to meet society’s ever-growing needs.
- Direct match for current oil or electricity – Needed to avoid the huge cost of building new infrastructure. Electricity needs to be non-intermittent, to avoid the cost of mitigating intermittency. We also need an oil substitute. This oil substitute theoretically might be generated using electricity to combine carbon dioxide and water to create a liquid fuel. Such substitution would require time and investment, however.
- Non-polluting – No carbon dioxide or air and water pollution.
- Inexpensive – Ideally no more than $20 or $30 barrel for oil equivalent; 4 cents/kWh electricity. Figure 15 shows wage growth has historically occurred primarily below when oil was below $30 barrel.
- Big energy gain in the process, since it is additional energy that society really needs – This generally goes with low price.
- Uses resources very sparingly, since these are depleting.
- Available now or very soon
- Self-financing – Ideally through boot-strapping–that is, generating its own cash flow for future investment because of very favorable economics.
It is interesting that when M. King Hubbert originally made his forecast of the decline of fossil fuels, he made his forecast as if an alternative fuel would become available in huge quantity, by the time of the decline. His original idea (in 1956) was that the new fuel would be nuclear. By 1976, his view was that the new fuel needed to be some version of solar energy.
What kind of solar energy might this be? Solar panels PV located on the ground are heavy users of resources, because they have a low capacity factor (percentage of the time they are actually collecting sunlight), and because they need to be fairly sturdy, to withstand wind, rain, and hail. Space solar theoretically would be much better, because it is much more sparing in its use of resources–it would have over a 99% capacity factor, and the PV film could be much thinner. Timing for space solar would be a big issue, however, assuming financial issues can be worked out.
Also, even if space solar or some other fuel should provide the fuel characteristics we need, we still need to address the population issue. As long as world population keeps rising, humans are an increasing strain on earth’s resources.
Big Ideas…
Off the keyboard of Steve from Virginia
Published on Economic Undertow on March 7, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
It’s hard to miss the Big Idea that the wheels are coming off the grand twentieth-century capitalist experiment; waste for its own sake, or waste for the sake of moving all-important ‘economic indicators’, waste for the purpose of enriching the even-more-important ‘entrepreneurs’ and ‘innovators’. The list of falling wheels would have to include China, Japan and Europe, but there are many more on a long list. It’s hard to think of a country in this world that doesn’t have major problems, the countries are interconnected by trade, treaty or finance so all are infected with each others’ problems in addition to their own: (Washington Post):
CDC says ‘nightmare bacteria’ a growing threat
Lena H. Sun
Federal officials warned Tuesday that “nightmare bacteria” — including the deadly superbug that struck a National Institutes of Health facility two years ago — are increasingly resistant to even the strongest antibiotics, posing a growing threat to hospitals and nursing homes nationwide.
Thomas Frieden, director of the Centers for Disease Control and Prevention, said at a news conference: “It’s not often that our scientists come to me and say we have a very serious problem and we need to sound an alarm. But that’s exactly what we are doing today.”
He called on doctors, hospital leaders and health officials to work together to stop the spread of the infections. “Our strongest antibiotics don’t work, and patients are left with potentially untreatable infections,” he said.
Just like the finance economy, the biosphere, the political economy; there are “potentially untreatable … infections”. The treatments remaining in the pharmacy are the same treatments that spawned the problems in the first place: repeat applications of MORE, everywhere in the world. If MORE cannot be had immediately there are earnest promises of MORE to come … tomorrow!
A ‘Big Idea’ that is making the rounds has the various countries engaged in a currency war. Nations actively depreciate their own currencies so that they might gain export trade advantage at the expense of others.
Instead, the nations are engaged in a war for petroleum that is being waged with currency. As in all wars there are the winners who will gain fuel imports, the losers will have limited access to petroleum, their domestic fuel consumption will be exported to the winners.
In this war all the countries are engaged, to do otherwise would be to give up claims on petroleum in the future. To have a seat at the table or have any chance of winning, the countries must waste as much- as fast as possible, as waste is the collateral for the needed (depreciated) currency. The advantage lies with the United States, not only does it waste more than the others, but it produces as a consequence much of the world’s credit. The waste of other countries such as China is collateral for American credit, that is, collateral for even more American waste.
Figure 1: China crude oil imports vs. exports from Mazama Science (click on for big). So far, China is winning, it must waste or be left behind: China currency is tethered to the dollar, its fate is intertwined with ours. To run in place the Chinese must waste more than the Americans, adding to both countries’ prodigious waste- costs.
As in America, China’s waste is promoted to the citizens as ‘progress’. These ‘improvements’ never acknowledge China’s multi-thousand-year traditions or even meet any real human needs. Instead, grandiose follies are heaped upon monstrous excesses … the process serves to rationalize the excesses’ so-called ‘value’. As with the other developed countries, sunk capital has the country by the neck. China’s vast waste is collateral for China’s vast debts, to service the debts it must add to collateral. The country devours energy today so that it might devour even more tomorrow. It’s always tomorrow, good or ill, China must devour otherwise the hated Americans will do so in its place.
The bravado of the xenophobic industrialism rings hollow, to win this war over resources is to lose: permanent smog, water pollution, desertification, land theft, an out of control loan-shark economy and high level capital flight. China growth is gained by constructing buildings rather than using them: ‘growth’ is thousands upon thousands of gigantic stone heads concrete towers.
Credit-driven speculation in apartments and office towers in China is intended to be a hedge against rising energy costs, just like recent credit-speculation in tract houses in the US and Tokyo office buildings twenty years ago. The Big Idea is that building prices will rise faster than the credit-inflated fuel prices. By this way of thinking, fuel is always affordable because what sets the price — credit — is the means to meet the price — credit driven momentum-chasing in asset markets. Fuel is simply another asset, rationed by access to credit.
These kinds of hedges arbitrage stupidity, they live in the hedgers’ minds and nowhere else. On Planet Earth fuel is either plentiful or not: what sets the price of fuel is the credit-cost to pull it from the ground plus a supply-and-demand driven scarcity premium. The real cost of fuel increases relentlessly over time because of depletion, meanwhile, the internal costs of the hedges increase as well. Even when fuel costs remain low, as they were from the mid-eighties to the end of the millennium, the hedges become unprofitable and collapse.
For hedgers to gain their fuel, the asset(s) must be sold to others more effectively greedy than the hedger. Whether they sell to actual customers or take out loans against their investment doesn’t matter. The selling reduces the number of potential customers: sooner or later they run out, even in populous China! That is the end of the hedge.
The Chinese who buy these buildings are unwitting conscripts in the great global currency war over petroleum. Millions of relatively prosperous Chinese have invested the life-savings of generations in future energy waste. In a world with diminishing energy supplies, the investments are stranded. The Chinese cannot afford to make use of all the currently empty buildings and the cities that contain them, otherwise they would be doing so! The Chinese would have been much better served to invest in conservation, instead they have invested in ‘conservation by other means’.
Another reason for the Chinese building frenzy is to literally set in concrete the claims of developers and urbanites over prior occupants of China’s countryside. This Big Idea is no different from Anglo-American claims that were perfected on native lands in the 19th century with farms and mines, railroads, towns and barbed wire cattle fences. There are certainly less costly ways that are equally effective and more equitable than the Big Stone Head approach.
Keep in mind, when the Chinese property bubble unravels like all the others, the banking system will be ruined. So too if one of the major currencies such as the euro, sterling or yen fails … that is, if China wins the currency war. China holds hundreds of billions- or trillions of these currencies as reserves, its positions are far too large to unwind. A currency failure, a run out of banks or a bond market hiccup would bankrupt China finance … which in turn would bankrupt the rest of the world’s finance.
Mercantilism is another Big Idea energy hedge. A country obtains petroleum at a price and uses some of it to make high-worth goods such as (fake) Gucci handbags or Lexuses which are sold to customers overseas. The gains from the sale pay for the country’s fuel plus profits to the manufacturers.
The mercantile country and its firms borrow against the overseas trading partners’ accounts. Exporter’s fuel consumption grows larger than what it ordinarily would be without the trade. This is the presumed intent of today’s currency combatants, for each become successful mercantilists and have ‘others’ subsidize their fuel waste.
Figure 2: Japan is going broke because its fuel imports are too costly to be met by export of its goods to increasingly broke customers. The reason the customers are broke is high fuel prices! They cannot find any countries to subsidize their own fuel waste.
If Japan doesn’t depreciate its currency it cannot export or win the petroleum war. At the same time, if it depreciates any gains from exports will offset by increased fuel cost. If the yen is sufficiently beaten down the world’s fuel suppliers will not accept it and demand dollars instead.
Japan has large foreign currency reserves but these are collateral for domestic debt. Like China, Japan has few options to free up its collateral: whatever collateral it can access is over-committed.
Japan is orbiting the drain, the recent trade deficit is the last straw, the country has too many obligations to meet … all of them coming due at once. The inflow of overseas funds into Japan and the carry trade have been the means by which the country has endured deflation without the associated depression. Japan now needs more waste — growth — or a return to the inflow of overseas funds.
Depreciating the yen is a symptom of Japan’s “potentially untreatable infection” — its past success is now killing the country. Japan is beyond desperate: on deck is nominal GDP (NGDP) targeting. This is the Bank of Japan making unsecured loans (because the Japanese private sector finance is not making any).
Sadly, the Japanese establishment does not understand why the private finance does not lend … they are in denial like the rest of the industrialized world. The private sector is bankrupt, it cannot borrow! So are Japan’s overseas customers, they just aren’t announcing it. Instead, they pretend and hope nobody is paying attention.
Deflation feeds on remedies designed to defeat it. All avenues here lead to entropy: if the private sector delevers, the government itself becomes insolvent. If Japan’s central bank leverages itself, it too becomes insolvent and there is no lender of last resort. The result is a run on Japanese banks and out of yen.
Around the world, various finance markets are pressurized, the Big Idea is to wring out volatility and create a Potemkin market that can pass as the real thing; ditto commodities, particularly gold, copper, foodstuffs and petroleum.
Time marches on and costs of volatility suppression are added to other ex-market costs, volatility emerges where the suppression forces are weakest. Right now, this is the currency markets. Switzerland can peg its currency to the euro at an affordable cost, just like the Chinese can peg its currency to dollars. Today’s question is where and how does Japan fit in particularly with its new trade deficit?
Japan has its own currency, unlike Europe, its treasury can issue yen to retire debt, extinguishing the self-created currency along with the debt. However, this remedy is likely too late to apply b/c the Japanese banking system is insolvent. An issue of government notes sufficient to effect Japan’s debt market would cause the banks to collapse.
Meanwhile, the Big Idea in Europe is the purposeful absence of any ideas at all! The technocrats are disappearing leaving a vacuum, to be filled by demagogues.
Figure 3: Europe produces about twenty-percent of its own petroleum fuel from rapidly depleting native sources, the rest must be imported. The mercantile states Germany and Italy export energy waste to others to meet their expenses, however, these customers cannot use the exporters’ waste to meet theirs. Like Japan, Europe is bankrupt.
The big difference between Europe and Japan the euro non-currency. Factionalism suggests Europe is set to lose the currency war and have its petroleum consumption shifted to others such as China and the United States. In other words, Europe cannot afford the euro, any currencies it can afford are nut suitable for the petroleum import trade. Because the euro is the currency of none of Europe’s states, there is no real issuer nor any lender of last resort, only a pretender.
Europe’s approach to the euro has been typical of the humans’ approach to everything else: to grasp what is immediately wanted then ignore life-cycle consequences. Europe wanted the euro as an energy hedge: it gave smaller countries the means to import waste from both Germany and OPEC. Now, these small countries cannot pay for the imports and the currency does not allow for the transfer of these costs to ‘others’. The waste — of course — is worthless, it cannot be ‘repossessed’.
The outcome is a Europe frozen on the spot. If it tries to pay for the expensive euro the entire continent will be ruined and unable to afford petroleum. This is the ‘austerity’ dynamic in force currently. If any country abandons the euro, the entire enterprise falls apart and there is nothing left to the Europeans with which to gain fuel. It is hardly likely that any petroleum supplier will accept a national currency from a bankrupt nation if the same nation’s bankruptcy has fatally undermined the euro! Of course, if the euro fails so will China finance, which holds massive amounts of euro-denominated debt as reserves, far too many to be readily rid of … without precipitating the disaster that it so desperately seeks to avoid.
Like so many other countries, Europe has an unraveling property bubble/energy hedge that also failed.
Meanwhile, the exit of the technocrat is the last step in post-petroleum down escalator toward chaos. After the technocrat comes zero-government, factionalism or abdication of governing authority. This is not to say that political and administrative reform is not possible; without new resources or an ‘upside down’ approach that husbands capital there is no foundation for reforms. The factions all promise MORE and a return to waste: the broken government is able to export fuel consumption elsewhere more efficiently and with less cost than do the factions, technocrats or ineffective government.
The problem in Europe and elsewhere is at the end of the everyone’s driveway. Every single day the Europeans must import twelve million barrels of crude oil at staggering cost, they must borrow from New York and London financiers to do so, as they have for ever day since the end of World War Two. Europe’s pathetic car industries cannot pay their own way much less the wasteful continent’s gigantic fuel bill. Europe is beyond insolvent, beyond broke, by rights it should never borrow again, ever, from this point in time until the sun consumes itself and balloons to fill the solar system. Europe’s bosses believe with this bit- or that bit of beautifully embellished central bank promises it can claim a good that is vanishingly rare and valuable … so that this good might be burned up for time-wasting entertainment purposes and economists’ reputations only.
This is the real Big Idea, it has not materialized in the imagination of the modern world … yet. It emerges from a concrete Big Reality that the modern human works hard to ignore. Modernity is intrinsically dysfunctional, its products are entropy and ruin. Its managers defend their right to waste as they please at the expense of the rest, the non-managers demand the right to waste along with the managers: this is madness! That a war might be waged with competitive waste as a tactic speaks to the inherent moral and physical bankruptcy of the ‘modern’ idea: it has hollowed itself out. At the end of the day the competitors are all smashed, together. There can realistically be no other outcome.
The next Big Idea must be an economy that rewards conservation and the husbandry of capital by every and all means, that treats all of capital as precious, rather than a substitutable ‘input’. It isn’t such a hard idea to grasp, its application is becoming a desperate necessity. Stewardship is less difficult than competitive depreciation financed by increased resource waste. In a well-functioning conservation economy shepherds of capital become rich and by so doing the others would become rich along with them. There is still entropy, but not the Hammer of Thor.
Time is running out … we adapt or else.
Homo Collaboratus
Off the keyboard of RE
Discuss this article at the Frostbite Falls Daily Rant inside the Diner
In his recent article The End of Technocracy and Zero Government, Steve from Virginia tracked the progress of the City of Detroit to the status of “Failed State”. Not just Detroit is in this situation of course, you see it progressing all over the world from Somalia, to Egypt to Greece…and not long to arrive in Italy or France either. Whose fault is this? Where does the BLAME lie for the failure of this model?
The ‘Blame the Victim’ Game in DetroitIn areas where technocracy has been installed such as Greece, both the initial conditions and the failure of the process is blamed on the inhabitants. Greeks are ‘corrupt tax-cheats and lazy’. Detroiters are ‘stupid, drug-crazed Negro savages bent on murder and destruction’, French are ‘near-communists and cowards’, Irish are ‘ugly … drunken child molesters’. The purpose of the blame game is distraction while retirement savings are stolen by the establishment. The elderly ‘deserve what they (don’t) get! The blame game hits the target by appearing to miss it.
In Detroit, the citizens didn’t chase retail stores away, they didn’t over-invest in the auto industry, they didn’t ghettoize the city with ill-conceived developments and a web of freeways, they didn’t pollute the city with lead, zinc, chromium, mercury, toxic petroleum-based chemicals, they didn’t sell the city out to billionaire developers.
The citizens didn’t pave the city over with parking lots or built thousands of monstrously ugly concrete box- buildings. Detroiters are being shot by criminals, being driven out by block busting and urban decay, losing what little property wealth they had, having already lost hundreds of thousands of jobs. Detroiters have been abandoned by their country not the other way around.
The US spends hundreds of billions of dollars in Afghanistan, why not Detroit?
Why not Detroit? Basically because it’s burned out, polluted flotsam of the Age of Oil, and costs too much to clean up. Predatory Capitalism doesn’t clean up the messes it leaves behind, it moves on to make new messes elsewhere, always promising the inhabitants a “better standard of living”, which a few Elites get while the rest of the herd is left hung out to dry.
Steve isn’t the ONLY Blogger tracking Failed State development, John Ward also has been cateloguing the collapse of the Greek State, as well as numerous others in Europe.
Greece is the first country Russell has ever cut to emerging from developed market status, although given the state of the EU it seems highly unlikely it’ll be the last. The Russells haven’t considered doing the same to Spain and Italy just yet, the paper says, because ‘we haven’t seen the same degree of decline as we’ve observed in Greece’. The two conclusions I draw from that are first, Russell guys need to get out more; and second, the company has a lot to learn yet about Spanish accounting, and Italian reporting accuracy. Don’t forget, this latter is the country whose Hadron Collider scientists only six months ago got the speed of Light wrong.
But the main thing it is still hard for the casual observer to get his head round is what you are if you emerge, having once been developed. The vagueness, it seems to me, lies in the interim bit between the two states of Being. In 1936, Nazi Germany was a developed State led by a lunatic, which was then crushed to a pulp by British, American and Russian forces who’d become a tad concerned about the Fatherland’s wanderlust habit. The interim stage was the crushing thing. This is what’s missing from the Russell Investments analysis about recent Greek history.
Why does it progress in this fashion? Going back to November of 2011, I wrote an article titled Homo Collaboratus on Reverse Engineering looking at the progress toward failed State in Egypt. I am going to quote the article in full, since it is not accessible to non-members of Reverse Engineering.
Egypt is now in its 3rd Day of an increasingly Bloody “Revolution”, where all that the Military Repression has succeeded in doing is bringing still MORE “Protesters” back into the streets….AGAIN. You can see here how and why even having vast techno power against protest eventually does FAIL, because of the Power of Numbers.
What I read in one MSM report was a quote from one member of the Military Junta currently running Egypt, which was that all this mayhem would succeed in doing was “Destroying the State”. That is a paraphrase, but essentially was his analysis, and its also quite TRUE.
The Hodgepodge of People out there on the street throwing Rocks have NO CLUE on how to set up a WORKING Goobermint, and once you pile them all together inside any kind of Newly Elected Parliament the Bickering will start all over again, and whomsoever they Choose to lead any new Goobermint will be just as powerless to bring any equity to their economic system as the last Dimwit Power Seeker was.
It’s the road obviously to a FAILED STATE, like say Somalia or Zimbabwe already are. The old soviet Union also turned into a Failed State, but they recoallesced into the smaller States it was composed of and briefly have slowed the devolution there. However, Eastern Europe is now on the brink of catastrophic debt collapse, and eventually here you will also get Failed States in places like Hungary and all the Balkan States.
Failed Nation States will become the Norm here over time, rather than the Exception that they are now in places like Somalia and Zimbabwe. In each Failed Nation State, people are dropping down to the next level of Organization, Tribal Affiliation. This as I see it is the medium term result which will occur through all Nation States as smaller groups of people Herd together for Self-Preservation.
In places like Afghanistan where they are not all that long removed from their Tribal Affiliations, the Pashtuns will gather together again fairly naturally, but what of Lazarus? Lazarus in this case being the vast multicultural diaspora of people who came to live in the FSofA, who have no real “Traditional Tribe” here and who have lived for generations under the political system of the Nation
State? Can they, WILL THEY be able to form up Tribes for mutual Survival and Protection?In my general POSITIVE Spin on this topic, I believe that they WILL in fact form up such Tribes SPONTANEOUSLY. My rationale for this is as follows.
Homo Sapiens demonstrates BOTH the traits of Predatory Animals and Herd Animals alternately, depending on circumstances. It’s likely one of the main reasons Homo Sapiens has been such a successful species overall, the adaptability to take on different survival paradigms dependent on circumstance. Real Herd Animals like Buffalo can never become Predators, and real Predators like Lions can never function as Herd Animals, but Homo Sapiens can function either way, pretty much equally successful either way also.
The circumstances we have been living under for the last few 1000 years is one of general Surplus in the environment, which Favored the Predatory paradigm. We have many Herd Homo Sapiens and a few Predators who live well by predating on most of the Herd. However, as the herd is Culled here, the Predators will die in greater numbers by percentage than the Herd does. If you look at any complex ecosystem with predators and prey, once the prey drops below a certain level the predators drop off a cliff. They essentially disappear. The “Ponzi” that is the Food Chain works from the Bottom Up, the Predators cannot be successful until the Prey is available in sufficient quantity to support them.
The Herding tendency in Homo Sapiens is evident any time the species is confronted by massive external stress. You see it whenever a Tornado Hits a Small town. All of a SUDDEN, people who otherwise simply can’t stand each other are all Pulling Together to dig others out of the Rubble. You see it in OWS. All of a sudden, generally Middle Class people become ACCEPTING of the long term Homeless in their midst, and they in fact LEARN from them strategies to handle living on the Street. Don’t drop your Tent onto the Ground, put it up on Pallets so you’re not losing Heat into the ground from your Sleeping Bag. Etc.
IMHO, OWS is the BEGINNING of a NEW TRIBAL Paradigm here in the FSofA, with those who are already off the cliff or close to it gathering together in HERDS for self-protection and SURVIVAL in the face of the Predators, exemplified by the Gestapo who Pepper Spray them and fire the Tear Gas Canisters at them.
MANY of the Herd will DIE here. But NOT as many by percentage as the Predators. The very ACT of Protest and Forming Up the Circle of the Herd is what will PROTECT the Herd in the end. They will lose many on the periphery. But they will also STAMPEDE the Predators.
In the end, they will almost all go to the Great Beyond. However, some of the herd will make it through, some of them will retreat into the Mountains, the Great Wall that GOD built to protect the Independent Souls of the World. The Predators will Die Off, and over time, the Herd will reproduce and RETURN from the Mountains to once again populate the Flatlands.
Where once again, if all goes as it has gone here so many times and in so many ecosystems, the predators will emerge once again. For Homo Sapiens however, who remain adaptable and who DO have the ability to LEARN, perhaps in the next go round we can make the LEAP to a new species, Homo Collaboratus, the first Species EVER to jump beyond the Predator and Prey paradigm. it is my great HOPE that those who do survive this latest incarnation of Armageddon will be the progenitors of Homo Collaboratus. Certainly, the incarnation of Homo Industrialis has been a Magnificent FAILURE here, and one we will not repeat again.
Sadly, I will not be around to see this from this side of the Great Divide, unless perhaps I do return in another corporeal incarnation. Even if that does not occur though, I’ll see it to be sure.
I’ll see it, and you, from the Other Side.
RE
The progession to Failed State is inexorable, baked into the cake of the monetary system. Depending on the resources and technology available, it can expand itself for a few Centuries, perhaps a Millenia before it reaches the Growth limits. Although the Collapse is Gathering Steam now, it’s been underway a LONG time for anyone with their Eyes Open to see.
When I was in HS in NY Shity, the City was BROKE. The Subways were dilapidated, apartment complexes built in the 40s and 50s were Roach Motels. My Aunt and Uncle lived in an awful complex called Vanderveer in Brooklyn. Fortunately they lived on the 1st floor, because the elevators never worked. Nothing was ever maintained, and none of it ever paid for itself in terms of “increased productivity”. That was always just a euphimism for increased energy wastage.
The folks in charge of Credit Creation financed all of it through Debt, even JP Morgan didn’t have Gold enough in his Basement Safe to finance building the Railroads. He also sure was not going to pay Irish and Chinese Coolies in Gold either.
These folks have refinaced themselves innumerable times, back in the 70s about ALL the major Banking Houses should have gone broke from Bad Loans made to South America in the 5os and 60s, when my dad was in the Biz of making those loans. Financial Legerdermain kept it rolling, but it doesn’t work FOREVER.
You can’t create new Resources by issuing more credit. Without copious resources to waste, its pointless to issue more credit. The ONLY reason more Credit gets extended to Greece now is to keep the whole House of Cards floating another day. Nobody in their right mind can possibly believe Greece can ever pay its debts.
So, one by one they collapse, the Somalias, the Egypts, the Greeces and the Detroits. The Money Masters and the Political Class work together in a Kabuki Theatre, trying to manage the collapse by blaming the Victims while preserving their own wealth and status.
The fact the collapse is accelerating now makes it clear these folks cannot control it anymore. The last 40 years since the 1970s has been all about Financialism as a means of containment, but it is running out of steam. The old tricks just ain’t WORKING anymore.
All due respect to John Michael Greer and fans of the idea of a Slow “Boiling Frog” form of catabolic collapse notwithstanding, systems as complex as this one eventually reach a “tipping point”, beyond which they can no longer function. 5 years ago when I began writing on collapse topics, NOBODY ventured the opinion a European Nation like Greece or now also Italy and Spain would be on the cusp of Failed State status, with numbers like 50% Youth Unemployment and GDP figures dropping like a rock.
It may seem “slow” to you on the span of your life for it to take 5 years for Greece to descend from “functioning” industrial economy to FAILED STATE, but even on the scale of the industrial revolution as a whole that is mighty fast. If you figure the Industrialization of Greece began with the Marshall Plan in the aftermath of WWII, it took them about 60 years from 1945 to 2005 to reach the Zenith of Industrialism there, and it has just about ALL been undone in the last 5 years. Greek “factories” are not producing Jack Shit, if they ever did. About the only big Industry out of Greece was Shipping, and their Shipyards are Ghost Towns now, there is overcapacity of ships, international trade is collapsing and the Baltic Dry Index is so low you could hire a ship wit your Unmployment Check.
How long do we have HERE in the FSoA before it also is a Failed State? The takeover of Detroit by the State of Michigan is a Canary in the Coal Mine which should let you know the collapse has begun in earnest now here. Michigan itself is of course no more solvent than Detroit, so eventually will be “taken over by Da Federal Goobermint. Who will take them over? The Ferengi?
That the FSoA will devolve to a Failed State is not a hypothetical, it WILL occur, and based on the timelines already apparent in Europe, it will not take more than another decade to be apparent even to those Ostriches with their heads most deeply buried in the sand.
The fact though that it probably will take that long gives people in the FSofA aware of this a short Window of Time to prepare for it, and Reverse Engineer for themselves a non-industrial way of life. You have to get started NOW in Collaboration with others to make such a transition possible.
Homo Industrialis and Homo Predatorus is going the way of the Dinosaur. Only Homo Collaboratus and Homo Herdus can survive the Zero Point. Form your Tribe NOW! Circle the Wagons. Defend the weak and the innocent. STAMPEDE the PREDATORS.
Bring ON the POWER of NUMBERS. We are not Sheeple. We are BISON. In number, NOTHING can stop us. It is time now to STAMPEDE.
RE
Reaching Debt Limits
Off the keyboard of Gail Tverberg
Published on Our Finite World on March 1, 2013
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If an economy is growing, it is easy to add debt. The additional growth in future years provides money both to pay back the debt and to cover the additional interest. Promotions are common and layoffs are few, so a debt such as a mortgage can easily be repaid.
Figure 1. Author’s image of an expanding economy.
The situation is fairly different if the economy is contracting. It is hard to find sufficient money for repaying the debt itself, not to mention the additional interest. Layoffs and business closings make repaying loans much more difficult.
Figure 2. Author’s image of declining economy.
If an economy is in a steady state, with no growth, debt still causes a problem. While there is theoretically enough money to repay the debt, interest costs are a drag on the economy. Interest payments tend to move money from debtors (who tend to be less wealthy) to creditors (who tend to be more wealthy). If the economy is growing, growth provides at least some additional funds offset to this loss of funds to debtors. Without growth, interest payments (or fees instead of interest) are a drain on debtors. Changing from interest payments to fees does not materially affect the outcome.
Recently, the growth of most types of US debt has stalled (Figure 3, below). The major exception is governmental debt, which is still growing rapidly. The purpose of sequestration is to slightly slow this growth in US debt.
Figure 3. US debt, based on Federal Reserve Z1 data,
The growth in government debt occurs because of a mismatch between income and expenditures. There is a cutback in government revenue because high oil prices make some goods using oil unaffordable, causing a cutback in production, and hence employment. The government is affected because unemployed workers don’t pay much in taxes. Government expenditures are still high because many unemployed workers are still collecting benefits.
What can we expect going forward? Will the debt situation get even worse?
I think we can expect that from here, the debt situation will deteriorate. One issue is rising oil prices. While there seems to be a large supply of oil available, it is at ever-higher cost of extraction, because of diminishing returns. (This is even true of tight oil, such as from the Bakken.) Furthermore, I recently showed that not only do high oil prices adversely affect government finances, they also adversely affect wages.1
Figure 4. US per capita non-governmental wages, in 2012 dollars. Non-governmental wages and population from Bureau of Economic Analysis; Adjusted to 2012 cost level using CPI-Urban from Bureau of Labor Statistics
If wages are low, the temptation is for governments to try to create more “spendable income” by increasing debt. This can’t really fix the situation, however. The real issue is increasingly high oil prices, which adversely affect both government finances and wages. Adding debt adds yet more interest payments, adding a further burden to wage earners, and creating a need for payback in the future, when wages are even lower.
Ultimately (which may not be very long from now), the debt system appears likely to collapse. The Quantitative Easing (QE) which a number of governments are now using to hold down interest rates and make more funds available to lend cannot continue forever. While there are claims that QE is a bridge to “when growth returns,” it is seriously doubtful that economic growth will ever return. Inexpensive oil is simply too essential to today’s economy. As oil prices rise, wages fall, and demand for oil is further constrained. Falling wages also reduce demand for debt, as payback becomes more difficult.
How Household Debt Adds to Spendable Income
One thing readers may have not thought about is that it is the increase in debt that adds to a person’s (or company’s) spendable income. For example, taking out a car loan allows a person to buy a car. Paying back the loan over a period of years tends to reduce spendable income. If, in the aggregate, the amount of debt outstanding starts decreasing each year, spendable income is actually reduced below the level of wages, because in total, the balance is being reduced.
If we add the increase in household debt (mortgages, credit cards, student loans, car loans, etc.) to wages, this is the pattern we see historically. (The increase has been adjusted for inflation using CPI-Urban):
Figure 5. Per capita wages (excluding government wages) similar to Figure 5. Also, the sum of per capita wages and the increase in household debt, also on a per-capita basis, and also increased to 2012$ level using the CPI-Urban. Amounts from US BEA Table 2.1 and Federal Reserve Z1 Report. *2012 estimated based on partial year data.
The pattern is very much what we would expect, given what we know about recent debt patterns. The amount of debt rose rapidly in the early 2000s, when interest rates were lowered and lending standards relaxed. Some people bought new homes. Home prices escalated, with the higher demand. Many homeowners were able to refinance at lower interest rates. In the process, homeowners were able to “pull out” funds that they could use for any purpose they liked–fixing up the house, buying a new car, or going on a vacation.
By 2008, the party was over. In fact, the amount that was added through debt started decreasing in 2006 and 2007, after the Fed Reserve raised interest rates, in an attempt to choke back inflation caused by high oil prices. I talk about this in Oil Supply Limits and the Continuing Financial Crisis, available here or here.
Increased Government Debt Can Also Add to Spendable Income
In Figure 5, we added the increase in household debt to wages, to get an estimate of spendable income, adjusted for debt. Theoretically, at least part of the increase in government debt might also be added to spendable income, since it is often used (in leu of increased taxes) for programs that benefit citizens. (Some of the increased debt is used for things like bailing out banks, which is of questionable value in raising the spendable income of individuals, so perhaps not all of the increase in government debt should be added in estimating spendable income. Also, increased interest costs related to higher debt amounts would tend to have a dampening effect on spending, if interest rates are not continually dropping, as they have been under QE.)
If we add the increase in government debt (all kinds, including state and local) to the amounts shown in Figure 5, this is what we get:
Figure 6. Amounts shown in Figure 5, plus change in government debt added to the sum of (wages plus increase in household debt). Non-Government debt from Federal Reserve Z1 report, with changes adjusted to 2012 cost levels using CPI Urban. *2012 amounts estimated based on partial year values.
How much did citizens really spend? The Bureau of Economic Analysis tells us that as well, as an item called Personal Consumption Expenditures. We sometimes hear that in the United States, personal consumption of goods and services makes up more than 70% of GDP. In fact, this percentage has been growing since about 1950.
Figure 7. Wages (excluding government wages) as a percentage of GDP and personal consumption as a percentage of GDP, both based on data of the US Bureau of Economic Analysis. *2012 estimated based on partial year data.
Strangely enough, wages excluding governmental wages have been falling as a percentage of GDP during the same period. How can wages be falling at the same time personal consumption is rising? I think that a large part of the answer may very well be “increasing debt.”
If we compare wages to personal consumption expenditures, we find that wages were about 2/3 of personal consumption expenditures at the beginning of the period graphed, but gradually fell to a lower and lower share of Personal Consumption Expenditures.3 If we add a line to Figure 6 showing 2/3 of personal consumption expenditures, the line comes out very close to where we might guess it would, if all of household debt increases, and part of government debt increases were acting to increase personal spending (Figure 8).
Figure 8. Same data shown on Figure 6, plus a line equal to 2/3 of Personal Consumption as shown on BEA Report 2.4.5. also adjusted to a per capita and 2012 cost basis using CPI-Urban.
While there are too many variables to make this comparison exact, it does indicate that the increases in debt levels are of the right order of magnitude to explain what would otherwise be a very strange anomaly.
I might mention, too, that part of the reason that Personal Consumption Expenditures can be rising as a percentage of GDP is the fact that investment has been falling, as businesses move their manufacturing offshore, and as other changes take place. According to the American Society of Civil Engineers, we are allowing bridges, roads, and dams to deteriorate, and not adequately maintaining electrical transmission infrastructure. We are reaching limits on how far we can allow investment to drop, however. In fact, the time is coming when we will need to increase investment, or face loss of some of the infrastructure we take for granted.
Figure 9. United States domestic investment compared to consumption of assets, as percentage of National Income. Based on US Bureau of Economic Analysis Table 5.1.
Where Do Debt Limits Put Us
Even if all debt limits were to do is erase the beneficial impact of debt increases, based on Figure 8, it appears that spendable income (or Personal Consumption Expenditures) would decrease by about 23%, to bring it back to might be expected based on wages.
In fact, reaching debt limits is likely be a messy affair, with some type of change (such as increasing rising interest rates as QE fails, or the US dollar losing its reserve currency status, or huge changes in the Eurozone) leading to changes that affect governments and currencies around the world. It seems likely that trade might be disrupted. Some governments might be replaced, and the debt of prior governments repudiated by the new governments. It is not clear what would happen to personal and corporate debt. In many countries, reform governments have redistributed land and other property. In such a circumstance, neither prior land ownership nor prior debt would have much meaning.
In our current circumstances, we are reaching debt limits because of a specific resource limit — lack of inexpensive oil. Oil is used almost exclusively as a transportation fuel and in many other applications as well (such as construction, farming, pharmaceutical manufacturing, and synthetic fabrics). Expensive oil is not really a substitute, and neither is intermittent electricity. We are reaching other limits as well. Perhaps the most pressing of these is availability of fresh water. Fresh water can be obtained by desalination, but expensive water is not really a substitute for cheap water, for the same reason that expensive oil is not really a substitute for cheap oil. See my post, Our Investment Sinkhole Problem.
The situation of reaching debt limits because of resource limits is a worrisome one, because it is hard to see a way to fix the situation. People often say that our debt problem arises because we have a financial system in which money is loaned into existence, and as a result, requires growth to pay back debt with interest. I am not sure that this is really the problem.
We have been used to a financial system that “works” in a growing economy. In such a system, it makes sense to take out loans on new business ventures. In such a system, money is also a store of value. In a shrinking economy, relationships change. Some loans will still “make sense,” but such loans will be a shrinking proportion of current loans, with long-term loans being especially vulnerable. Money will either need to “expire,” or a high rate of inflation will need to be expected, making interest rates on loans very high. In a shrinking economy, businesses will fail much more often, and workers will more often lose their (fossil fuel supported) jobs.
Some have suggested that new local currencies will fix our problems. I am doubtful this will be the case. The problem may well be that all currencies start being more local in nature. What we may lose is interchangeability based on trust.
Notes:
[1] As background for those who have not read my post The Connection of Depressed Wages to High Oil Prices and Limits to Growth, wages recently have been depressed, in part because fewer people are working. Figure 4 above, showing “Per Capita Non-Government Wages,” provides a measure of how wages have changed. This is calculated by taking wages for all US residents, subtracting wages of government workers, and dividing by the total US population (not just the number working). The average wage calculated in this manner is than adjusted to the 2012 price level based on the CPI-Urban price index. Government workers have been omitted because I am trying to get at the base from which other funding comes. Government wages are ultimately paid by taxes on workers in private companies.
The thing that is striking about Figure 4 is that a similar pattern occurs in the 1973 to 1983 period as the 2002 to 2012 period. Oil prices were high in both periods. (Figure 10, below). In fact, the vast majority of wage growth has occurred when oil prices were $30 or less in 2012$.
Figure 10. Per capita non-government wages, calculated by dividing non-government wages from the Bureau of Economic Analysis by the US population, and then bringing to 2012$ using CPI-Urban price index, together with historical oil prices in 2012$, based on BP 2012 Statistical Review of World Energy data, updated with 2012 EIA Brent oil price data.
There are several reasons why rising oil prices can be expected to reduce the number of people working, or the hours they work:
(a) Discretionary sector layoffs. Consumers find that the price of food (which uses oil in its production and transport) and of commuting is rising. Prices of other goods are also rising. This forces consumers to cut back on discretionary spending. Employees in discretionary sectors get laid off, because of these impacts.
(b) General layoffs. Even outside discretionary sectors, employees may be laid off, if the cost of goods rises indirectly because of a rise in oil price. Often this will be because of higher transport cost, but it could because of another use of oil, such as by construction equipment, or as a raw material. With higher costs of delivered products, companies find that demand falls, if they raise prices sufficiently to maintain profit margins. (This falling demand occurs because some consumers can no longer afford their products.) Businesses find it necessary to scale back the size of their operations–lay off workers and close stores or other facilities. Alternatively, businesses can move operations to China or another low cost site of operation, to reduce costs, but this also leads to layoffs of US employees.
(c) Government layoffs. Eventually the government tax base is reduced, because of a smaller proportion of the population paying taxes. Governments also find a need to pay our more in direct costs–such as more for unemployment insurance, and more for asphalt (an oil product) for paving roads. Governments also find themselves laying off workers.
The effects outlined above can be mitigated to some extent by changes such as moving closer to work and more fuel efficient cars. But experience seems to suggest that even more what happens is that the effects shift from sector to sector over time, as businesses “fix” their problems, leaving them to with wage-earners and governments.
The high price oil situation was mostly resolved in the early 1980s, because other relatively inexpensive oil was available to drill, bringing the price down again. (The new price, at $30 barrel, was still 50% higher than the $20 barrel price prior to the crisis, though.) The availability of new low-priced supplies seems much less likely now, because we extracted the inexpensive-to-extract oil first. We are now reaching diminishing returns. While there seems to be plenty of oil available, it is high-priced oil. This is even true of the new “tight oil” supplies in the Bakken and several other areas.
[2] Government debt in this post refers to all types of government debt combined, including state and local debt. Within this debt, only debt classified as “Marketable” is included. As such, it does not include debt owed to the Social Security system (because contributions that were collected by the Social Security system were spent on something else, and are not available to pay Social Security recipients) or to other pre-funded government agencies. Such debt is a future liability, not affecting today’s spending, so I didn’t add it in. (The Federal Reserve Z1 report also does not include it.) There are, in fact, a huge number of government obligations that are not reflected, such as promises to bail out pension programs and FDIC coverage of bank accounts, because they are contingent in nature. Such programs can be expected to add to the problems we would have, if our debt system should fail.
[3] We would not expect non-government wages to equal Personal Consumption Expenditures, since for one thing, wages of non-government employees leave out expenditures by government employees. They also leave out various derivative amounts, such as expenditures by entrepreneurs, and expenditures of amounts that would be classified as rents and dividends. Changes in savings rates would also play a role.
The End of Technocracy and Zero Government
Off the keyboard of Steve from Virginia
Published on Economic Undertow on February 26, 2013
Figure 1: Detroit city tax map from WDWOT (click on for interactive big), (HT Atlantic Cities): Detroit is a good model for the rest of the United States as the country sinks into post-petroleum depression. One symptom is the inability of the city to provide basic services for its citizens because of shrinking revenue. Owners in the city are unable or unwilling to pay property taxes.
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The map illustrates properties which are current, properties in arrears and those in states of foreclosure. Only a handful of neighborhoods within the city are home to owners current on their property taxes. You can adjust the map to determine the degree to which property in the city is impaired, for instance half the city looks to be in tax arrears and under threat of tax auction.
Here’s Atlantic Cities:
Detroit’s Property Tax Black Hole, in Map Form John MetcalfeTo get a handle on how bad of a tax mess Detroit is sitting in right now, look no further than (above) depressing map showing every property in the city suffering “tax distress.”What looks like a big hunk of moldy cheese is in fact the property-tax status of 384,861* properties, as logged by Wayne County’s online tax portal. The lighter yellow boxes represent more than 59,000 distressed buildings where the owners haven’t paid their taxes. Squished among them are a honeycomb of orange boxes, indicating that these properties have such a large backlog of delinquent taxes that they’re now subject to foreclosure. (Count those up and you arrive at about 74,000 doomed properties.) The plots shown in red, meanwhile, are the 18,246 properties that have already been foreclosed.On the bright side, gray areas mean those places don’t have tax issues. Lucky!
The gray areas are highways and city streets, parkland, commercial structures that earn enough in rent to pay expenses and non-taxable city property.
Detroit does not currently have a purely technocratic city administration but one looms over the horizon. Perhaps the establishment in Michigan can rethink the process as technocracy is an endgame, it will fail in Detroit as it has in Greece and Italy.
What is technocracy? It’s an establishment- installed ‘non-political’ manager with powers to restructure a jurisdiction to protect big business interests regardless of social or political consequences. Jurisdictions that have lost the ability to borrow and thence roll-over debts and pay interest are candidates for the technocratic ‘fix’. Meanwhile, the same inability to borrow strands the technocrats who have no tools to work with.
Technocracy tends to be the last step before default/repudiation of non-payable debts. After technocracy comes ‘zero-government’; the capitulation of the establishment, its dissolution into factions and chaos. This is part of the transition to a post-petroleum economy and breakdown of the status quo. Arguably, Detroit has endured ineffective, paternalistic ‘pro-business’ leadership since World War Two: the non-government is a necessary precondition to technocracy which surrenders shortly afterward to zero-government.
Hat meet rabbit: an emergency managers cannot magically deliver the means to repay tax arrears or interest on loans. To do so requires the creation of thousands of new jobs which is never within managers’ scope of employment. Their duty is to cut jobs. Technocrats lack imagination, they are repo-men They provide administrative smokescreens behind which the creditor interests pick over and privatize remaining marketable assets that have previously been too costly to pillage. The problem is … when governments reach the technocratic inflection point assets aren’t worth anything.
Here is the current Emergency Manager of the Detroit Public School System:
Roy S. Roberts was appointed by Gov. Rick Snyder in May 2011 to serve as Detroit Public Schools Emergency Manager under the Local Government and School District Fiscal Accountability Act. Mr. Roberts, who was most recently Managing director at Reliant Equity Investors, has decades of managerial, financial and organizational experience, having served as the highest-ranking African-American executive in the U.S. automobile industry as Group Vice President for North American Vehicle Sales, Service and Marketing of General Motors Corporation from July 1999 to April 2000. Prior to that, Mr. Roberts also served as Vice President and Group Executive, North American Vehicle Sales, Service and Marketing of General Motors Corporation from October 1998 to July 1999. He was Vice President and General Manager in charge of Field Sales, Service and Parts for the Vehicle Sales, Service and Marketing Group of General Motors Corporation from August 1998 to October 1998. He served as General Manager of the Pontiac-GMC Division from February 1996 to October 1998, presiding over the merger of Pontiac-GMC …
Do you laugh or cry? Roberts offers management expertise to a bankrupt school system gained from within the bankrupt General Motors as a glorified car salesman! Roberts is not expected to improve learning in Detroit, but to facilitate the flow of public funds toward the private sector … this is what technocrats do.
3.1 Salary The Emergency Manager’s salary for services rendered under this Contract shall be $250,000.00 per year, paid by the District.
He is additionally compensated for personal expenses. Unsurprisingly, the citizens refuse to pay taxes. Tax evasion/declining government revenue is a characteristic of technocracies: why throw good money after bad? Here’s Mike ‘Mish’ Shedlock:
Half of Detroit Properties Have Not Paid Taxes; Update on Detroit Bankruptcy The hollowing out of Detroit is nearly complete. All that’s left is a bankrupt shell of a city with no services and scattered citizens that do not pay taxes.The Detroit News reports Half of Detroit Property Owners Don’t Pay Taxes.“Nearly half of the owners of Detroit’s 305,000 properties failed to pay their tax bills last year, exacerbating a punishing cycle of declining revenues and diminished services for a city in a financial crisis, according to a Detroit News analysis of government records.The News reviewed more than 200,000 pages of tax documents and found that 47 percent of the city’s taxable parcels are delinquent on their 2011 bills. Some $246.5 million in taxes and fees went uncollected, about half of which was due Detroit and the rest to other entities, including Wayne County, Detroit Public Schools and the library.
Delinquency is so pervasive that 77 blocks had only one owner who paid taxes last year, The News found. Many of those who don’t pay question why they should in a city that struggles to light its streets or keep police on them.
“Why pay taxes?” asked Fred Phillips, who owes more than $2,600 on his home on an east-side block where five owners paid 2011 taxes. “Why should I send them taxes when they aren’t supplying services? It is sickening. … Every time I see the tax bill come, I think about the times we called and nobody came.”
Shedlock’s ‘solution’ is technocratic: to quash the unions and fire workers. It would be far better to fire the automobiles instead. Raising taxes in a depression is a failure, blaming the city workers is blaming the victims.
In Detroit, homeowners are broke and unable to pay, others are in dispute with the city over the amount of tax due: real estate worth has plummeted over the past 20 years and assessments are ‘uncertain’. There are questions about durable title particularly on foreclosed properties. The large banks and mortgage servicers own multiple properties they look to shift the burdens each property represents onto the taxpayers.
Many thousands of houses in Detroit are burn-outs or dilapidated and require demolition. By not paying taxes, the banks force the city to take over properties and demolish buildings at city’s- rather the banks’ expense. In Detroit, the cost of demolition is not much less than the average cost of a house.
Occasionally the government runs amok: houses in Detroit are demolished after people buy them … to save them from demolition. Why pay taxes and support ineptitude or criminals?
It is likely to be difficult for Michigan’s governor to find another car salesman willing to become Detroit’s Next Great Technocrat! Pre-failure failure in Detroit, (Huffington):
Asked during a short, one-on-one session with The Associated Press if any potential candidates for such a job (emergency manager) had already declined it, Snyder responded: “Oh yeah. There were quite a few people who were in that camp. Because if you think about it, and this is not to imply we’re going to do one, but it would be an extremely challenging position.” Challenging may be an understatement.Mayor Dave Bing has placed the city’s current budget deficit at about $327 million. The report given to Snyder Tuesday by the state-appointed review team said the accumulated deficit as of June 30, 2012, would have topped $900 million if Detroit leaders in recent years had not issued bonds to pay some of its bills.Long-term liabilities, including underfunded pensions, is more than $14 billion, and in recent months the city has relied on bond money from an escrow account to meet its dwindling cash flow needs and to pay city workers.The review team also said that because of its cash deficit the city would have to either increase revenues or decrease expenditures, or both, by about $15 million per month between January and March to “remain financially viable.”
In areas where technocracy has been installed such as Greece, both the initial conditions and the failure of the process is blamed on the inhabitants. Greeks are ‘corrupt tax-cheats and lazy’. Detroiters are ‘stupid, drug-crazed Negro savages bent on murder and destruction’, French are ‘near-communists and cowards’, Irish are ‘ugly … drunken child molesters’. The purpose of the blame game is distraction while retirement savings are stolen by the establishment. The elderly ‘deserve what they (don’t) get! The blame game hits the target by appearing to miss it.
In Detroit, the citizens didn’t chase retail stores away, they didn’t over-invest in the auto industry, they didn’t ghettoize the city with ill-conceived developments and a web of freeways, they didn’t pollute the city with lead, zinc, chromium, mercury, toxic petroleum-based chemicals, they didn’t sell the city out to billionaire developers.
The citizens didn’t pave the city over with parking lots or built thousands of monstrously ugly concrete box- buildings. Detroiters are being shot by criminals, being driven out by block busting and urban decay, losing what little property wealth they had, having already lost hundreds of thousands of jobs. Detroiters have been abandoned by their country not the other way around.
The US spends hundreds of billions of dollars in Afghanistan, why not Detroit?
Detroit’s notorious crime problem appears to be the result of lead pollution from fuel additives and manufacturing residues in the soil along with fumes from burning lead paint spewed into the air from the thousands of building fires taking place every year in the city … rather than skin color.
The black establishment in Detroit has never been able to stand up to the white establishment which owns everything important, which controls the city’s budget, which anoints various city administrations, which constantly looks for opportunities to blame blacks for everything gone wrong.
Since 1920 the auto industry has run Detroit like a coal mining ‘company town’. Most of the housing stock in Detroit was sub-standard as built: cheap frame houses thrown up as rapidly as possible on an unrelenting grid. Detroiters are learning the hard way: land use and urban design matter. The citizens did not design the buildings or lay out the streets. What charm the city once possessed has been swept away for parking lots and cheap commercial and institutional ‘facilities’. The citizens did not do this, it was business interests seeking the quick buck for themselves at the expense of everyone else.
Following the Great Wave of European master craftsmen to the city in the 19th century, most of the emigres in decades following have been unskilled, uneducated agricultural workers seeking assembly-line jobs. They added little to the community other than modest paychecks and a burning desire to relocate themselves to the suburbs as soon as possible. Even in the 1950s, when the auto workers union gained touted increases in pay and benefits, the companies they worked for were shrinking, first by way of automation then by ruinous competition and business failure.
The unraveling of the US car industry has been the decline and fall of Detroit: the population has shrunk from 1.8 million to less than 700,000. Who is to live in the abandoned houses? Even without the fires and the blight, half of the ‘original city’ would be empty. Where are the jobs?
Meanwhile, the Detroiters are on the hook for tens billions of dollars of debt taken on to run the ossified city government, pay pensions, build football and baseball stadiums … arenas, improvements for casinos and retail ‘big-box’ stores. The reason Michigan keeps Detroit at arm’s length is because the state is as bankrupt as the city. If it does nothing, the city’s finance burdens will crush the state, if it tries to ‘fix’ the city the effort will crush the state just as well.
The establishment has created this mess, not the Detroiters. Meanwhile, technocracy marches over the edge of the cliff around the world:
– Japan’s ‘democracy’ has been a facade that masks control by business cartels, in this way all recent governments in Japan are technocratic. Japanese citizens are confronted with the doubling of consumption taxes by 2014: these are taxes levied to meet the spiraling cost of servicing Japan’s monumental debt. Enter the new ‘Shinzo Abe 2.0′ government promising to borrow more, faster … presuming Japan’s total debt burden can be added to without causing a crash. Increasing numbers of Japan’s citizens are elderly, they do not consume, they are unwilling to pay more taxes. Meanwhile, Japan’s overseas customers are broke. They cannot buy Japanese products and by doing so lend to the Japanese.
The outcome is a currency market panic … that is not likely to end well.
– The Greeks are bankrupt, the European Union has bailed out (some of) Greece’s lenders while burdening Greeks with higher taxes that the Greeks refuse to pay. The technocratic government installed by the IMF, European Central Bank and the EU has collapsed, the country now has post-technocratic ‘zero government’.
– Italians have been confronted with higher technocrat-imposed taxes: they evade them or refuse to pay. Voters have just now jettisoned the current IMF-supported technocrat regime. The outcome is post-technocratic zero-government in Italy.
– The French unraveling is well underway the current government is the precursor to a technocracy. The Socialists are incoherent, they appear to have no set strategy or clear understanding of their dilemma which is the consequence of extinguished capital. When the French cannot borrow cheaply, they will be given the ‘Italian Choice’: to install a technocratic regime or be frozen out of credit markets.
– Sequester in the US is technocracy-by-the-numbers, the theft of retirements under the guise of ‘responsible government’ for the benefit of lenders. After technocracy fails comes zero-government.
Moderns look to waste resources but the outcome is to become Detroit in every sense. Japan and Greece have passed their respective points of no-return. Their ability to waste resources is collapsing because their external debt subsidies have been curtailed, they cannot borrow to repay their debts so they cannot borrow to obtain fuel. Meanwhile, working out of debt is beyond what can be done with human labor or what modest remaining capital can leverage.
The wild card in Italian politics: by John Hooper and Lizzy Davies (Guardian UK):
Italy on Monday night risked pitching into political turmoil as projections of the result of its general election pointed to a hung parliament and confirmed that the anti-establishment Five Star Movement (M5S), led by an ex-comedian, Beppe Grillo, had exploded onto the national stage. So far, Grillo has ruled out supporting either side in his drive to sweep away Italy’s existing political parties and the cronyistic culture they support.
Ambrose Evans-Pritchard (Telegraph UK):
In an earthquake result, the Five Star protest movement of comedian Beppe Grillo looked likely to emerge as the biggest single party in the lower house. The scourge of bankers and corrupt elites, Mr Grillo has campaigned for a return to the lira and a restructuring of Italy’s €1.9 trillion (£1.64 trillion) public debt. The conservative bloc of ex-premier Silvio Berlusconi looked poised to win the senate, coming back from the political grave with vows to rip up the EU’s austerity plans and push through tax cuts to pull Italy out of deep slump.“The majority of Italians have clearly voted against the Brussels consensus. That is a damning indictment,” said Mats Persson from Open Europe.A euphoric rally on European bond and stock markets early on Monday gave way to abrupt selling as it became clear that Italy would be left with a hung parliament and no consensus over fundamental policies, leaving the country almost ungovernable.
There is little chance of escape for Italy from zero-government, just like Detroit. The innovation of the Five Star Movement is that it spurns TV and the need for officials to sell themselves to business interests in order to raise advertising money. Five Star candidates offer their platforms on Facebook and Twitter. None of this addresses our evaporating capital problem. Italy and the rest need new ideas about how to wisely use what capital remains: to husband it for the future rather than burning it up faster and faster.
Our current economy uses the destruction of capital as collateral for ‘infinite’ loans. This process must be voluntarily ended or it will be ended for us with zero-government as a component of the process.
Europe and the rest of the world is being de-carred: this is because cars are unaffordable luxuries. For some reason, this is too complex and difficult a problem for economists and policy makers to grasp! What is ‘growth’? Always more and more cars. Why isn’t there any growth? Because adding more cars amplifies the car-cost problem, which is the increasingly efficient destruction of capital. The solution to our capital destruction problem isn’t baling out lenders … presumably so they might lend again … but to end cars and their monstrous claims against capital!
The world’s fuel supply is shrinking along with credit availability. Without a constant supply of new fuel there are shortfalls. Economic activity is curtailed as a result. Without that constant supply of new credit, nobody can retire old loans or service them, nobody can obtain fuel. Credit is constrained further in a vicious cycle … there is no way out.
The establishment insists that the problems in Detroit and elsewhere is the social safety net/excess savings. Lenders complain about the safety net, insisting savings impinges debt repayment. Yet gutting it represents only a temporary reprieve, the debts cannot be repaid because the collateral for the debt is waste and the instrument of waste is cars. In a way, Detroit is a victim of its own success.
The cars’ days are numbered: the car and tire manufacturers, the fuel industry, the highway construction industry, the tract house industry, the big-box retailer industry, the truck-transport industry, the gigantic 80-story concrete penis in the middle of town industry, the military industrial complexes, the finance and insurance industries … all of the automobile dependencies are bankrupt, a gigantic, worldwide dinosaur that has cut its own head cut off by way of its pointless success … too stupid to lay down and die.
Die it will and very soon, children, very soon … not before threshing everything in the world to bits, first.
Twelve Reasons Why Globalism is a Huge Problem
Off the keyboard of Gail Tverberg
Published on Our Finite World on February 22, 2013
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Globalization seems to be looked on as an unmitigated “good” by economists. Unfortunately, economists seem to be guided by their badly flawed models; they miss real-world problems. In particular, they miss the point that the world is finite. We don’t have infinite resources, or unlimited ability to handle excess pollution. So we are setting up a “solution” that is at best temporary.
Economists also tend to look at results too narrowly–from the point of view of a business that can expand, or a worker who has plenty of money, even though these users are not typical. In real life, the business are facing increased competition, and the worker may be laid off because of greater competition.
The following is a list of reasons why globalization is not living up to what was promised, and is, in fact, a very major problem.
1. Globalization uses up finite resources more quickly. As an example, China joined the world trade organization in December 2001. In 2002, its coal use began rising rapidly (Figure 1, below).
Figure 1. China’s energy consumption by source, based on BP’s Statistical Review of World Energy data.In fact, there is also a huge increase in world coal consumption (Figure 2, below). India’s consumption is increasing as well, but from a smaller base.
Figure 2. World coal consumption based on BP’s 2012 Statistical Review of World Energy2. Globalization increases world carbon dioxide emissions. If the world burns its coal more quickly, and does not cut back on other fossil fuel use, carbon dioxide emissions increase. Figure 3 shows how carbon dioxide emissions have increased, relative to what might have been expected, based on the trend line for the years prior to when the Kyoto protocol was adopted in 1997.
Figure 3. Actual world carbon dioxide emissions from fossil fuels, as shown in BP’s 2012 Statistical Review of World Energy. Fitted line is expected trend in emissions, based on actual trend in emissions from 1987-1997, equal to about 1.0% per year.3. Globalization makes it virtually impossible for regulators in one country to foresee the worldwide implications of their actions. Actions which would seem to reduce emissions for an individual country may indirectly encourage world trade, ramp up manufacturing in coal-producing areas, and increase emissions over all. See my post Climate Change: Why Standard Fixes Don’t Work.
4. Globalization acts to increase world oil prices.
Figure 4. World oil supply and price, both based on BP’s 2012 Statistical Review of World Energy data. Updates to 2012$ added based on EIA price and supply data and BLS CPI urban.The world has undergone two sets of oil price spikes. The first one, in the 1973 to 1983 period, occurred after US oil supply began to decline in 1970 (Figure 4, above and Figure 5 below).
Figure 5. US crude oil production, based on EIA data. 2012 data estimated based on partial year data. Tight oil split is author’s estimate based on state distribution of oil supply increases.After 1983, it was possible to bring oil prices back to the $30 to $40 barrel range (in 2012$), compared to the $20 barrel price (in 2012$) available prior to 1970. This was partly done partly by ramping up oil production in the North Sea, Alaska and Mexico (sources which were already known), and partly by reducing consumption. The reduction in consumption was accomplished by cutting back oil use for electricity, and by encouraging the use of more fuel-efficient cars.
Now, since 2005, we have high oil prices back, but we have a much worse problem. The reason the problem is worse now is partly because oil supply is not growing very much, due to limits we are reaching, and partly because demand is exploding due to globalization.
If we look at world oil supply, it is virtually flat. The United States and Canada together provide the slight increase in world oil supply that has occurred since 2005. Otherwise, supply has been flat since 2005 (Figure 6, below). What looks like a huge increase in US oil production in 2012 in Figure 5 looks much less impressive, when viewed in the context of world oil production in Figure 6.
Figure 6. World crude oil production based on EIA data. *2012 estimated based on data through October.Part of our problem now is that with globalization, world oil demand is rising very rapidly. Chinese buyers purchased more cars in 2012 than did European buyers. Rapidly rising world demand, together with oil supply which is barely rising, pushes world prices upward. This time, there also is no possibility of a dip in world oil demand of the type that occurred in the early 1980s. Even if the West drops its oil consumption greatly, the East has sufficient pent-up demand that it will make use of any oil that is made available to the market.
Adding to our problem is the fact that we have already extracted most of the inexpensive to extract oil because the “easy” (and cheap) to extract oil was extracted first. Because of this, oil prices cannot decrease very much, without world supply dropping off. Instead, because of diminishing returns, needed price keeps ratcheting upward. The new “tight” oil that is acting to increase US supply is an example of expensive to produce oil–it can’t bring needed price relief.
5. Globalization transfers consumption of limited oil supply from developed countries to developing countries. If world oil supply isn’t growing by very much, and demand is growing rapidly in developing countries, oil to meet this rising demand must come from somewhere. The way this transfer takes place is through the mechanism of high oil prices. High oil prices are particularly a problem for major oil importing countries, such as the United States, many European countries, and Japan. Because oil is used in growing food and for commuting, a rise in oil price tends to lead to a cutback in discretionary spending, recession, and lower oil use in these countries. See my academic article, “Oil Supply Limits and the Continuing Financial Crisis,” available here or here.
Figure 7. World oil consumption in million metric tons, divided among three areas of the world. (FSU is Former Soviet Union.)Developing countries are better able to use higher-priced oil than developed countries. In some cases (particularly in oil-producing countries) subsidies play a role. In addition, the shift of manufacturing to less developed countries increases the number of workers who can afford a motorcycle or car. Job loss plays a role in the loss of oil consumption from developed countries–see my post, Why is US Oil Consumption Lower? Better Gasoline Mileage? The real issue isn’t better mileage; one major issue is loss of jobs.
6. Globalization transfers jobs from developed countries to less developed countries. Globalization levels the playing field, in a way that makes it hard for developed countries to compete. A country with a lower cost structure (lower wages and benefits for workers, more inexpensive coal in its energy mix, and more lenient rules on pollution) is able to out-compete a typical OECD country. In the United States, the percentage of US citizen with jobs started dropping about the time China joined the World Trade Organization in 2001.
Figure 8. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. 2012 is partial year estimate.7. Globalization transfers investment spending from developed countries to less developed countries. If an investor has a chance to choose between a country with a competitive advantage and a country with a competitive disadvantage, which will the investor choose? A shift in investment shouldn’t be too surprising.
In the US, domestic investment was fairly steady as a percentage of National Income until the mid-1980s (Figure 9). In recent years, it has dropped off and is now close to consumption of assets (similar to depreciation, but includes other removal from service). The assets in question include all types of capital assets, including government-owned assets (schools, roads), business owned assets (factories, stores), and individual homes. A similar pattern applies to business investment viewed separately.
Figure 9. United States domestic investment compared to consumption of assets, as percentage of National Income. Based on US Bureau of Economic Analysis data from Table 5.1, Savings and Investment by Sector.Part of the shift in the balance between investment and consumption of assets is rising consumption of assets. This would include early retirement of factories, among other things.
Even very low interest rates in recent years have not brought US investment back to earlier levels.
8. With the dollar as the world’s reserve currency, globalization leads to huge US balance of trade deficits and other imbalances.
Figure 10. US Balance on Current Account, based on data of US Bureau of Economic Analysis. Amounts in 2012$ calculated based on US CPI-Urban of the Bureau of Labor Statistics.With increased globalization and the rising price of oil since 2002, the US trade deficit has soared (Figure 10). Adding together amounts from Figure 10, the cumulative US deficit for the period 1980 through 2011 is $8.6 trillion. By the end of 2012, the cumulative deficit since 1980 is probably a little over 9 trillion.
A major reason for the large US trade deficit is the fact that the US dollar is the world’s “reserve currency.” While the mechanism is too complicated to explain here, the result is that the US can run deficits year after year, and the rest of the world will take their surpluses, and use it to buy US debt. With this arrangement, the rest of the world funds the United States’ continued overspending. It is fairly clear the system was not put together with the thought that it would work in a fully globalized world–it simply leads to too great an advantage for the United States relative to other countries. Erik Townsend recently wrote an article called Why Peak Oil Threatens the International Monetary System, in which he talks about the possibility of high oil prices bringing an end to the current arrangement.
At this point, high oil prices together with globalization have led to huge US deficit spending since 2008. This has occurred partly because a smaller portion of the population is working (and thus paying taxes), and partly because US spending for unemployment benefits and stimulus has risen. The result is a mismatch between government income and spending (Figure 11, below).
Figure 11. Receipts and Expenditures for all US government entities combined (including state and local) based on BEA data. 2012 estimated based on partial year data.Thanks to the mismatch described in the last paragraph, the federal deficit in recent years has been far greater than the balance of payment deficit. As a result, some other source of funding for the additional US debt has been needed, in addition to what is provided by the reserve currency arrangement. The Federal Reserve has been using Quantitative Easing to buy up federal debt since late 2008. This has provided a buyer for additional debt and also keeps US interest rates low (hoping to attract some investment back to the US, and keeping US debt payments affordable). The current situation is unsustainable, however. Continued overspending and printing money to pay debt is not a long-term solution to huge imbalances among countries and lack of cheap oil–situations that do not “go away” by themselves.
9. Globalization tends to move taxation away from corporations, and onto individual citizens. Corporations have the ability to move to locations where the tax rate is lowest. Individual citizens have much less ability to make such a change. Also, with today’s lack of jobs, each community competes with other communities with respect to how many tax breaks it can give to prospective employers. When we look at the breakdown of US tax receipts (federal, state, and local combined) this is what we find:
Figure 12. Source of US Government revenue, by year, based on US Bureau of Economic Analysis Data.The only portion that is entirely from corporations is corporate income taxes, shown in red. This has clearly shrunk by more than half. Part of the green layer (excise, sales, and property tax) is also from corporations, since truckers also pay excise tax on fuel they purchase, and businesses usually pay property taxes. It is clear, though, that the portion of revenue coming from personal income taxes and Social Security and Medicare funding (blue) has been rising.
I showed that high oil prices seem to lead to depressed US wages in my post, The Connection of Depressed Wages to High Oil Prices and Limits to Growth. If wages are low at the same time that wage-earners are being asked to shoulder an increasing share of rising government costs, this creates a mismatch that wage-earners are not really able to handle.
10. Globalization sets up a currency “race to the bottom,” with each country trying to get an export advantage by dropping the value of its currency.
Because of the competitive nature of the world economy, each country needs to sell its goods and services at as low a price as possible. This can be done in various ways–pay its workers lower wages; allow more pollution; use cheaper more polluting fuels; or debase the currency by Quantitative Easing (also known as “printing money,”) in the hope that this will produce inflation and lower the value of the currency relative to other currencies.
There is no way this race to the bottom can end well. Prices of imports become very high in a debased currency–this becomes a problem. In addition, the supply of money is increasingly out of balance with real goods and services. This produces asset bubbles, such as artificially high stock market prices, and artificially high bond prices (because the interest rates on bonds are so low). These assets bubbles lead to investment crashes. Also, if the printing ever stops (and perhaps even if it doesn’t), interest rates will rise, greatly raising cost to governments, corporations, and individual citizens.
11. Globalization encourages dependence on other countries for essential goods and services. With globalization, goods can often be obtained cheaply from elsewhere. A country may come to believe that there is no point in producing its own food or clothing. It becomes easy to depend on imports and specialize in something like financial services or high-priced medical care–services that are not as oil-dependent.
As long as the system stays together, this arrangement works, more or less. However, if the built-in instabilities in the system become too great, and the system stops working, there is suddenly a very large problem. Even if the dependence is not on food, but is instead on computers and replacement parts for machinery, there can still be a big problem if imports are interrupted.
12. Globalization ties countries together, so that if one country collapses, the collapse is likely to ripple through the system, pulling many other countries with it.
History includes many examples of civilizations that started from a small base, gradually grew to over-utilize their resource base, and then collapsed. We are now dealing with a world situation which is not too different. The big difference this time is that a large number of countries is involved, and these countries are increasingly interdependent. In my post 2013: Beginning of Long-Term Recession, I showed that there are significant parallels between financial dislocations now happening in the United States and the types of changes which happened in other societies, prior to collapse. My analysis was based on the model of collapse developed in the book Secular Cycles by Peter Turchin and Sergey Nefedov.
It is not just the United States that is in perilous financial condition. Many European countries and Japan are in similarly poor condition. The failure of one country has the potential to pull many others down, and with it much of the system. The only countries that remain safe are the ones that have not grown to depend on globalization–which is probably not many today–perhaps landlocked countries of Africa.
In the past, when one area collapsed, there was less interdependence. When one area collapsed, it was possible to let cropland “rest” and deforested areas regrow. With regeneration, and perhaps new technology, it was possible for a new civilization to grow in the same area later. If we are dealing with a world-wide collapse, it will be much more difficult to follow this model.
You Know You’re in Trouble When…
Off the keyboard of Steve from Virginia
Published on Economic Undertow on February 19, 2012
You Know You’re In Trouble When ..
… the President lies on TV about energy:
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
According to the president, the country has 100 years’ supply of natural gas … everyone knows this, even the president who is a square, the last to know everything. Right?
When a president mentions energy in any speech is a big red flag. The word energy from the president always has ‘problem’ lurking somewhere in the background: remember Jimmy Carter. The president suggests our problem is a matter of perception: this must be ‘the audacity of something-or-other’ that the ‘frantic urgency of nothing in particlar’ that have become part of the national conversation as a consequence of Mr. Obama’s presidency.
Frantic urgency to waste: keep in mind at all times that every single word and phrase of the president’s State of the Union Address is scrutinized and measured by flotillas of lawyers and professionals … and algorithms. The president does not write the speech, highly paid national security specialists … and algorithms … write the speech. Every word in the speech is there for a specific purpose. The president just didn’t blurt out by accident that the country has 100 years supply of natural gas: this misstatement was calibrated … by an algorithm.
The algorithm conveniently overlooked proven reserves or the rate of consumption, whether that rate would increase or decrease. For example, if we use no gas we have hundreds of thousands of years of supply. If the US had the same proven reserves as Saudi Arabia — or a bit better – we would have 13 years at the current rates of consumption.
Wiki — and the US EIA — gives the US about 9 trillion cubic meters of proven reserves.
At the current US rate of consumption, Russia, with six-times US reserves, would give us 80 years supply. Perhaps the president’s statement signals the upcoming invasion of Russia! The only way the US would get 100 years out of Russia’s massive reserves would be with stringent conservation! It would also mean no gas at all for Europe, the Baltic states, Belarus or Ukraine … or Russia itself.
“Whoa! Check out the reserves on Rep. Sanchez!”
Notice the map @ the right. Surprisingly out of focus on the high-definition TV, the map is overlapped with suggestive continent-sized giant, gassy bubbles. The map itself is made up of pink blobs giving the impression that America is bulging with natural gas … that a pin pricking the ground anywhere will cause the gas to flow. There are only a few areas in the country that are gas deposit free: the Eastern Seaboard, Minnesota, Nevada and the Pacific Northwest.
The map is published by the US Energy Information Agency:
Notice the gas- and oil bearing formations. The map is misleading because there are only a few high-output hot spots within each mauvey-pink play. Other areas are not productive or deplete very rapidly. Once production is underway, the hoped-for vast resources generally turn out to be overstated. Gas or oil that cannot be retrieved may as well not exist.
The productivity of gas or oil wells follows a curve: for every hot spot a larger number of wells must be drilled that produce an average amount then rapidly deplete. There are also large numbers of dry holes. The technology that everyone raves about doesn’t make individual wells more productive but rather cuts the number of (costly) dry holes … technology such as ’3D seismic’ (reflection seismology).
The president never mentions cost: gaining gas from shale formations requires companies to drill far more wells than were required to extract from conventional hydrocarbon-bearing formations. He never mentions the customers ability to pay for the wells, nor does he mention the effects of drilling and hydrofracking everywhere in the country on the nation’s drinking water supply. He never mentions whether the water we have is enough … to extract the promised oil and gas.
It is the fact of the lie that is more important than the content or nature of the lie. It insists that within this government, nothing is true until it is officially denied.
You know you are in trouble when the president is not lying when he is lying.
The US actually is bubbling with natural gas, the president is right! The problem is the gas is dispersed and flows are intermittent and irretrievable. Methane gas leaks out of landfills, from marshes, from undersea clathrates, from melting permafrost, leaking around fracked wells and coal mines, it emerges from animal waste, from peat bogs … none of these are useful ‘reserves’ for the natural gas industry or its customers. Instead, the gas circles the globe in the atmosphere, contributing to climate change. Millions of cubic feet of gas are simply flared:
(TRC Solutions) Flaring natural gas from Bakken oil well. Funds are always available to lavish on waste, proper husbandry of capital and gaining the maximum return is unaffordable. Here is the perverse waste-based US energy policy made manifest: citizens and firms are given every incentive to burn through non-renewable natural resources as fast as possible. Flaring suggests that the world will come to an end if the associated oil is kept in the ground for a few more months until gas transmission infrastructure can be installed.
It also suggests there isn’t enough oil or gas to worry about, not enough to pay the bills.
You know you’re in trouble when corruption and influence peddling becomes so commonplace as to be invisible, the background noise behind ordinary business-as-usual.
Comes now another billionaire … to take his rightful place in the leadership cadre, as potential boss of the Department of Energy, (Washington Post):
Billionaire has unique role in official Washington: climate change radical
Juliet Eilperin
When Thomas Steyer — a San Francisco billionaire and major Democratic donor — discusses climate change, he feels as if one of two things is true: What he’s saying is blindingly obvious, or insane.
“I feel like the guy in the movie who goes into the diner and says, ‘There are zombies in the woods and they’re eating our children,’ ” Steyer said during a recent breakfast at the Georgetown Four Seasons, his first appointment in a day that included meetings with a senator, a White House confidant and other D.C. luminaries.
It’s a somewhat shocking statement for someone who’s in the running to succeed the cerebral Steven Chu as energy secretary. Granted, he’s a long shot — the leading contender is MIT professor Ernest Moniz, who served as the department’s undersecretary during the Clinton administration …
Unsurprising that leading nominee Moniz is a Clinton retread and nuclear industry whore. Recycled insiders from previous regimes has been a characteristic of the Obama administration … bet the rent on Moniz (Reuters).
Moniz, who was undersecretary at the Energy Department during the Clinton administration, is a familiar figure on Capitol Hill, where he has often talked to lawmakers about how abundant supplies of U.S. natural gas will gradually replace coal as a source of electricity. Moniz is director of MIT’s Energy Initiative, a research group that gets funding from industry heavyweights including BP, Chevron, and Saudi Aramco for academic work on projects aimed at reducing climate-changing greenhouse gases. (Reporting by Roberta Rampton and Jeff Mason; Editing by Paul Simao)
While Moniz is a tycoon enabler, Steyer is an actual tycoon. He offers more upside to Obama than the technocrat Moniz. With Steyer’s connections, Obama could wind up being somebody after he’s finished with his probationary period as president … Steyer might even capitalize an Obama hedge fund!
Steyer is taking on a more prominent public role. On Sunday, he spoke to a crowd that organizers estimated at 35,000, gathered on the Mall to call for a stronger national climate policy.“I’m not the first person you’d expect to be here today. I’m not a college professor and I don’t run an environmental organization,” he said. “For the last 30 years I’ve been a professional investor and I’ve been looking at billion-dollar investments for decades and I’m here to tell you one thing: The Keystone pipeline is not a good investment.” The move stems from an uncomfortable conclusion Steyer has reached: The incremental political victories he and others have been celebrating fall well short of what’s needed to avert catastrophic global warming. “If we can win every single battle and lose the war, then we’re doing something wrong,” he said, moments after consuming two mochas on the table before him.The simultaneous mocha-drinking is understandable: Steyer had arrived just hours before on the red-eye, which he chooses over a private jet to reduce his carbon footprint. He may have built one of the nation’s most successful hedge funds — Farallon Capital Management, named after the waters off San Francisco Bay teeming with great white sharks — but he’s not flashy.
It’s good to know billionaires are ordinary folks just like you and me … while at the same time inhabitants of the rarefied precincts of sacred money. As a consequence, star-struck Eilperin avoids shining any light into the dark corners of Steyer’s fund, (Wikipedia):
Tom Steyer founded Farallon in January 1986 with $15 million in seed capital. Previously, Steyer worked for San Francisco-based private equity firm Hellman & Friedman, as a risk arbitrage trader, under Robert Rubin, at Goldman Sachs and in Morgan Stanley’s corporate mergers and acquisitions department.
Rubin … Goldman-Sachs … take it back: Steyer is certainly equally qualified- if not more so than ‘Brand X’ candidate Moniz. In Washington, DC, where money talks, Steyer carries his own lobbyist around in his wallet.
Steyer knows coal because Farallon once owned the 2d largest coal-fired power plant in Indonesia! The following is from a report criticizing Steyer’s handling of university endowment funds (Amanda Ciafone, Working Group on Globalization and Culture, Yale University):
(Un)Fa(i)rallon in the Endowment:
Tracking Yale’s Global Capitalism In 2002, when Farallon purchased a 51% stake of Indonesia’s Bank Central Asia for $520 million dollars the fund could not avoid the high visibility of mainstream media attention. Bank Central Asia was the “crown jewel” of Indonesia’s banking sector with approximately $10 billion in assets and eight million customer accounts. In 1998, when the Asian financial crisis brought on by foreign investment and currency speculation brought Indonesia’s banks “to the brink of ruin,” the Indonesian government nationalized the bank, bailing it out and taking on its debtors by replacing unpaid loans with government bonds.In line with demands from the IMF, the sale of Bank Central Asia was seen as crucial to the overall success of the government’s privatization program: “international lenders and the IMF placed great emphasis on BCA’s divestment as a yardstick of economic reform, threatening to withhold financial aid if it was not completed.” Private investors could now buy an Asian bank on the cheap. Although it offered 25 rupiah a share less and has never run a bank, Farallon was chosen over other bidders. In fact, Farallon had won a huge asset for Yale and its other investors; for the $520 million it paid, it bought a bank predicted to earn $650 million in government interest payments a year for the next few years. In actuality, the Indonesian government was paying Farallon interest on its own bonds originally issued to save the bank that Farallon now owns.
Ciafone questions how non-Indonesian Farallon could buy the bank with both the lower bid and zero-experience in running a financial institution? It emerged that Farallon was well connected in Indonesia and could leverage its friends in high places (IMF) better than the other financiers.
Some of Farallon’s (Yale’s) money was invested in Paiton I, Indonesia’s first private power venture and “one of the most expensive power deals of the decade.” As the first private power project in the country the huge Paiton I coal burning power plant set the tone for subsequent private power ventures which “cut overpriced, politically influenced deals that undermined the Indonesian economy.” Although little is known about Farallon’s connection to the Paiton project, the financial press revealed that Farallon held a “controlling position in the $180 million [bond] issue” of Indonesia’s Paiton I plant. But much is known about the nature of the Paiton I project; three Wall Street Journal investigative articles detail the crony capitalism, price gauging, and environmental risks surrounding the plant in Indonesia.
It’s hard to say who would be worse as DOE Boss: captive insider Moniz or finance criminal Steyer. Both are creatures of the money-establishment: the end result is more of the current status-quo: lies and continuing incentives to waste, more theft from the citizens by tycoons. Regardless who whomever becomes DOE Boss, don’t expect any real change as to do so might adversely effect tycoons’ two-fisted lifestyles.
Meanwhile, you know you are in trouble when the Federal Reserve is lending $85 billion dollars to the Federal Government and the mortgage business every month.
It is both worrisome and suggestive that the central bank is such a large lender to the government. Are there no other lenders? This is a tremendous red flag: this sort of direct monetization suggests the government is a credit risk.
Is is also worrisome and suggestive when the Fed is lending billions every day to the mortgage industry. If the industry was solvent it would not need a continuing $40 billion-per-month bailout! At the same time, it is worrisome that the Fed is guaranteeing bank deposits. When the Fed accepts securities as collateral during open market operations such as ongoing Quantitative Easing (QE) it credits the banks with ‘excess’ reserves. These reserves are never deployed (into circulation) unless the banks’ balance sheets are collapsing … as when there are runs on the banks.
Does the Fed know something about the banks we should worry about?
You know you are in trouble when the inflation/deflation argument is still with us.
Deflation tends to be described as a change in prices for goods, a fall in the general price level or a contraction of credit and available money. Rather, deflation is where the cost of repayment of any debt is greater in real terms than the worth of the debt.
Current deflation is meaningless out of context of debt and energy. The world is running out of energy and has taken on $640 trillion$ in debt in order to run out of energy.
There is debt deflation when the cost of repaying a debt increases as the debt is repaid, because the act of repayment extinguishes currency. The scarcity premium of currency increases faster than the rate at which the debt(s) can be retired. In fact, debt repayments by 3d parties has the effect of rendering all debts unaffordably costly to repay. Read Irving Fisher’s paper on ‘Debt Deflation’ (1933).
Energy deflation occurs when energy becomes scarce and more expensive in real terms, there is a scarcity premium added to fuel that the customers cannot afford … fuel becomes too valuable to waste by driving tens of millions of useless cars in circles from gas station(s) to gas station(s).
Fuel is hoarded or unaffordable, so is money used to buy fuel. If currency is more useful to gain fuel than credit, there is no credit. The cycle is broken only when there is no fuel or no demand for it.
Economists are blind to the distinction between ledger loans (amounts noted on spreadsheets as due and payable) and circulating money.
Central banks offer ledger loans as do private sector lenders. The latter offer unsecured loans to customers. Ledger loans are credits made to borrowers’ accounts, funds thereto are simply ‘invented’. As the name implies, circulating money is loans that have changed hands to 3d (or more) parties in the marketplace where their worth is determined.
Banks’ offering unsecured loans is called ‘inflation’, demanding circulating money as repayment for unsecured loans is called ‘deflation’. Since most repayment is made by taking out greater loans, inflation tends to be a background condition. Unsecured loans represent economic ‘growth’ as their tally makes up the components of GDP.
Private sector lenders demand repayment in circulating money which is always in limited/finite supply. Borrowers cannot offer ledger repayments! They must earn, borrow or steal the funds demanded for repayment from others who then do not have the funds. Repayment reduces the amount of money in circulation which reduces GDP. When repayment demands exceed the amount of new loans there is a recession.
Clearly, offering more ledger credit — which costs very little — and gaining circulating money in return — which costs everything — is good business for lenders. Everyone is robbed whether they borrow or not because of the increased scarcity and cost of needed circulating money!
Central banks cannot make unsecured loans (loans in excess of collateral) therefor there is no such thing as central bank ‘money printing’. Because reserve banks have no capital structure — they are reserve banks after all — they cannot extend unsecured credit. Any central bank that offers unsecured loans is instantly and permanently insolvent!
This is not an Economic Undertow supposition but a condition like gravity. If ordinary commercial or depository banks are rendered insolvent by excess leverage and bad loans, a central bank which leverages itself while taking on the bad loans of its clients is ruined just the same as the other banks, for the same reason!
Under such circumstances, there is no effective lender of last resort, the only real collateral for all loans is currency on deposit. There are bank runs to redeem as much as possible … (as are underway in Europe and commencing in Japan).
The outcome of the discussion is delay in implementing reforms. Meanwhile, there is ongoing energy- and resource waste.
You know you are in trouble when your world burns 88.8 million barrels of petroleum per day … and is fantastically in debt by trillions of dollars!
That petroleum is gone forever. Another 88.8 million barrels will flush down the toilet tomorrow and another 88.8 million the day after … day after day after day!
and the day after that. What do we get in return for 88.8 million barrels per day? People laugh at the Medievals but they left behind some nice towns and useful buildings. What do we have to show … for the million barrels … burned up for nothing every single day for decades?
We have some used cars, some potholed ‘infrastructure’, millions of ugly buildings … we’re bankrupt.
In order to burn the 88.8 million barrels we’ve had to borrow billions of dollars from bankers and finance every day, as well, The total amount we owe to the financiers is $640 TRILLION dollars (Bank for International Settlements, PDF warning)!
Don’t listen to the soothing bromides of the analysts. Each swap noted on BIS ledgers cost someone real money, they hedge something real, the total system credit including that derived by way of foreign exchange.
We burn instead of holding onto our oil until someone can figure out something better to do with it. We rush to burn as much as possible as fast as possible. We want to burn it faster so that we can change some ‘indicators’ and allow tycoons, ‘entrepreneurs’ and ‘innovators’ to borrow some more.
We are like a family that has inherited a palace: we have burned all the furniture in order to keep warm now the furniture is gone we must burn the house. Well-dressed salesmen knock on the door offering efficient saws and furnaces to cut the house apart and burn it.
Madness … whatever is happening to us we deserve it.
Forward on Climate, 2/17/2013
From the Keyboard of Surly1
Originally published in Doomstead Diner
February 20, 2013
Discuss this article here in the Diner forum.
Contrary and I were proud to part of a large contingent of people form our area of Virginia to travel to the National Mall in DC for the Forward on Climate rally on Sunday. It was a long and extraordinary day.
The Forward on Climate rally, as it was billed by environmental groups Sierra Club and 350.org, called for President Obama to take immediate action on climate change, including blocking further construction of the Keystone XL oil pipeline.
Dozens of buses discharged rallyers from all across the country. The assembly massed on the National Mall, where speakers and musicians addressed the crowd. As they gathered for the march, participants listed to a variety of talks from luminaries, including 350.org President Bill McKibben, who tweeted, “Today was one of the best days of my life, because I saw the movement come together finally, big and diverse and gorgeous.”
Bill McKibben speaks.
More "domestic terrorists" in action.
“I waited a quarter century since I wrote the first book about all this stuff to see if we were going to fight,” McKibben told the crowd. “And today, I know we are going to fight. The most fateful battle in human history is finally joined, and we will fight it together.”
We gathered under this banner. At first, the Virginia contingent was pretty easy to find. Later in the day, finding anyone became impossible.
Van Jones was also on the dais. He urged the crowd to put pressure on the President: “This President has the power to achieve the single biggest carbon reduction ever, by holding our biggest carbon polluters – dirty power plants – accountable for what they dump into the air, Cleaning up this pollution and using more clean energy will provide jobs to thousands of Americans, save families real money when it comes to electricity bills and, most important, will make a real difference in our health and the health of our children.”
Loved this man's sign. He said he FOUND it along the way!
Organizers distributed placards.
Wind power advocates brought visual aids.
Two of my favorite people: the lovely Contrary, and Jaded Prole, both local Occupiers.
Kathy and Jeff, also local Occupiers. They walk the walk.
Other speakers included:
- The Rev. Lennox Yearwood, Hip Hop Caucus President and CEO
- Michael Brune, Sierra Club Executive Director
- Van Jones, NRDC Trustee and President Rebuild the Dream
- Sen. Sheldon Whitehouse, Democratic Senator from Rhode Island
- Rosario Dawson
- Chief Jacqueline Thomas, native peoples chief and co-founder Yinka Dene Alliance
A chill and biting win gusted on the participants, who stood in the frozen mud of the Mall to brave the elements. Even huddling together like penguins didn’t make it any more bearable. Those in attendance later marched through the streets bearing placards, signs and musical instruments.
In an interesting turn, earlier that week Michael Bruce, President of the Sierra Club, Robert F. Kennedy, Jr., and others handcuffed themselves to the White House gates in an act of civil disobedience to bring attention to these interrelated issues. This marks the first time in the Sierra Club’s history that it has engaged in acts of civil disobedience.
During his turn at the microphone, Brune addressed the crowd: “Twenty years from now on President’s Day, people will want to know what the president did in the face of rising sea levels, record droughts and furious storms brought on by climate disruption . . .” “President Obama holds in his hand a pen and the power to deliver on his promise of hope for our children. Today, we are asking him to use that pen to reject the Keystone XL tar sands pipeline, and ensure that this dirty, dangerous, export pipeline will never be built.”
Many in the crowd expressed by voice and sign that the pipeline would be stopped “by any means necessary.”
Capt. Ray Lewis gives an interview.
Ray Lewis, Occupier and hero.
There was also much opposition to fracking, and much support for clean, alternative fuels. Neither Charles nor David Koch was spotted in the crowd. It was also a pleasure to meet Captain Ray Lewis, a true Occupy hero. I was able to thank him for his work.
It remains to be seen what will come of this effort. Stay tuned.
Of all the signs seen on this day, this one spoke perhaps the most to the two of us. Because, as for most of us, this outing is not about us, but for the generations to come.
All images Surlyfoto.
Our Investment Sinkhole Problem
Off the keyboard of Gail Tverberg
Published on Our Finite World on February 8, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
We are used to expecting that more investment will yield more output, but in the real world, things don’t always work out that way.
Figure 1. Comparison of 2005 to 2011 percent change in real GDP vs percent change in oil consumption, both on a per capita basis. (GDP per capita on a PPP basis from World Bank, oil consumption from BP’s 2012 Statistical Review of World Energy.)In Figure 1, we see that for several groupings, the increase (or decrease) in oil consumption tends to correlate with the increase (or decrease) in GDP. The usual pattern is that GDP growth is a little greater than oil consumption growth. This happens because of changes of various sorts: (a) Increasing substitution of other energy sources for oil, (b) Increased efficiency in using oil, and (c) A changing GDP mix away from producing goods, and toward producing services, leading to a proportionately lower need for oil and other energy products.
The situation is strikingly different for Saudi Arabia, however. A huge increase in oil consumption (Figure 1), and in fact in total energy consumption (Figure 2, below), does not seem to result in a corresponding rise in GDP.
Figure 2. Total primary energy consumed per capita, based on BP’s 2012 Statistical Review of World Energy data and population data from EIA.At least part of problem is that Saudi Arabia is reaching limits of various types. One of them is inadequate water for a rising population. Adding desalination plants adds huge costs and huge energy usage, but does not increase the standards of living of citizens. Instead, adding desalination plants simply allows the country to pump less water from its depleting aquifers.
To some extent, the same situation occurs in oil and gas fields. Expensive investment is required, but it is doubtful that there is an increase in capacity that is proportional to its cost. To a significant extent, new investment simply offsets a decline in production elsewhere, so maintains the status quo. It is expensive, but adds little to what gets measured as GDP.
The world outside of Saudi Arabia is now running into an investment sinkhole issue as well. This takes several forms: water limits that require deeper wells or desalination plants; oil and gas limits that require more expensive forms of extraction; and pollution limits requiring expensive adjustments to automobiles or to power plants.
These higher investment costs lead to higher end product costs of goods using these resources. These higher costs eventually transfer to other products that most of us consider essential: food because it uses much oil in growing and transport; electricity because it is associated with pollution controls; and metals for basic manufacturing, because they also use oil in extraction and transport.
Ultimately, these investment sinkholes seem likely to cause huge problems. In some sense, they mean the economy is becoming less efficient, rather than more efficient. From an investment point of view, they can expect to crowd out other types of investment. From a consumer’s point of view, they lead to a rising cost of essential products that can be expected to squeeze out other purchases.
Why Investment Sinkholes Go Unrecognized
From the point of view of an individual investor, all that matters is whether he will get an adequate return on the investment he makes. If a city government decides to install a desalination plant, the investor’s primary concern is that someone (the government or those buying water) will pay enough money that he can make an adequate return on his investment over time. Citizens clearly need water. The only question is whether citizens can afford the desalinated water from their discretionary income. Obviously, if citizens spend more on desalinated water, the amount of discretionary income available for other goods will be reduced.
The same issue arises with pollution control equipment installed by a utility, or by an auto maker. The need for pollution control equipment arises because of limits we are reaching–too many people in too small a space, and too many waste products for the environment to handle. The utility or auto makers adds what is mandated, since clearly, buyers of electricity or of an automobile will recognize the need for clean air, and will be willing to use some of their discretionary income for pollution control equipment. Mandated renewable energy requirements are another way that governments attempt to compensate for limits we are reaching. These, too, tend to impose higher costs, and indirectly reduce consumers’ discretionary income.
All types of mineral extraction, but particularly oil, eventually reach the situation where it takes an increasing amount of investment (money, energy products, and often water) to extract a given amount of resource. This situation arises because companies extract the cheapest to extract resources first, and move on to the more expensive to extract resources later. As consumers, we recognize the situation through rising commodity prices. There is generally a real issue behind the rising prices–not enough resource available in readily accessible locations, so we need to dig deeper, or apply more “high tech” solutions. These high tech solutions indirectly require more investment and more energy, as well.
While we don’t stop to think about what is happening, the reality is that increasingly less oil (or other product such as natural gas, coal, gold, or copper) is being produced, for the same investment dollar. As long as the price of the product keeps rising sufficiently to cover the higher cost of extraction, the investor is happy, even if the cost of the resource is becoming unbearably high for consumers.
The catch with energy products is that consumers really need the products extracted–the oil to grow the food they eat and for commuting, for example. We also know that in general, energy of some sort is required to manufacture every kind of product that is made, and is needed to enable nearly every kind of service. Oil is the most portable of the world’s energy sources, and because of this, is used in powering most types of vehicles and much portable equipment. It is also used as a raw material in many products. As a result, limits on oil supply are likely to have an adverse impact on the economy as a whole, and on economic growth.
The Oil and Gas Part of the Problem
A major issue today is that oil supply is already constrained–it is not rising very quickly on a world basis, no matter how much investment is made (Figure 3).
Figure 3. World oil supply with exponential trend lines fitted by author. Oil consumption data from BP 2012 Statistical Review of World Energy.As noted above, the easy-to-extract oil and gas was extracted first. New development is increasingly occurring in expensive-to-extract locations, such as deep water, Canadian oil sands, arctic oil, and “tight oil” that requires fracking to extract. This oil requires more energy to produce, and more inputs of other sorts, such as water for fracking. Because of rising costs, the price of oil has tripled in the last 10 years.
Investment costs also continue to soar because of rising costs associated with exploration and production. Worldwide, oil and gas exploration and production spending increased by 19% in 2011 and 11% in 2012, according to Barclays Capital. Such spending produced only a modest increase in output–about 0.1% increase in crude oil production in 2011, and 2.2% increase in the first 10 months of 2012, based on EIA data. Natural gas production increased by 3.1% in 2011, according to BP. Estimates for 2012 are not yet available.
If we want to “grow” oil and gas production at all, businesses will need to keep investing increasing amounts of money (and energy) into oil and gas extraction. For this to happen, prices paid by consumers for oil and gas will need to continue to rise. In the US, there is a particular problem, because the selling price of natural gas is now far below what it costs shale gas producers to produce it–a price estimated to be $8 by Steve Kopits of Douglas Westwood. The Henry Hub spot natural gas price is now only $3.38.
The question now is whether oil and gas investment will keep rising fast enough to keep production rising. Barclays is forecasting only a 7% increase in worldwide oil and gas investment in 2013. According to the forecast, virtually none of the investment growth will come from North America, apparently because oil and gas prices are not currently high enough to justify the high-priced projects needed. The flat investment forecast by Barclays suggests a major disconnect between what the IEA is saying–that North America is on its way to becoming an energy exporter–and the actual actions of oil and gas companies based on current price levels. Of course, if oil and gas prices would go higher, more investment might be made–a point I made when writing about the IEA analysis.
What will the ultimate impact be on the economy?
I would argue that for most of the developed (OECD) countries, the ultimate impact will be a long-term contraction of the economy, similar to that illustrated in Scenario 2 of Figure 4.
Figure 4. Two views of future economic growth.What happens is that as we increasingly reach limits, more and more investment capital (and physical use of oil) is allocated toward the investment sinkholes. This has a double effect:
(1) The prices paid for resources that are subject in investment sinkholes need to continue to rise, in order to continue to attract enough investment capital. This is true both for goods that directly come from investment sinkholes (oil, gas and water) and from products that have a less direct connection, but depend on rising-cost inputs (such as food and electricity).
(2) Products outside of essential goods and services will increasingly be starved of investment capital and physical resources. This happens partly because of the greater investment needs in the sinkhole areas. Also, as consumers pay increasing amounts for essential goods and service because of (1), they cut back on the purchase of discretionary items, reducing demand for non-essentials.
In some real sense, because of the sinkhole investment phenomenon, we are getting less and less back for every dollar invested (and every barrel of oil invested). This phenomenon as applied to energy resources is sometimes referred to as declining Energy Return on Energy Invested.
As discussed above, world oil supply in recent years is quite close to flat (Figure 3). The flat supply of oil is further reduced by the additional oil investment required by sinkhole projects, such as the ones Saudi Arabia is undertaking. Also, there is a tendency for the developing world to attract a disproportionate share of the oil supply that is available, because they can leverage its use to a greater extent. Both of these phenomena lead to a shrinking oil supply for OECD countries.
The combination of shrinking OECD oil supply, together with the need for oil for many functions necessary for economic growth, leads to a tendency for the economies of OECD nations to shrink. It is hard to see an end to this shrinkage, because there really is no end to the limits we are reaching. No one has invented a substitute for water, or for unpolluted air. People talk about inventing a substitute for oil, but biofuels and intermittent electricity are very poor substitutes. Often substitutes have even higher costs, adding to the investment sinkhole problem, rather than solving it.
Where we are now
When resource prices rise, the impact is felt almost immediately. Salaries don’t rise at the same time oil prices rise, so consumers have to cut back on some purchases of discretionary goods and services. The initial impact is layoffs in discretionary sectors of the economy. Within a few years, however, the layoff problems are transformed into central government debt problems. This happens because governments need to pay benefits to laid-off workers at the same time they are collecting less in taxes.
The most recent time we experienced the full impact of rising commodity prices was in 2008-2009, but we are not yet over these problems. The US government now has a severe debt problem. As the government attempts to extricate itself from the high level of debt it has gotten itself into, citizens are again likely to see their budgets squeezed because of higher taxes, lay-offs of government workers, and reduced government benefits. As a result, consumers will have less to spend on discretionary goods and service. Layoffs will occur in discretionary sectors of the economy, eventually leading to more recession.
Over time, we can expect the investment sinkhole problem to get worse. In time, the impact is likely to look like long-term contraction, as illustrated in Scenario 2 of Figure 4.
Is there an End to the Contraction?
It is hard to see a favorable outcome to the continued contraction. Our current financial system depends on long-term growth. The impact on it is likely to be huge stress on the financial system and a large number of debt defaults. It is even possible we will see a collapse of the financial system, or of some governments.
In a way, what we are talking about is the Limits to Growth problem modeled in the 1972 book by that name. It is the fact that we are reaching limits in many ways simultaneously that is causing our problem. There are theoretical ways around individual limits, but putting them together makes the cost impossibly high for the consumer, and places huge financial stress on governments.
Different this time…
Off the keyboard of Steve fromVirginia
Published on Economic Undertow on February 10, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
The North Dakota Department of Mineral Resources made a presentation to native peoples’ tribal leaders in the state last fall regarding oil and gas production in the Bakken area, (PDF alert). It’s a comprehensive report and worth the time to examine it. This jumped out:
Figure 1: “Oil price could fall enough to make some areas uneconomic” (click on for big). At issue is whether prices in certain areas of the US are low enough to shut in marginal production already.
Figure 1: the cost of Brent crude vs. the ability of crude customers to pay for it made graphic, from TFC Charts. What the chart can’t say is that the industrial world is impoverished by the high cost of crude in a vicious cycle. What it also doesn’t show is that real fuel prices will increase relative to other costs, even when nominal prices decline. Funds must be diverted toward obtaining fuel away from the purchase of non-fuel goods and services. When the drillers gain credit the customers are deprived of it … the alternative is less fuel.
Little has changed over the past two weeks except that Brent prices are a little higher due to war fears in the Middle East, moral hazard by central banks and nonsense bullish frenzy that has overtaken asset speculators. Right now, customers are borrowing at the expense of drillers. If the prices climb high enough, listen for ugly noises from the euro-zone or Japan as the higher prices bite hard … and businesses (banks) start to fail. That will be the end of the bullishness.
Keep in mind if the economy starts deleveraging (again), there is little the establishment and central banks can do but stand aside and wring their hands. Everything has been committed already: interest rates are at near zero, governments are at the borrowing limit, there is little in the way of collateral remaining for central banks to take on as security for new loans.
Speculators don’t realize conditions are fundamentally different this time … nations, regions, individuals and firms have experienced temporary shortages of fuel, credit and other resources in the past due to wars, droughts and other disruptions: the world in its entirety has never run out of energy before, which is what is underway right now.
| Commodity | Units | Price | Change | % Change | Contract | Time(ET) |
|---|---|---|---|---|---|---|
| Crude Oil (WTI) | USD/bbl. | 95.72 | -0.11 | -0.11% | Mar 13 | 17:15:00 |
| Crude Oil (Brent) | USD/bbl. | 118.90 | +1.66 | +1.42% | Mar 13 | 18:00:00 |
| RBOB Gasoline | USd/gal. | 305.88 | +5.89 | +1.96% | Mar 13 | 17:15:00 |
Is $118 the new $147? Here is another look from Stuart Staniford:
Figure 2: Brent and WTI performing together on the same stage (click on for big). The lower West Texas Intermediate price is good for refiners who can sell products outside the Midwest at the world price. This is a burden for drillers as Bakken formation supports the most expensive, fastest depleting wells on Earth. Landlocked wells put the squeeze on drillers: if the Bakken oil field was near the Gulf coast, drillers could sell their crude at the Brent price, putting the squeeze on refiners instead.
– Drillers have to keep pace with depletion in the Bakken and similar tight fields so large numbers of wells have to be drilled continuously.
– Drillers also have to keep pace with depletion in conventional formations which is occurring at a rate + 4% per year.
– Drillers in the US face an inhospitable environment: oil-field labor shortages, skeptical regulators, anti-fracking activists and the price squeeze.
Rune Likvern (Oil Drum) called keeping up with Bakken depletion rates ‘Running With the Red Queen’ Drillers need to punch holes in the ground at ever-increasing rates just to maintain current rates of output. Any slacking in efforts and flows of product decline sharply, says Likvern:
In reality, it was the growth in the oil price to an apparent structurally higher level that secured commercial support for crude oil production from shales. In that respect it was the oil price that was the true game changer and unleashed the “shale/tight oil revolution”. There is a saying that goes like; “Do not listen to what they say (technology). Look at what they are doing! (spending borrowed money)”. This may as well go for the Bakken formation. The oil service giant Baker Hughes recently expressed concerns about slowing activity levels in shale plays if oil prices moved below $80/Bbl. Further the oil companies Marathon and Occidental recently cut back on their activities in the Bakken formation. Oil and gas companies still care about the colors of the numbers at the bottom line for their projects.
How landlocked is the Bakken crude? Most of the product is shipped by truck to pipeline terminals and railheads, (from the Mineral Resources presentation):
Figure 3: Running with the Ace of Spades: by the time the transportation mess is straightened out the Bakken fields will be depleted.
Coastal refiners must pay world prices for crude while selling high cost products. As a result of the squeeze, coastal refiners are going out of business. Here is a clip from Stillwater Associates:
US East Coast Refinery for Sale: Who’s Buying? Earlier in September, Sunoco had announced plans to sell its Marcus Hook and Philadelphia, PA refineries, noting that the refineries had been profitable for only two of the last 10 quarters, and stating that both refineries would be idled in July 2012 if buyers have not been found. However, in an early November conference call with analyst, Lynn Elsenhans, Sunoco’s CEO and Chairman, stated that “…if at any point we believe it’s in the best interest of the shareholders to either stop operating (Marcus Hook and Philadelphia) or change their utilization rate, up or down, even if that’s before July, 2012, we would take the appropriate action.” Sunoco Refining and Supply reported a $17 million pretax loss for 3Q 2011, the ninth quarter out of the last 11 for which Sunoco Refining and Supply lost money.When ConocoPhillips announced that it was seeking a buyer for the Trainer refinery, Willie Chiang, then ConocoPhillips’ Senior Vice President of Refining, Marketing, Transportation and Commercial, noted that their decision to sell, like Sunoco’s, was based on unfavorable economics caused by a competitive and difficult market environment characterized by “…product imports, weakness in motor fuel demand, and costly regulatory requirements.”So, who will buy these refineries?Valero has been mentioned by some as a possible buyer, but Valero exited the refining business on the US East Coast when it sold its Paulsboro, NJ and Delaware City, DE refineries in 2010. Valero has said it plans to move gasoline from its recently acquired Pembroke, UK refinery, which can process heavier sour crude, to the US East Coast.
Keep in mind, the transport bottleneck is the reason for so much gas flaring in tight oil formations. Gas does not command a price high enough to support a crash program to build out distribution infrastructure. Meanwhile, enough gas to heat a big city like Minneapolis is wasted.
Keith Schaefer @ Oil and Gas Investment Bulletin says:
A vertical well into a conventional oil field costs something like $1 million. The Bakken’s horizontal, multi-stage frack wells cost an average of $9 million, according to the North Dakota Department of Mineral Resources. That’s a huge upfront cost. Each well produces approximately 615,000 barrels of oil, meaning the breakeven price for each Bakken well ends up in the $70-$90/barrel range, once taxes, royalties, and expenses are included. If oil prices slump below that level, a lot of people say Bakken wells aren’t worth the cost.
A lot of people like grade school arithmetic teachers. Because businesses cannot lose money perpetually, low prices keep crude in the ground … conservation by other means.
As the wells in the Bakken grow closer together, initial production rates are sliding. According to some sets of data, average first year well output climbed steadily from 2005 to a peak in mid-2010, then declined almost 25% over the following 12 months. With more wells tapping into the same resources, there is simply less oil pressure available to each well. And when initial well output starts to fall, an accelerating number of new wells must be brought online to sustain overall production volumes.Such is the heart of the pessimist argument: that sliding initial flow rates will tag-team with the Bakken’s high decline rates to mean that, no matter how many new wells are drilled, production will stagnate.
One thing to keep in mind is when oil-bearing rock is fractured, it is turned into gravel, the stones held apart by propants: sand or ceramic grains. Once rock is fractured, it cannot be fractured a second time. Fracking is ‘one and done’.
Of course, the real problems are on the consumption side, not the production. Consumption is waste, it does not and cannot pay for itself. What does the heavy lifting is debt and lots of it. We’ve had debt around for so long we’ve gotten used to it. What we are starting to realize is the monumental cost alongside the impossible debt dynamic. The debts are too large to repay only refinance with new debts. Meanwhile, costs including repayment obligations compound exponentially. We ‘fix’ debt problems by taking on new debts, falling deeper into a hole with each round of debt.
The outlines of our condition are becoming more defined, the clock is ticking … Numerian says (Economic Populist) HT Usman:
Even if another credit blow-out occurred, we all know how that would end – very badly, as in 2008 credit crisis all over again. Unfortunately, without another credit splurge the results are the same. When the credit stops flowing, income is hit hard, because most of the growth in income in the economy is produced by debt, and it is not organic growth that would result from a normal recovery generated through capital investment, wage and benefit increases, revenue advances, and expanded global trade. This is precisely what the Fed understands, and why it is expanding its balance sheet ceaselessly, and enabling the Congress and Administration to build up debt at the tune of a trillion dollars a year. All this credit is the lifeblood of the economy, allowing the government to make Social Security and Medicare/Medicaid payments, feed 48 million people through food stamps, fight wars in multiple hot spots around the world, pay interest on the debt to keep bondholders happy, and shift unemployment money to the states. The problem for the Fed is that the unraveling is already beginning. The stock market may be testing its highs, and 50 out of 50 economists may be anticipating a solid economic recovery, but without new sources of credit that is going to be impossible to achieve. Credit has already dried up in the real economy, which is why you hear so many retailers say “nobody has any money” …
“Nobody has any money …” should be familiar: What the chart can’t say is that the industrial world is impoverished by the high cost of crude in a vicious cycle.
When credit stops flowing, income is hit hard because ALL of the growth in income in the economy is produced by debt … without it there is no industry!
What we are experiencing are two interrelated phenomena: an energy shortage due to our wonderful economic ‘success’ over a period of 400 years and the consequences of exponential growth of loans needed to ‘buy’ this success..
Debt is taken on to capitalize industries and their customers. More debt is taken on later to fill the pockets of the industrialists and roll over the first rounds of debt. Finally, debt is taken on the service the previous rounds and nothing more, the economy is saturated with debt.
The first round of debt gains the industrialist tools to produce goods and provides customers with purchasing power. The second round gives the industrialist his fortune and repays the venture capitalist: during this round fewer tools are gained and less in the way of goods are produced. The third round pays the moneylenders’ interest and nothing more, customers and industries are bankrupted by their debts.which are unproductive. Eventually, the moneylenders also fail.
‘Moneylenders’ here must also include the central banks.
Our economy is in the third stage and has been here for awhile, perhaps since 1980 and the ‘Reagan Revolution’.
Added to this is the ongoing shortage of liquid fuels which results in higher prices which must be met with debt. The cost of new fuel rises past what customers can borrow using fuel waste … as collateral. Waste of the fuel does not provide an organic return so all returns must be borrowed adding to the demand for debt… during a period when productivity of debt is diminished.
More about central bank-n-market head-fakery and wishful thinking, (Naked Capitalism):
Is the Euro Crisis Over? By Robert Guttmann, Professor of Economics at Hofstra University and a visiting Professor at University of Paris, Nord. Cross posted from Triple Crisis.A strange calm has settled over Europe. Following Mr. Draghi’s July 2012 promise “to do whatever it takes” to save the euro, which the head of the European Central Bank followed shortly thereafter with a new program of potentially unlimited bond buying known as “outright monetary transactions,” the market panic evaporated. Since then super-high bond yields have come down to more reasonable levels, allowing fiscally and financially stressed debtor countries in the euro-zone to (re)finance their public-sector borrowing needs a lot more easily than before. Even Greece has been able to borrow in the single-digits for the first time in three years.This calming of once-panicky debt markets has led to optimistic assessments that the worst of the crisis has passed. Draghi himself declared at the beginning of the new year that the euro-zone economy would start recovering during the second half of 2013. He talked of a “positive contagion” taking root whereby the mutually reinforcing combination of falling bond yields, rising stock markets and historically low volatility would set the positive market environment for a resumption of economic growth across the euro zone. Christine Lagarde, as the head of the IMF part of the “troika” (i.e. ECB, IMF, and European Commission) managing the euro-zone crisis, declared at the World Economic Forum in Davos a few weeks ago that collapse had been avoided, making 2013 a “make-or-break year.”
Here is conventional economic analysis that never gets around to mentioning energy.
– A strange calm has settled over Europe … following Mr. Draghi’s July 2012 promise “to do whatever it takes” to save the euro,
Draghi didn’t actually do anything, he talked about it.
– the market panic evaporated.
That’s an assumption. The more likely is credit strangulation eased a bit.
– This calming of once-panicky debt markets has led to optimistic assessments that the worst of the crisis has passed.
Not by a long shot, the crisis is the cost of energy and the inability of the Europeans to earn anything by wasting it.
– we can see that Ireland, Spain, Portugal or even Greece have been able to lower their current-account deficits substantially,
Automobile sales in these countries along with France have collapsed, petroleum use has significantly declined. Consequently, there is less fuel being imported by these countries. Keep in mind, their fuel use will decline to zero if they do not effect conservation measures. What is underway is not a rehearsal, it is the effects of entropy being felt along with diminishing supply of fuel overall. Fuel is being rationed, conservation by other means.
– renewed turmoil in the sovereign-bond markets will be just a matter of time. Most troubling in this context is the doom-loop dynamic of persistent fiscal austerity across the continent.
Withholding credit is a way to compel the export of European fuel consumption to credit issuers such as the US. Any fuel not burned in Italy or Spain is available to be burned in Los Angeles. America’s energy ‘surplus’ is by way of theft from Europe and elsewhere, not fracking. The problem with the professor is he is not cynical enough!
– This dialectic centers above all on the euro’s trade-adjusted exchange rate.
Not in the sense that the professor implies: the more deflation-priced euro gives those who hold it the means to buy fuel at a bit of a discount … and an incentive to keep the euro. Any replacement currency would be depreciated violently, there would be small likelihood of any petroleum exporter accepting any replacement currency other than d-marks.
– will undermine the competitiveness of the euro-zone’s economies,
The assumption is that countries like Greece or Portugal are industrial countries with factories filled with overpaid proletarian workers like China. Instead, they are senior centers filled with retirees. Peoples’ pensions are being looted, this is called ‘competitiveness’, stealing on a grand scale is what is showing up on the ‘stats’.
– But the euro-zone cannot afford this stop-go pattern of policy-making in the face of a systemic crisis. It will have to undertake far-reaching reform on several fronts beyond what Europe’s leading politicians have been willing to entertain.
Europe is being de-carred by pauperizing the populations. The necessary reform is for governments to take charge of this dynamic and decar the continent on purpose while sparing the citizens. Europe can stand to jettison its useless cars and the fuel waste these things represent. It is the waste that has undermined the European — and world — economies, not trivial real interest rate movements or currency exchange rates. These last are abstractions, petroleum waste is permanent: when the fuel is gone baby, it’s gone, forever.
How High Oil Prices Lead to Recession
Off the keyboard of Gail Tverberg
Published on Our Finite World on January 24, 2013
Discuss this article at the Epicurean Delights Smorgasbord inside the Diner
There is ample evidence that spikes in oil prices leads to recession, at least in the US, which is an oil-importing nation. James Hamilton has shown that 10 out of the last 11 US recessions were associated with oil price spikes. How does this happen? An analogy can perhaps help explain the situation. This analogy also sheds light on a number of related economic mysteries:
- How can oil have a far greater impact on the world economy than its share of the world GDP would suggest? After all, BP’s World Energy Outlook to 2030 shows the world cost of oil is only a little over 4% of world GDP.
- How can high oil prices continue to act as a “drag” on the economy, long after the initial spike is past?
- Why isn’t a service economy insulated from the problems of high oil prices? After all, its energy use is relatively low.
The Oil Analogy
An oil product, such as jet fuel, is in some ways analogous to a specialized employee, with skills different from what human employees have. Let’s think of an airline. It has human employees–pilots, copilots, flight attendants, baggage workers, mechanics, and airport check-in personnel. None of these human employees can actually provide the energy to make the jet fly, however. It takes jet fuel to do that.
What happens if the price of jet fuel triples? Jet fuel is now more that than triple the price (near $3.00 gallon) it was in the late 1990s (under $1.00 gallon, at today’s prices).
Figure 1. Jet fuel price in December 2012 $. Jet fuel price per gallon is Spot Gulf Coast price from EIA; price adjustment based on CPI-Urban, from US Bureau of Labor Statistics.The high cost of jet fuel is analogous to the jet fuel employees’ union demanding triple the wages they were paid previously. So what is the airline to do? With very high aviation fuel prices, many tourists who might buy airline tickets will be “priced out” of the market for long distance travel. The airline can sell some airline tickets at higher prices, but not as many.
One thing airlines can do is to cut the number of flights, taking the least fuel-efficient planes out of service and reducing flights on routes with the most unfilled seats. According to a recent Wall Street Journal article, airlines spend 34% of revenue on fuel. With such a high fuel cost, even with these changes, airline ticket prices will remain high. But perhaps with fewer flights, the airline can make a profit.
If an airline cuts its number of flight, this leads to an “across the board” cut in the goods and services the airline buys. The airline will use less jet fuel (and thus use fewer “jet fuel employees”). If it is able to retire quite a few fuel-inefficient jets, “jet fuel employees” will be cut to a greater extent than human employees. It will use fewer human workers, at all levels: pilots, copilots, flight attendants, and ground workers of all types. The airline will reduce its electricity usage because it needs fewer gates in airports for its operations. The airline will also need less gasoline because it will operate fewer baggage-transport vehicles and other ground vehicles.
In many ways, the airline is simply shrinking in size to reflect reduced demand for its high-priced services. When this happens in multiple industries, the result looks very much like recession. I described this situation earlier in a post called How is an oil shortage like a missing cup of flour?. In that post, I said that if oil supplies are short, the situation is not too different from a baker who does not have enough flour to make a full batch of cookies. If he still wants to make cookies, he needs to make a smaller batch, and so needs to cut back on all of the other ingredients as well.
Other Changes an Airline Can Make to Fix Profitability
Apart from cutting back on the number of flights and retiring inefficient jets in the process, there are other things an airline can do to offset the higher “wages” demanded by the jet fuel employees union. One is to reduce the wages of human workers. For example, wages and pension plans of pilots can be cut back, or hours lengthened. Wages of other workers can be frozen or cut back.
Another approach is a merger with another airline, so that “redundant” employees can be eliminated, and flights can perhaps be cut back further. Of course, these layoffs and cutbacks in wages will add to recessionary impacts, because these workers will have less discretionary income.
A third approach to restoring profitability is to automate some of the functions previously handled by human employees. In this case, electricity is used to substitute for human workers. We can think of this automation as substituting new “electrical employees” (analogous to the “jet fuel employees”) for human employees. Relative to the amount of physical work (pushing buttons, moving luggage, etc.) humans can do, humans are far higher paid than either “oil employees” or “electricity employees”. If we assume that the energy of humans is similar to that used by a 100 watt light bulb, at $20,000 a year, humans are paid roughly 1,500 times as much as “oil employees” and 3,500 times as much as “electricity” employees, to do equivalent physical work. So if automation is an option, it almost always saves money.
A fourth way an airline can reduce costs is by purchasing lighter, more fuel-efficient jets. Making a transition of this type takes a long time. Boeing’s Dreamliner 787 is an attempt in this direction, with a 20% fuel savings anticipated. Boeing has over 800 jets of this type on order, but the 50 already in use have been grounded until battery problems are resolved. Quite a few changes have been made in the new jet, so there is a possibility of additional problems also needing to be ironed out, before production ramps up as planned.
Another Example: Asphalt
Asphalt is another product whose consumption has dropped in recent years.
Figure 2. Trends in US Fuel Consumption by Type, with 1994 = 1.0, based on EIA data.The amount of asphalt produced in 2012 was only about 70% as much as was produced in 1994. The reason for the shortfall in asphalt is partly because at current high oil prices, refineries can make more profit by selling high-valued products like gasoline, diesel, and jet fuel than they can make by selling asphalt. A recent EIA article titled, Hydrocracking is an important source of diesel and jet fuel, makes the statement, “A refinery’s ability to upgrade low-value products into high-value products and convert high-sulfur material to low-sulfur material with a secondary unit like a hydrocracker plays a key role in determining its economic fate.”
State budgets are tight for a variety of reasons, including inadequate gasoline taxes to cover the cost of maintaining roads. While part of the need for asphalt can be obtained from recycling, many governments are finding that today’s asphalt costs are so high that concrete roads would be cheaper in the long run. Many states have found it necessary to go back to gravel on some of the smaller roads, because of the high cost of paving today. State and local budgets are likely to be stretched even farther if the US government solves its budget woes by sending programs back to the states, and lets the states work out the funding.
What happens when a state decides move some roads from asphalt back to gravel? For one thing, jobs lost in the road paving business. Also, the new gravel roads have an uneven surface, providing more rolling resistance, so automobile and truck mileage is poorer. In addition, roads tend to degrade more quickly, keeping long-term maintenance costs high. If budgets are tight and roads are not maintained, there is a chance gravel roads will become unusable.
If local governments continue to use asphalt for paving (or switch to concrete, which has even higher initial costs, but lasts longer), they find a need to cut back on other types of services they provide, if they are to avoid a tax increase. This leads to services such as library hours being cut. Cutting back on services reduces both wages and energy costs (lighting and heating/cooling costs). The effect is not all that different from what happens in the airline industry: cuts are made that affect both wages and energy usage of many types. Employee wages seem to be especially affected because changes in employee hours can be made more easily than, say, closing a building or running fewer school buses.
The More General Problem
It is not just airlines and users of asphalt that cut back because of high oil prices. The story plays out in different ways in many industries. Clearly any restaurant is at risk if high oil prices cause consumers to cut back on discretionary purchases, because reducing the frequency of eating out is an easy way of reducing discretionary expenditures. If restaurants have fewer customers, some restaurants will close and are not replaced. This is the restaurant industry’s way of “making a smaller batch”. The result is fewer jobs, less oil use, and less use of resources in general.
Another type of discretionary purchase that gets cut when oil prices are high is the purchase of a new car. A recent article by the New York Times says that the recovery of auto sales since the recent recession has been very slow, with charts for several countries. Reduced car sales is yet another example of making a “smaller batch.” The result is fewer jobs, less use of oil, and less use of many other types of resources.
A similar story can be told about new home sales. These dropped in the recent recession, and have been slow to recover. The drop-off is frequently attributed to the housing bubble bursting, but rising oil prices played an important role as well. When oil prices increased in the 2004-2005 period, the Federal Reserve raised interest rates, trying to cut oil prices. Instead, the higher interest rates together with lower discretionary income from high oil prices led to lower housing prices, starting in 2006. (See my article from the journal Energy, here or here.)
The Economic Implications of High Oil Prices
Our economy is all about “adding value”. But where does this value added come from? To a significant extent, this value comes from adding external energy of some sort. It is really the “energy employees” I mentioned earlier that add this value. Human workers are needed as well, but with automation, the number of human workers required tends to decline.
The ability of external energy to add value is what causes the link between GDP, energy consumption, and oil consumption. Oil plays a special role, because it is easily transported, and can be used in many situation where electricity or some other form of energy (such as human energy, wind energy, or natural gas) would not work.
If we look at a graph of changes GDP compared to changes in world oil and energy usage, (Figure 3, below), we see that all three tend to rise and fall together. In fact, changes in oil and energy usage appear to slightly precede GDP changes. This is the pattern we would expect, if economics are causing a “smaller batch” to be made when oil prices are high.
Figure 3. World growth in energy use, oil use, and GDP (three-year averages). Oil and energy use based on BP’s 2012 Statistical Review of World Energy. GDP growth based on USDA Economic Research data.Part of this change may simply reflect a transfer of energy use from less efficient industries (ones using more high-priced oil in their fuel mix) to more efficient industries (ones using less high-priced oil in their fuel mix). If could also reflect a shift in oil and energy distribution to more less efficient countries (ones using more high-priced oil in their fuel mix) to more efficient countries (ones using less high-priced oil in their fuel mix). For example, Greece (which specializes in vacation tourism, and which uses much oil in its energy mix) would be expected to be an oil/energy loser (Figure 4, below).
Figure 4. Greece’s growth in energy use, oil use, and GDP (three-year averages). Oil and energy use based on BP’s 2012 Statistical Review of World Energy. GDP growth based on USDA Economic Research data.China (which uses much coal in its energy mix and thus keeps costs low, and specializes in inexpensive manufacturing) would be expected to be an oil/energy gainer (Figure 5, below). See my posts, Energy Leveraging: An Explanation for China’s Success and the World’s Unemployment and Why Coal Consumption Keeps Rising, for discussion of this issue.
Figure 5. China’s growth in energy use, oil use, and GDP (three-year averages). Oil and energy use based on BP’s 2012 Statistical Review of World Energy. GDP growth based on USDA Economic Research data.High prices work together with a number of other factors (including increased automation and increased competition from countries with lower wages) to force wages of humans down, and to reduce the number with jobs. The proportion of US citizens with jobs started declining about the year 2000 and accelerated with the recent recession:
Figure 6. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. 2012 is partial year estimate.If we look at the ratio of wages (broadly defined, including proprietors’ income and taxes paid on behalf of employees by employers, but not including transfer payments, such as Social Security payments and Unemployment Insurance) to GDP in Figure 7, below, we see that the ratio of wages to GDP has been dropping since 2000–another indication that human wages are not keeping up with the rest of the economy.
Figure 7. Wage Base (defined as the sum of “Wage and Salary Disbursements” plus “Employer Contributions for Social Insurance” plus “Proprietors’ Income” from Table 2.1. Personal Income and its Distribution) as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.If “Energy Employees” Are Really Doing Most of the Work
If it is really the “energy employees” doing most of the work, then the models used by many economists today are not really correct, and some of the standard beliefs based on these model aren’t right either. For example:
1. The idea that the value of oil or other energy to the economy is proportional to its price doesn’t hold. This can be seen from the examples provided. In fact, if oil or another needed energy product is removed, very close to no work gets done. Humans can provide a little energy, but compared to the energy of oil or electricity, our efforts are puny, and very high-priced. Without external energy, humans’ efforts are limited to tasks like digging with a stick in the ground, or making baskets with reeds that they have gathered.
2. One type of energy doesn’t necessarily substitute easily for another type of energy. Just as one type of employee (mechanic, airline pilot, or flight attendant) can’t necessarily be substituted for another, one type of energy cannot necessarily be substituted for another. Dreamliner’s battery problems illustrate that even trying to substitute a little more electrical energy for oil energy can provide a technological challenge.
3. Somewhat surprisingly, high oil prices remain a drag on the economy permanently, because the high wages of the “oil employees” remain. Output isn’t any higher with these higher wages, so there is not a proportional benefit to society from these higher oil wages. More human workers may be hired in the oil extraction process (often in another country). But even if more workers are hired in the same country, their output does not replace the entirely different kind of output that is provided by the (now-unaffordable to many) high-priced oil.
Another factor in the slow uptake of high oil prices is the fact that governments can temporarily hide some of the effects of high-priced oil through unemployment benefits and stimulus programs. This temporary cover-up cannot continue for long, though, because governments (such as the US and other oil importers) soon run into problems with high deficits (as is happening now). When governments raise taxes or reduce benefits to solve their financial problems, the deferred high-priced oil problems return, showing that the problem never really left.
4. An economy which is mostly services, is not insulated from the problem of high oil prices. Both the airline and asphalt examples illustrate how high oil costs can circulate through the economy and disrupt discretionary spending, even in the US. (Also see Ten Reasons Why High Oil Prices are a Problem.)
Services tend to be the “fluff” of society because for the most part, because we could live without them, at least temporarily. For now, we have a temporary respite from oil-price impacts because of high deficit spending by governments. If governments are forced to balance their budgets, cutbacks seem likely in many areas of services, including medicine for the elderly, higher education, and government-sponsored research programs. If cutbacks occur in areas such as these, we can expect that GDP will shrink faster than savings in oil and energy use–a reversal of what has happened in the past, and a reversal of what many economists have come to expect in the future.
Also, contrary to popular belief, we cannot increase the economy very much by simply selling services that do not require energy to one another. It really takes “energy employees” to play their role as well. Without external energy, we can dig in each others’ back yards with sticks, but this activity doesn’t add much to the economy. We need “energy employees” playing their role as well, if we are to have computers, and metal scissors, and the many other tools we expect, even in a service economy.