Growth

Steady State Economies

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Published on Cassandra's Legacy on April 17, 2016

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What is it like to live in a steady state economy? Miss Hokusai in Edo Japan

 

 

"Miss Hokusai" is a delicate and beautiful movie set during the late Edo period in Japan. It may give us a feeling of what it is like to live in a steady-state economy. In the picture from the movie, you can see O-Ei (Miss Hokusai) together with her father, the painter Tetsuzo, better known by his pen name of Hokusai.

We owe to Kennet Boulding the concept that “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.” And we call the end of this impossible growth a condition of "no growth", "zero growth" or "stable state." Many people argue that such a condition is not only necessary because of physical reasons, but it is also a good condition to be in.

In practice, we don't know what a true "zero-growth" society could be, simply because it has never existed in the modern Western World. The only hint we can find on how such a society could be is from history. Probably the best example of such a society, close in time and very well known, is Japan during the Edo Period, that historians place between 1603 and 1868.

We have no data about Edo Japan that we could compare to our modern concept of "Gross Domestic Product," which is at the basis of our idea of "economic growth". However, we have good data about the population of that time and there is no doubt that it remained nearly stable during the whole period. We also know that the extent of cultivated land in Japan didn't vary over almost one century and a half, from 1720 to 1874 (source). The large cities, such as Edo (the modern Tokyo) grew during this period, but that can only be the result of people moving away from smaller cities or from the countryside. Overall, I think we can say that, for some two centuries, Edo Japan was as close to a "zero-growth" society as we can imagine one.

So how was life in a zero-growth society? Clearly, Edo Japan very different than our society. The large majority of the people (around 90% of the population) were peasants living in country villages. On the other side of the social spectrum, there was the elite, the warrior class who ruled the country with an iron hand and meted harsh punishment to the smallest sign of disobedience. There was no such a thing as "democracy", to say nothing about concepts such as "personal freedom", "human rights," or "social security."

But it would be wrong to dismiss Edo Japan as a harsh dictatorship of no interest for us. In between the peasants and the warriors, there were people whom we could identify as close to our concept of "middle class:" craftsmen and merchants. These people were not rich, but they seem to have been reasonably free of worries about near-term survival. And they seem to have been thriving. Basically, as long as they didn't attempt to rebel against the ruling class, they were left in peace by the government. This sector of the Japanese society was lively and innovative. Edo Japan was a country of artists and of master craftsmen in all fields: the Japanese were very advanced in technologies from metallurgy to paper-making, and they created a culture that we still know and admire today: from poets such as Matsuo Basho to painters such as Hokusai and Hiroshige.

Today, we have a large number of fiction works, from Manga to Samurai movies, that try to convey something of a period that, evidently, modern Japanese still remember very well and, probably, with a certain degree of nostalgy. From all these works, we can have a visual impression of what it could have been to live in Edo Japan as a member of the craftsmen or merchant class. And the impression is that, yes, so many things were different but, maybe, not so much. Everywhere and at all times, people face the same troubles, challenges, and opportunities. So, the "middle class" of Edo Japan lived in a simple world, dressed in simple but elegant cotton kimonos, their only drink was sake, and wherever they wanted to go, they had to walk there on their own feet. But they seemed to be able to live a fulfilling life. They enjoyed nature, poetry, literature, music, and each other's company. Not even their oppressive government could take that away from them.

The movie "Miss Hokusai" is an especially good portrait of life in Edo Japan, showing a great attention to the details of everyday life. It is a delicate and beautiful movie, centered on the life of O-Ei, the daughter of the famous painter Hokusai. It has no great dramas nor scenes of battles or fights (although it does have quite a bit of supernatural hints). But it is an unforgettable portrait of human life that transcends its historical setting and tells us something of what it means to be human anywhere in the world.

We cannot say if in the future we will be able to attain a global "zero-growth" society as Japan did during the Edo Period. Maybe empires will continue to grow and fall as they have done during the past millennia. Or, maybe, we will be able to create a worldwide stable society that might look like ancient Japan. Will it have to be a harsh dictatorship as it was then? We cannot say for sure, although is at least possible that, in order to maintain stability, it is necessary to block social mobility and to suppress every attempt of rebellion. But, in any case, nothing can stop human beings from being human. The future remains open and it will be what we will want it to be.

 
 

 

 

 

Economic growth: How it works; how it fails; why wealth disparity occurs

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Published on the Our Finite World on December 8, 2015

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Economists have put together models of how an economy works, but these models were developed years ago, when the world economy was far from limits. These models may have been reasonably adequate when they were developed, but there is increasing evidence that they don’t work in an economy that is reaching limits. For example, my most recent post, “Why ‘supply and demand’ doesn’t work for oil,” showed that when the world is facing the rising cost of oil extraction, “supply and demand” doesn’t work in the expected way.

In order to figure out what really does happen, we need to consider findings from a variety of different fields, including biology, physics, systems analysis, finance, and the study of past economic collapses. Since I started studying the situation in 2005, I have had the privilege of meeting many people who work in areas related to this problem.

My own background is in mathematics and actuarial science. Actuarial projections, such as those that underlie pensions and long term care policies, are one place where historical assumptions are not likely to be accurate, if an economy is reaching limits. Because of this connection to actuarial work, I have a particular interest in the problem.

How Other Species Grow 

We know that other species don’t amass wealth in the way humans do. However, the number of plants or animals of a given type can grow, at least within a range. Techniques that seem to be helpful for increasing the number of a given species include:

  • Natural selection. With natural selection, all species have more offspring than needed to reproduce the parent. A species is able to continuously adapt to the changing environment because the best-adapted offspring tend to live.
  • Cooperation. Individual cells within an organism cooperate in terms of the functions they perform. Cooperation also occurs among members of the same species, and among different species (symbiosis, parasites, hosts). In some cases, division of labor may occur (for example, bees, other social insects).
  • Use of tools. Animals frequently use tools. Sometimes items such as rocks or logs are used directly. At other times, animals craft tools with their forepaws or beaks.

All species have specific needs of various kinds, including energy needs, water needs, mineral needs, and lack of pollution. They are in constant competition with both other members of the same species and with members of other species to meet these needs. It is individuals who can out-compete others in the resource battle that survive. In some cases, animals find hierarchical behavior helpful in the competition for resources.

There are various feedbacks that regulate the growth of a biological system. For example, a person or animal eats, and later becomes hungry. Likewise, an animal drinks, and later becomes thirsty. Over the longer term, animals have a reserve of fat for times when food is scarce, and a small reserve of water. If they are not able to eat and drink within the required timeframe, they will die. Another feedback within the system regulates overuse of resources: if any kind of animal eats all of a type of plant or animal that it requires for food, it will not have food in the future.

Energy needs are one of the limiting factors, both for individual biological members of an ecosystem, and for the overall ecosystem. Energy systems need greater power (energy use per period of time) to out-compete one another. The Maximum Power Principle by Howard Odum says that biological systems will organize to increase power whenever system constraints allow.

Another way of viewing energy needs comes from the work of Ilya Prigogine, who studied how ordered structures, such as biological systems, can develop from disorder in a thermodynamically open system. Prigogine has called these ordered structures dissipative systems. These systems can temporarily exist as long as the system is held far from equilibrium by a continual flow of energy through the system. If the flow energy disappears, the biological system will die.

Using either Odum’s or Prigogine’s view, energy of the right type is essential for the growth of an overall ecosystem as well as for the continued health of its individual members.

How Humans Separated Themselves from Other Animals

Animals generally get energy from food. It stands to reason that if an animal has a unique way of obtaining additional energy to supplement the energy it gets from food, it will have an advantage over other animals. In fact, this approach seems to have been the secret to the growth of human populations.

Human population, plus the domesticated plants and animals of humans, now dominate the globe. Humans’ path toward population growth seems to have started when early members of the species learned how to burn biomass in a controlled way. The burning of biomass had many benefits, including being able to keep warm, cook food and ward off predators. Cooking food was especially beneficial, because it allowed humans to use a wider range of foodstuffs. It also allowed bodies of humans to more easily get nutrition from food that was eaten. As a result, stomachs, jaws, and teeth could become smaller, and brains could become bigger, enabling more intelligence. The use of cooked food began long enough ago that our bodies are now adapted to the use of some cooked food.

With the use of fire to burn biomass, humans could better “win” in the competition against other species, allowing the number of humans to increase. In this way, humans could, to some extent, circumvent natural selection. From the point of the individual who could live longer, or whose children could live to maturity, this was a benefit. Unfortunately, it had at least two drawbacks:

  1. While animal populations tended to become increasingly adapted to a changing environment through natural selection, humans tend not to become better adapted, because of the high survival rate that results from more adequate food supplies and better healthcare. Humans might eventually find themselves becoming less well adapted: more overweight, or having more physical disabilities, or having more of a tendency toward diabetes.
  2. Without a natural limit to population, the quantity of resources per person tends to decline over time. For example, such a tendency tends to lead to less farmland per person. This would be a problem if techniques remained the same. Thus, rising population tends to lead to constant pressure to raise output (more food per arable acre or technological advancements that allow the economy to “do more with less”).

How Humans Have Been Able to Meet the Challenge of Rising Population Relative to Resources

Humans were able to meet the challenge of rising population by taking the techniques many animals use, as described above, and raising them to new levels. The fact that humans figured out how to burn biomass, and later would learn to harness other kinds of energy, gave humans many capabilities that other animals did not have.

  • Co-operation with other humans became possible, through a variety of mechanisms (learning of language with our bigger brains, development of financial systems to facilitate trade). Even as hunter-gatherers, researchers have found that economies of scale (enabled by co-operation) allowed greater food gathering per hectare. Division of labor allowed some specialization, even in very early days (gathering, fishing, hunting).
  • Humans have been able to domesticate many kinds of plants and animals.  Generally, the relationship with other species is a symbiotic relationship–the animals gain the benefit of a steady food supply and protection from predators, so their population can increase. Chosen plants have little competition from “weeds,” thanks to the protection humans provide. As a result, they can flourish whether or not they would be competitive with other plants and predators in the wild.
  • Humans have been able to take the idea of making and using tools to an extreme level. Humans first started by using fire to sharpen rocks. With the sharpened rocks, they could make new devices such as boats, and they could make spears to help kill animals for food. Tools could be used for planting the seeds they wanted to grow, so they did not have to live with the mixture of plants nature provided. We don’t think of roads, pipelines, and lines for transmitting electricity as tools, but as a practical matter, they also provide functions similar to those of tools. The many chemicals humans use, such as herbicides, insecticides, and antibiotics, also act in way similar to tools. The many objects that humans create to make life “better” (houses, cars, dishwashers, prepared foods, cosmetics) might in some very broad sense be considered tools as well. Some tools might be considered “capital,” when used to create additional goods and services.
  • Humans created businesses and governments to enable better organization, including division of labor and hierarchical behavior. A single person can create a simple tool, just as an animal can. But there are economies of scale, such as when many devices of a particular kind can be made, or when some individuals learn specialized skills that enable them to perform particular tasks better. As mentioned previously, even in the days of hunter-gatherers, there were economies of scale, if a larger group of workers could be organized so that specialization could take place.
  • Financial systems and changing systems of laws and regulations provide additional structure to the system, telling businesses and customers how much of a given product is required at a given time, and at what prices. In animals, appetite and thirst determine how important obtaining food and water are at a given point in time. Financial systems provide a somewhat similar role for an economy, but the financial system doesn’t operate within as constrained a system as hunger and thirst. As a result, the financial system can give strange signals, including prices that at times fall below the cost of extraction.
  • Humans have tended to put resources of many kinds (arable land, land for homes and businesses, fresh water, mineral resources) under the control of governments. Governments then authorize particular individuals and business to use this land, under various arrangements (“ownership,” leases, or authorized temporary usage). Governments often collect taxes for use of the resources. The practice is in some ways similar to the use of territoriality by animals, but it can have the opposite result. With animals, territoriality is used to prevent crowding, and can act to prevent overuse of shared resources. With human economies, ownership or temporary use permits can lead to a government sanctioned way of depleting resources, and thus, over time, can lead to a higher cost of resource extraction.

Physicist François Roddier has described individual human economies as another type of dissipative structure, not too different from biological systems, such as plants, animals, and ecosystems. If this is true, an adequate supply of energy is absolutely essential for the growth of the world economy.

We know that there is a very close tie between energy use and the growth of the world economy. Energy consumption has recently been dropping (Figure 1), suggesting that the world is heading into recession again. The Wall Street Journal indicates that a junk bond selloff also points in the direction of a likely recession in the not-too-distant future.

Figure 1. Three year average growth rate in world energy consumption and in GDP. World energy consumption based on BP Review of World Energy, 2015 data; real GDP from USDA in 2010$.

 

 

 

Figure 1. Three year average growth rate in world energy consumption and in GDP. World energy consumption based on BP Review of World Energy, 2015 data; real GDP from USDA in 2010$.

What Goes Wrong as Economic Growth Approaches Limits?

We know that in the past, many economies have collapsed. In fact, if Roddier is correct about economies being dissipative structures, then we know that economies cannot be expected to last forever. Economies will tend to run into energy limits, and these energy limits will ultimately bring them down.

The symptoms that occur when economies run into energy limits are not intuitively obvious. The following are some of the things that generally go wrong:

Item 1. A slowdown in economic growth.

Research by Turchin and Nefedov regarding historical collapses shows that growth tended to start in an economy when a group of people discovered a new energy-related resource. For example, a piece of land might be cleared to allow more arable land, or existing arable land might be irrigated. At first, these new resources allowed economies to grow rapidly for many years. Once the population grew to match the new carrying capacity of the land, economies tended to hit a period of “stagflation” for another period, say 50 or 60 years. Eventually “collapse” occurred, typically over a period of 20 or more years.

Today’s world economy seems to be following a similar pattern. The world started using coal in quantity in the early 1800s. This helped ramp up economic growth above a baseline of less than 1% per year. A second larger ramp up in economic growth occurred about the time of World War II, as oil began to be put to greater use (Figure 2).

Figure 2. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil's Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

 

 

 

Figure 2. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends for 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

Worldwide, the economic growth rate hit a high point in the 1950 to 1965 period, and since then has trended downward. Figure 2 indicates that in all periods analyzed, the increase in energy consumption accounts for the majority of economic growth.

Since 2001, when China joined the World Trade Organization, world economic growth has been supported by economic growth in China. This growth was made possible by China’s rapid growth in coal consumption (Figure 3).

Figure 3. China's energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

 

 

 

Figure 3. China’s energy consumption by fuel, based on data of BP Statistical Review of World Energy 2015.

China’s growth in energy consumption, particularly coal consumption, is now slowing. Its economy is slowing at the same time, so its leadership in world economic growth is now being lost. There is no new major source of cheap energy coming online. This is a major reason why world economic growth is slowing.

Item 2. Increased use of debt, with less and less productivity of that debt in terms of increased goods and services produced.  

Another finding of Turchin and Nefedov is that the use of debt tended to increase in the stagflation period. Since growth was lower in this period, it is clear that the use of debt was becoming less productive.

If we look at the world situation today, we find a similar situation. More and more debt is being used, but that debt is becoming less productive in terms of the amount of GDP being provided. In fact, this pattern of falling productivity of debt seems to have been taking place since the early 1970s, when the price of oil rose above $20 per barrel (in 2014$). It is doubtful that that economic growth can occur if the price of oil is above $20 per barrel, without debt spiraling ever upward as a percentage of GDP. It is supplemental energy that allows the economy to function. If the price of energy is too high, it becomes unaffordable, and economic growth slows.

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See post on debt for explanation of methodology.

 

 

 

Figure 4. Worldwide average inflation-adjusted annual growth rates in debt and GDP, for selected time periods. See author’s post on debt for explanation of methodology.

China has been using debt to fund its recent expansion. There is evidence that it, too, is encountering falling productivity of additional debt.

We mentioned that appetite controls how much an animal eats. Debt helps control demand for energy products, and in fact, for products of all kinds in the economy. Appetite is different from debt as a regulator of demand. For one thing, debt can be used for an almost unlimited number of purposes, whether or not these purposes have any real possibility of adding GDP to the economy. (This is especially true if interest rates are close to 0%, or even negative.) There are few controls on debt. Governments have discovered that in some instances, debt stimulates an economy. Because of this, governments have tended to be very liberal in encouraging growth in debt. Often, when a debtor is near default, this problem is hidden by extending the term of the loan and pretending that no problem exists.

With respect to biological organisms, energy is often stored up as fat and used later when there is a shortfall of energy. This is the opposite of the way financing for human “tools” generally works. Here financing is often obtained when a tool is put into operation, with the hope that the new tool will pay back its worth, plus interest, over the life of the tool. Much debt doesn’t even have such a purpose; sometimes it is used simply to make an expensive object easier to purchase, or to give a young person (perhaps with poor grades) an opportunity to attend college. When debt has such poor regulation, we cannot expect it to work as reliably as biological mechanisms in feeding back information regarding true “demand” through the price system.

Item 3. Increased disparity of wages; non-elite workers earning less.

Item 3 is another problem that Turchin and Nefedov encountered in reviewing economies that collapsed. One of the reasons for the increased disparity of wages is the increased need for hierarchical relationships if an economy wants to work around a shortfall in goods and services by adding new “tools”. Businesses and governments need to grow larger if they are to accommodate these more complex processes. In such a case, the natural tendency is for these organizations to become more hierarchical in nature. Also, if there is growth, followed by a temporary need to shrink back, the cutbacks are likely to come disproportionately from the lower ranks of workers, reinforcing the hierarchical structure.

Figure 5. Chart by Pavlina Tscherneva, in Reorienting Fiscal Policy, as reprinted by the Washington Post.

 

 

 

Figure 5. Chart by Pavlina Tscherneva, in Reorienting Fiscal Policy, as reprinted by the Washington Post.

Funding arrangements for the new “tools” to work around shortages add to the hierarchical behavior. Typically, businesses must expand to fund the development of the new tools. This expansion may be funded by debt, or by stock programs. Regardless of which approach is used for funding, the programs tend to funnel an increasing share of the wealth of the economy to the wealthier members of the economy. This happens because interest payments and dividend payments both go disproportionately to benefit those who are already high up on the wealth hierarchy.

Furthermore, the inherent problem of fewer resources per person is not really solved, so an increasingly large share of jobs become “service” jobs, using only a small quantity of energy products, but also providing little true benefit to the economy. The wages for these jobs are thus low. The addition of these low-paid jobs to the economy further reinforces the hierarchical nature of the system.

In a sense, what is happening is that the economy as a whole is growing very little in output of goods and services. An ever-larger share of the output is going to the wealthier members of the economy, because of increased hierarchical behavior and because of growth in debt and dividend payments. Non-elite members of the economy find their wages falling in inflation adjusted terms, because, in a sense, the productivity of their labor as leveraged by a falling amount of energy resources is gradually contracting, rather than increasing. It becomes increasingly difficult for the low-paid members of the economy to “pay the wages” of the high-paid members of the economy, so overall demand for goods and services tends to contract. As a result, the increasingly hierarchical behavior of the economy pushes the economy even more toward contraction.

Item 4. Increased difficulty in obtaining adequate funding for government programs.

Governments operate on the surpluses of an economy. As an economy finds itself in a squeeze (job loss, more workers with lower wages, fewer goods and services being produced), governments find themselves increasingly called upon to deal with these problems. Governments may need larger armies to try to obtain resources elsewhere, or they may be needed to build a public works project (like a dam, to get more water and hydroelectric power), or they may need to make transfer payments to displaced workers. Here again, Turchin and Nefedov found governmental funding to be one of the problems of economies reaching limits.

Energy products are unique in that their value to society can be quite different from their cost of extraction. A third value, which may be different from either of the first two values, is the selling price of the energy product. When the cost of producing energy products is low, the wide difference between the value to society and the cost of extraction can be used to fund government programs and to raise the wages of workers. In fact, this difference seems to be a primary reason why economic growth occurs. (This difference is not recognized by most economists.)

As the cost of extraction of energy products rises, the difference between the value to society and the cost of extraction falls, because the value to society is pretty close to fixed (except for changes taking place because of energy efficiency changes), based on how far a barrel of oil can move a truck or how many British thermal units of energy it can provide. As the cost of energy extraction rises, it becomes increasingly difficult to obtain enough tax revenue, either from taxing energy products directly, or from taxing wages. Wages tend to reflect the energy consumption required to support each job because supplemental energy acts to leverage the abilities of workers, and thus improves their productivity.

Energy selling prices may behave in a strange manner, as an economy increasingly reaches limits. Falling prices redistribute what gain is available, so that energy importers get more, while energy exporters get less. Of course, the problem we are now seeing is that oil exporting countries are having difficulty obtaining sufficient revenue for their programs.

Debt is different this time

This time truly is different. We should have learned from past experience that debt tends not to be very permanent; it often defaults. We should therefore expect huge periods of debt defaults, and we should expect to need frequent debt jubilees. Economist Michael Hudson reports that the structure of debt was very different in the past (Killing the Host or excerpt). In early times, he found that by far the major creditors were the temples and palaces of Bronze Age Mesopotamia, not private individuals acting on their own. Because of the top-down nature of the debt, it was easy for the temples and palaces to forgive debt and restore balance to the social structure.

Now, especially since World War II, there is a new belief in the permanency of debt, and about its suitability for funding insurance companies, banks, and pension plans. The rise in economic growth after World War II was important in this new belief in permanency, because without economic growth, it is extremely difficult to pay back debt with interest, unless debt is used for a truly productive purpose. (See also Figures 2 and 4, above)

FIgure 6. Ngram showing frequency of words over a period of years, by Google searches in books.

 

 

 

Figure 6. Ngram showing frequency of words over a period of years, by Google searches of a large number of books. Words searched from top to bottom are “economic growth, IRA, financial services, MBA, and pension plans.”

The Ngram chart above, showing the frequency of word searches for “economic growth, IRA (Individual Retirement Accounts), financial services, MBA (Master of Business Administration), and pension plans” indicates that economic growth was essentially a new concept after World War II. Once it became clear that the economy could grow, financial services began to grow, as did the training of MBAs. Pension plans grew at first, but once companies with pension programs found that it was difficult to keep them adequately funded, there was a shift to IRAs. With IRAs, employees are expected to fund their own retirements, generally using a combination of stock and debt purchases.

Now that debt is “reused” and integrated into the economy, it becomes much more difficult to forgive. We have a situation where insurance companies, banks, and pension plans are all tied together. They all depend on the current economic growth paradigm, including use of debt with interest, continued dividend plans, and rising stock market prices. We have a major problem if widespread debt defaults start.

Demographic Bubble

The other problem we are up against, making government funding even more difficult than it would otherwise be, is the retirement of the baby boomers, born soon after World War II. This by itself would be a problem for maintaining adequate government funding. When it is added to multiple other problems, including bailing out banks, insurance companies, and pension plans if there are debt defaults, the demographic bubble leaves us in much worse shape than economies that reached limits in the past.

Note that High Energy Prices Are Not on the List of Expected Problems

The idea that as we approach limits, we should expect ever-higher energy prices, is simply not true. It should be viewed as a superstition, or as an erroneous understanding of our current situation, based on a poor model of energy supply and demand. Turchin and Nefedov found evidence of spiking food prices, perhaps similar to the spiking we saw in energy prices as we approached the peak in prices in 2008. But with wages of non-elite workers falling too low, especially on an after-tax basis, it was hard for prices to continue to spike.

The idea that collapse can come from low prices, rather than high, is something that is not obvious, unless a person thinks through the situation carefully. Prices seem to be primarily influenced by two factors:

(1) Wages of non-elite workers. These wages are important because there is such a large number of them. If their wages are high enough, they buy homes, cars, and other products that are big users of commodities, both when they are made, and as they are operated.

(2) Increases or decreases in the amount of debt outstanding. If debt defaults start to rise, it is very easy for growth in the quantity of debt outstanding to slow, or even to fall. In such a case, low commodity prices, rather than high, become a problem. As economic growth slows, we should expect more debt defaults, not fewer. There is also a limit to how high Debt/GDP ratios can rise before many suspect that the world economy functions much like a Ponzi Scheme.

Mark Twain wrote, “It ain’t what you know that gets you in trouble. It’s what you know for sure, that just ain’t so.” This is especially a problem for academic researchers who depend on the precedents of past academic papers. A researcher may have come to a conclusion years ago, based on a narrow set of research that didn’t cover today’s conditions. The belief can get carried forward endlessly, even though it isn’t really true in today’s situation.

If we are going to figure out the real answer to how the economy operates, we need to look closely at indications from many areas of research. Such an approach can allow us to see the situation in a broader context and thus “weed out” firmly held beliefs that aren’t really true.

Global Trade Is Collapsing As The Worldwide Economic Recession Deepens

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Published on The Economic Collapse on October 19, 2015

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When the global economy is doing well, the amount of stuff that is imported and exported around the world goes up, and when the global economy is in recession, the amount of stuff that is imported and exported around the world goes down.  It is just basic economics.  Governments around the world have become very adept at manipulating other measures of economic activity such as GDP, but the trade numbers are more difficult to fudge.  Today, China accounts for more global trade than anyone else on the entire planet, and we have just learned that Chinese exports and Chinese imports are both collapsing right now.  But this is just part of a larger trend.  As I discussed the other day, British banking giant HSBC has reported that total global trade is down 8.4 percent so far in 2015, and global GDP expressed in U.S. dollars is down 3.4 percent.  The only other times global trade has plummeted this much has been during other global recessions, and it appears that this new downturn is only just beginning.

For many years, China has been leading the revolution in global trade.  But now we are witnessing something that is almost unprecedented.  Chinese exports are falling, and Chinese imports are absolutely imploding

Growth of exports from China has been dropping relentlessly, for years. Now this “growth” has actually turned negative. In September, exports were down 3.7% from a year earlier, the “inevitable fallout from China’s unsustainable and poorly executed credit splurge,” as Thomson Reuters’ Alpha Now puts it. Most of these exports are manufactured goods that are shipped by container to the rest of the world.

And imports into China – a mix of bulk and containerized freight – have been plunging: down 20.4% in September from a year earlier, after at a 13.8% drop in August.

This week it was announced that Chinese GDP growth had fallen to the lowest level since the last recession, and that makes sense.  Global economic activity is really slowing down, and this is deeply affecting China.

So what about the United States?

Well, based on the amount of stuff that is being shipped around in our country it appears that our economy is really slowing down too.  The following comes from Wolf Richter, and I shared some of it in a previous article, but I think that it bears repeating…

September is in the early phase of the make-or-break holiday shipping season. Shipments usually increase from August to September. They did this year too. The number of shipments in September inched up 1.7% from August, according to the Cass Freight Index.

But the index was down 1.5% from an already lousy September last year, when shipments had fallen from the prior month, instead of rising. And so, in terms of the number of shipments, it was the worst September since 2010.

It has been crummy all year: With the exception of January and February, the shipping volume has been lower year-over-year every month!

The index is broad. It tracks data from shippers, no matter what carrier they choose, whether truck, rail, or air, and includes carriers like FedEx and UPS.

What major retailers such as Wal-Mart are reporting also confirms that we are in a major economic slowdown.  Wal-Mart recently announced that its earnings would fall by as much as 12 percent during the next fiscal year, and that caused Wal-Mart stock to drop by the most in 27 years.

And of course this is going to have a huge ripple effect.  There are thousands of other companies that do business with Wal-Mart, and Reuters is reporting that they are starting to get squeezed…

Suppliers of everything from groceries to sports equipment are already being squeezed for price cuts and cost sharing by Wal-Mart Stores. Now they are bracing for the pressure to ratchet up even more after a shock earnings warning from the retailer last week.

The discount store behemoth has always had a reputation for demanding lower prices from vendors but Reuters has learned from interviews with suppliers and consultants, as well as reviewing some contracts, that even by its standards Wal-Mart has been turning up the heat on them this year.

“The ground is shaking here,” said Cameron Smith, head of Cameron Smith & Associates, a major recruiting firm for suppliers located close to Wal-Mart’s headquarters in Bentonville, Arkansas. “Suppliers are going to have to help Wal-Mart get back on track.”

Similar things are going on at some of the other biggest companies in America as well.

For instance, things have gotten so bad for McDonald’s that one franchise owner recently stated that the restaurant chain is “facing its final days”

“McDonald’s announced in April that it would be closing 700 ‘underperforming’ locations, but because of the company’s sheer size — it has 14,300 locations in the United States alone — this was not necessarily a reduction in the size of the company, especially because it continues to open locations around the world. It still has more than double the locations of Burger King, its closest competitor.”

However, for the franchisees, the picture looks much worse than simply 700 stores closing down.

“We are in the throes of a deep depression, and nothing is changing,” a franchise owner wrote in response to a financial survey by Nomura Group. “Probably 30% of operators are insolvent.” One owner went as far as to speculate that McDonald’s is literally “facing its final days.”

Why would things be so bad at Wal-Mart and McDonald’s if the economy was “recovering”?

Come on now – let’s use some common sense here.

All of the numbers are screaming at us that we have entered a major economic downturn and that it is accelerating.

CNBC is reporting that the number of job openings in the U.S. is falling and that the number of layoffs is rising

Job openings fell 5.3 percent in August, while a 2.6 percent rise in layoffs and discharges offset a 0.3 percent gain in hires. Finally, the amount of quits — or what Convergex calls its “take this job and shove it” indicator because it shows the percentage of workers who left positions voluntarily — fell to 56.6 percent from 57.1 percent, indicating less confidence in mobility.

And as I discussed the other day, Challenger Gray is reporting that we are seeing layoffs at major firms at a level that we have not witnessed since 2009.

We already have 102.6 million working age Americans that do not have a job right now.  As this emerging worldwide recession deepens, a lot more Americans are going to lose their jobs.  That is going to cause the poverty and suffering in this country to spike even more, if you can imagine that.

Just consider what authorities discovered on the streets of Philadelphia just this week

Support is flooding in for a homeless Philadelphia family whose two-year-old son was found wandering alone in a park in the middle of the night.

Angelique Roland, 27, and Michael Jones, 24, were sleeping with their children behind cardboard boxes underneath the Fairmount Park Welcome Center in Love Park when the toddler slipped away.

The boy was found just before midnight and handed over to a nearby Southeastern Pennsylvania Transportation Authority police officer, who took him to the Children’s Hospital of Philadelphia.

He was wearing a green, long sleeve shirt, black running pants and had a diaper on, but did not have shoes or socks.

Could you imagine sleeping on the streets and not even being able to provide your two-year-old child with shoes and socks?

These numbers that I write about every day are not a game.  They affect all of us on a very personal level.

Just like in 2008 and 2009, millions of Americans that are living a very comfortable middle class lifestyle today will soon lose their jobs and will end up out in the streets.

In fact, there will be people that will read this article that this will happen to.

So no, none of us should be excited that the global economy is collapsing.  There is already so much pain all around us, and what is to come is beyond what most of us would even dare to imagine.

How Economic Growth Fails

Off the keyboard of Gail Tverberg

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Published on Our Finite World on August 10, 2015

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oilwell

Discuss this article at the Economics Table inside the Diner

We all know generally how today’s economy works:

Figure 1

 

 

 

Figure 1

Our economy is a networked system. I have illustrated it as being similar to a child’s building toy. Ever-larger structures can be built by adding more businesses and consumers, and by using resources of various kinds to produce an increasing quantity of goods and services.

Figure 2. Dome constructed using Leonardo Sticks

 

 

 

Figure 2. Dome constructed using Leonardo Sticks

There is no overall direction to the system, so the system is said to be “self-organizing.”

The economy operates within a finite world, so at some point, a problem of diminishing returns develops. In other words, it takes more and more effort (human labor and use of resources) to produce a given quantity of oil or food, or fresh water, or other desirable products. The problem of slowing economic growth is very closely related to the question: How can the limits we are reaching be expected to play out in a finite world? Many people imagine that we will “run out” of some necessary resource, such as oil, but I see the situation differently. Let me explain a few issues that may not be obvious.

1. Our economy is like a pump that works increasingly slowly over time, as diminishing returns and other adverse influences affect its operation. Eventually, it is likely to stop.

As nearly as I can tell, the way economic growth occurs (and stops taking place) is as summarized in Figure 3.

Figure 3. Overview of our economic predicament

 

 

 

Figure 3. Overview of our economic predicament

As long as (a) energy and other resources are cheap, (2) debt is readily available, and (3) “overhead” in the form of payments for government services, business overhead, and interest payments on debt are low, the pump can continue working as normal. As various parts of the pump “gum up,” the economic growth pump slows down. It is likely to eventually stop, once it becomes too difficult to repay debt with interest with the meager level of economic growth achieved.

Commodity prices are also likely to drop too low. This happens because the wages of workers drop so low that they cannot afford to buy expensive products such as cars and new homes. Growing purchases of products such as these are a big part of what keep the economic pump operating.

Let me explain some of the pieces of the problem that give rise to the slowing economic growth pump, and the difficulties it encounters as it slows down.

2. “Promises,” such as government pension programs for the elderly, and promises to repair existing roads, tend to get bigger and bigger over time.

We can understand how promises tend to grow by looking at an example I constructed:

Figure 4

 

 

 

Figure 4

Suppose a pension program begins in 2010 and gradually adds more retirees. Or suppose a road repair program starts out in 2010 with more roads gradually being added.

The payments made each calendar year, whether for the pensions or the road repairs, are the totals at the bottom of the column. These totals keep growing, even if each retiree gets the same amount each year, and even if each road costs the same amount to repair each year. Admittedly, using 100 for all amounts is unrealistic–this is done to keep the math simple–but regardless of what numbers are used, the sum of the payments each calendar year tends to rise.

If we look at US government expenditures as a percentage of wages, the pattern is as we might expect: government spending rises significantly faster than wages.

Figure 5

 

 

 

Figure 5

3. At least partly because of growing “promises,” it is very difficult for an economy to shrink in size without collapsing.

We can think of many kinds of promises in addition to pensions and road repairs. One such promise is the promise by banks that they will allow depositors to withdraw funds held on deposit in the bank. Another kind of promise is the promise of debtors to repay debt with interest. All of these promises tend to grow in total quantity over time, at least in part because population grows.

If an economy shrinks, all of these promises become very difficult to fulfill. This is the problem that Greece and other countries in financial difficulty are encountering. There is a need to reduce some program or to sell something so that the calendar year payments are not too high, relative to revenue for the year. These payments really represent a flow of goods and services to the individuals to whom the promises were made. “Printing money” does not really substitute for goods and services: pensioners expect that they will be able to buy food, medicine and housing with their pensions; those withdrawing money from a bank expect that the money will actually buy goods and services needed to live on.

If there is a major problem with “making good” on promises, it is difficult to have an economy. It is hard to operate an economy without functioning bank accounts. Even cutting off pensions or road repairs becomes a problem.

4. The over-arching problem as we reach diminishing returns is that workers become less and less efficient at producing desired end products.

When an economy starts hitting diminishing returns, we find that the economy produces goods less and less efficiently. It takes more worker-hours and more resources of various kinds (for example, fracking sand and deep sea drilling equipment) to produce a barrel of oil, causing the cost of producing a barrel of oil to rise. Usually this trend is expressed as a rising cost of oil production:

Figure 6

 

 

 

Figure 6

Looked at a different way, the number of barrels of oil produced per worker starts decreasing (Figure 7). It is as if the worker is becoming less efficient. His wages should be reduced, based on his new lack of productivity.

Figure 7. Wages per worker in units of oil produced, corresponding to amounts shown in Figure 6.

 

 

 

Figure 7. Wages per worker in units of oil produced, corresponding to amounts shown in Figure 6.

There are many types of diminishing returns. They tend to lead to a smaller quantity of  end product per worker. For example, if the population of a country increases, but arable land stays the same, adding more and more farmers to a plot of arable land eventually leads to less food produced on average per farmer. (Some might say that each additional farmer adds less marginal production.) Similarly, mining ores of lower and lower concentration leads to a need to separate more and more waste material from the desired mineral, leading to less mineral production per worker.

As another example, if a community finds itself short of fresh water, it may need to begin using desalination to produce water, instead of simply using relatively inexpensive wells. The result is a steep rise in the cost of water produced, not too different from the steep rise in the cost of oil in Figure 6. Viewed in terms of the amount of fresh water produced by each worker, the return per worker falls, as happens in Figure 7.

If workers get paid for their work, the logical result of diminishing returns is that after a point, workers should get paid less, because what they are producing as an end product is diminishing in quantity. Workers may be making more intermediate products (such as desalination plants or fracking sand), but these are not the end products people want (such as fresh water, electricity, or oil).

In some sense, fighting pollution leads to another form of diminishing returns with respect to human labor. In this case, increasing human effort and other resources are used to produce pollution control equipment and to produce workarounds, such as alternative higher-priced fuels. Again, wages per worker are expected to decline. This happens because, on average, each worker produces less of the desired end product, such as electricity.

Admittedly, less pollution, such as less smog, is desired as well. However, if it is necessary to pay extra for this service, the effect is recessionary because workers must cut back on purchasing discretionary goods and services in order to have sufficient funds available to purchase the higher-priced electricity. Thus, fighting pollution using approaches that raise the price of end products is part of what slows the world’s economic growth pump.

5. When civilizations collapsed in the past, a major cause was diminishing returns leading to declining wages for non-elite workers.

We know how diminishing returns played out in a number of past civilizations based on the analysis conducted by Peter Turchin and Surgey Nefedov for their book Secular Cycles. They found that typically a period of rapid population growth took place after some change occurred that increased the total amount of food an economy could provide. Perhaps trees were cut down on a large plot of land, or irrigation was introduced, or a war led to the availability of land previously farmed by others. When the original small population encountered the newly available arable land, rapid growth became possible for a while–very often, for well over 100 years.

At some point, the carrying capacity of the land was reached. Then the familiar problem of diminishing returns on human labor occurred: adding more farmers to the plot of land didn’t increase food production proportionately. Instead, the arable land needed to be subdivided into smaller plots to accommodate more farmers. Or the new farmers could only be “assistants,” without ownership of land, and received much lower wages, or went to work for the church, again at low wages. The net result was that at least part of the workers started receiving much lower wages.

One contributing factor to collapses was the fact that required tax levels tended to grow over time. Some reasons for this growth in tax levels are described in Items (2) and (3) above. Furthermore, the pressure of growing population meant that groups needed access to more arable land–a problem that might be overcome by a larger army. Paying for such an army would require higher taxes. Joseph Tainter in The Collapse of Complex Societies writes about the problem of “growing complexity,” with rising population. This, too, might give rise to the need for more government services.

Raising taxes became a problem when wages for much of the population were stagnating or falling because of diminishing returns. If taxes were raised too much, low-paid workers found themselves unable to buy enough food. In their weakened condition, they tended to succumb to epidemics. If taxes couldn’t be raised enough, governments had different problems, such as not being able to support a large enough army to fend off attacks by neighboring armies.

6. The United States now has a problem with declining wages of non-elite workers, not too different from the problem experienced by civilizations that collapsed in the past.

Figure 8 shows that on an inflation-adjusted basis, US Median Family Income has been falling in recent years. In fact, the latest value is between the 1996 and 1997 value. In a sense, this represents diminishing returns on human labor, just as has occurred with agricultural civilizations that collapsed.

Figure 8

 

 

 

Figure 8

Wages have been falling to a much greater extent among young people in the United States. Figure 9 from a report by Dettling and Hsu in the Federal Reserve Bank of St. Louis Review shows that median wages have dropped dramatically since 1989, both for young people living with parents and for young people living independently. To make matters worse, the report also indicates that the share of young people living with parents has risen during the same period.

Figure 9

 

 

 

Figure 9

In some sense, the loss of efficiency of the economy (or diminishing returns) outlined in Item 4 is making its way through to wages. The wages of young people are especially affected.

7. Demand for goods and services comes from what workers can afford. If their wages are low, demand for goods of many kinds, including commodities, is likely to fall.

There are many rich people in the world, but most of their wealth sits around in bank accounts, or in ownership of shares of stock, or in ownership of land, or in other kinds of investments. They use only a small share of their wealth to buy food, cars, and homes. Their wealth has relatively little impact on commodity prices. In contrast, the many non-elite workers in the world tend to spend a much larger share of their incomes on food, homes, and cars. When non-elite workers cut back on major purchases, it is likely to affect total purchases of goods like homes and cars. Other related goods, such as gasoline, home heating fuel, and the building of new roads, are likely to be affected as well.

When the demand for finished goods falls, the demand for the commodities to produce these finished goods falls. Because of these issues, when the wages of non-elite workers fall, we should expect downward pressure on commodity prices. Commodity prices may fall back to a more affordable range, after they have spent several years at higher levels, as has happened recently.

There is a common belief that as we approach limits, the price of oil and other commodities will spike. I doubt that this can happen for any extended period. Instead, the low wages of non-elite workers will tend to hold commodity prices down. Because of this issue, we should expect predominately low oil prices ahead, despite the continuing pressure of rising costs of production because of diminishing returns.

The mismatch between the rising cost of commodity production and continued low commodity prices is likely to lead to a sharp drop in the supply of many types of commodities. Thus, the slowing operation of our economic growth “pump” is likely to lead to a situation where the production of commodities, including oil, falls because of low prices, not high prices. 

8. What is needed to raise the productivity of workers is a rising quantity of energy to leverage human labor. Such energy supplies are affordable only if the price of energy products is very low.

The amount a person can produce reflects a combination of his own labor and the resource he has to work with. If energy products are available, they act like energy slaves. With their assistance, humans can do things that they could not do otherwise–move goods long distances, quickly; operate machines (including computers) that can help a worker do tasks better and more quickly; and communicate long distance by means of the telephone or Internet. While technology plays a major role in making energy products useful, the ultimate benefit comes from the energy products themselves.

We have been using a rising amount of energy products since our hunter-gatherer days (Figure 10). In fact, the use of energy products seems to distinguish humans from other animals.

Figure 10

 

 

 

Figure 10

Clearly, cheaper is better when it comes to the affordability of energy products since available money goes further. If gasoline costs $5 per gallon, a worker with $100 can buy 20 gallons. If gasoline costs $2 per gallon, a worker with $100 can buy 50 gallons.

In recent years, with the high prices of energy products, world growth in energy consumption has lagged. It should not be surprising that world economic growth seems to be lagging during the same period.

Figure 11. Three year average growth rate in world energy consumption and in GDP. World energy consumption based on BP Review of World Energy, 2015 data; real GDP from USDA in 2010$.

 

 

 

Figure 11. Three year average growth rate in world energy consumption and in GDP. World energy consumption based on BP Review of World Energy, 2015 data; real GDP from USDA in 2010$.

In fact, Figure 11 seems to indicate that changes in energy consumption precede changes in world economic growth, strongly suggesting that growth in energy consumption is instrumental in raising economic growth. The recent steep drop in energy consumption suggests that the world is approaching another major recession, but this has not yet been recognized in international data.

9. One way of describing our current problem is by saying that the economy cannot live with the high commodity prices we have been experiencing in recent years and is resetting to a lower level that is affordable. This reset is related to low net energy production. 

If oil and other commodities could be produced more cheaply, they would be more affordable. We would not have the economic problems we have today. Energy use in Figure 11 could be rising more quickly, and that would help GDP grow faster. If GDP were growing faster, we would have more funds available for many purposes, including funding government programs, repaying debt with interest, and paying the wages of non-elite workers. We perhaps would not have the problem of falling wages of non-elite workers.

The current “fad” for solving our energy problem is to mandate the use of intermittent renewables, such as wind and solar PV. A major problem with this approach is that such renewables make the cost of electricity production rise even faster, exacerbating our problems, instead of making them better.

Figure 12 by Euan Mearns

 

 

 

Figure 12 by Euan Means. Installed capacity is in Watts (W) per capita.

To make matters worse:

  1. The way our economy works, energy flows in a given year (not on a net present value basis) are what are important, because this is the way we use energy to make goods such as foods, metals, and homes. The energy flows of renewables are very much front ended. Thus, the disparity in energy use on an energy flow basis is likely to be greater than reflected in Figure 12.
  2. What we really need from energy products is the ability to stimulate the economy in a way that adds tax revenue. Either the energy products must produce high tax revenue directly, or they must indirectly produce high tax revenue by stimulating demand for new cheaper goods, produced with the new inexpensive form of energy. This is what I think of as “adding net energy”. Wind and solar PV clearly do the opposite. Thus, they behave like “energy sinks,” rather than as products that add net energy.
  3. Modern renewables that are connected to the grid can be expected to stop working when the grid stops working. This may not be too far in the future because we need oil to operate the trucks and helicopters that maintain the electric grid. If this problem were considered in the pricing of electricity from wind and solar PV, their required prices would be higher.

As I see it, one of the major roles of energy products is to support the growing overhead of our economy; this is what the discussion about the need for “net energy” is about. Thus, we need energy products that are cheap enough that they can be taxed heavily now, and still produce an adequate profit for those producing the energy products. If we find ourselves mostly with energy products that are producing cash flow losses for their producers, as seems to be the case today, this is an indication that we have a problem. We don’t have enough “net energy” to run our current economy.

10. Debt and other paper assets are likely to “have a problem” as the economic growth pump falters and stops.

Debt is absolutely essential to making an economy work because it allows businesses to “bring forward” future profits, so that they don’t have to accumulate a high level of savings prior to building a new factory or opening a new mine. Debt also allows potential buyers of expensive products such as homes, cars, and factories to pay for them on an affordable monthly payment plan. Because more buyers can afford finished goods with the use of debt, debt raises the demand for goods, and indirectly raises the prices of commodities. With these higher prices, a greater quantity of commodity extraction is encouraged.

At some point, it becomes very difficult to support the very large amount of debt outstanding. In part, this happens because of the large accumulated amount of debt. Falling inflation-adjusted wages of rank and file workers add to the problem. In such a situation, interest rates need to be kept very low, or it becomes impossible to repay debt with interest. Even with continued low rates, defaults can eventually be expected.

Once debt defaults begin, commodity prices are likely to drop even further. Such a drop is likely to lead to even more loan defaults, especially by commodity producers (such as oil companies) and commodity exporters. Prices of equities can be expected to drop as well, because the problems of the debt system will affect businesses of all kinds.

Once debtors start defaulting, it will become very difficult to keep financial institutions from collapsing. International trade is likely to become a problem because financial institutions are needed to provide debt-based financial guarantees for long-distance transactions.

Other Information on this Subject

I have written previously and talked about some of the issues raised in this post.

An academic article I wrote that is directly related is Oil Supply Limits and the Continuing Financial Crisis. It was published in the journal Energy in 2012. Scopus shows 30 articles citing this paper.

A series of talks and videos that I conducted in China are now available on this website. These are some links to my presentations:

1. Overview of Energy Modeling Problem

2 Importance of Energy

3 Overview of a Networked Economy

4 Economic Growth – Diminishing Returns

5 Government costs and debt

6. Competition and Resource Exhaustion

7. Twelve Principles of Energy and the Economy

8. Renewable Energy

Videos of these presentations are also available on my Presentations/Podcasts page.

The Crash of 2015: Going Global

Off the keyboard of Thomas Lewis

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Published on the Daily Impact on May 26, 2015

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titanic-sinking

Discuss this article at the Economics Table inside the Diner

Titanic_sinking,_painting_by_Willy_StöwerJust in the past week, the headlines have been coming like triphammer blows: in Bloomberg News, “Something has gone wrong with the global consumer,” (according to JP Morgan); in International Business Times, “G7 Finance Ministers to address faltering global growth;” in London’s Telegraph, “HSBC fears world recession with no lifeboats left;” in OilPrice.com, “Clock running out for struggling oil companies;” and even in the mainstream vanilla Washington Post, a column by Robert Samuelson predicts “China’s coming crash,” then puts a question mark at the end to make sure we don’t worry too much.

When you add these concerns to longer standing ones about wild gyrations in the world’s stock and bond markets; the advent of peak oil in pretty much every oil-exporting country in the world; the onset of the effects of global climate change in California, the Middle East, North Africa, Brazil and elsewhere; it becomes apparent that optimism ought to be listed as a disorder requiring medical intervention.

What’s wrong with the global consumer? In the imortal words of Howard Davidowitz, a leading expert on retail, consumers “don’t have any f’ing money.” It is slowly — way too late — dawning on the Masters of the Universe that unless ordinary people have money to spend — and by that we mean real money, not more credit cards or a third mortgage — the Masters are toast.

According to J.P. Morgan economist Joseph Lupton, “It would be difficult to overstate the recent downside surprise in global consumer spending.” Lower gas prices were supposed to stimulate spending. They didn’t. The high stock markets were supposed to encourage enough job creation to seriously dent unemployment rates and stimulate spending. They didn’t. The lackluster numbers of early spring were supposed to be the result of bad weather. They weren’t. “Clearly,” says Lupton, “something is off track.”

Indeed. International shipping is at historic lows. Energy consumption is declining. In the US, the trucking industry is starting to show weakness. At the same time rail-freight shipments are declining sharply. Retail stores are closing by the thousands. While, obliviously, the stock market soars to new heights.  

Meanwhile, says International Business Times, “Finance ministers from the world’s largest developed economies meet in Germany this week against a backdrop of faltering global growth, scant inflationary pressures and a bond market in turmoil.” They’ll get to all this after they have figured out how to keep Greece from nuking the European Union by defaulting on its obligations because Greece hasn’t got any f’’ing money, either. Even if they can figure out how to amputate Greece without getting an infection, they will still be looking at either anemic growth or actual contraction in the powerhouse economies of the United States, China, Canada and Europe.

Now, even if you believe, as I do, that the notion of infinite growth on a finite planet is ridiculous, and the notion that all growth is always good is suicidal, you still live, as I do, in a system that will crash if its faith on growth is broken. So pay attention to these idiots. They’re driving.

Meanwhile, a report written by and for HSBC, the world’s third largest bank, likens the world economy to the Titanic, “sailing across the ocean without any lifeboats.” In fact the report is titled “The World Economy’s Titanic Problem,” and was written by a writer of financial horror stories appropriately named Stephen King. In his relentless account, the world’s central bankers have expended every bit of ammunition they have to stop the approaching iceberg of debt and depression, and the iceberg is bigger and closer than ever. You will stifle a scream as you read.

This gathering emergency is only invisible to those whose paychecks require that they do not see it. Unfortunately, that includes many journalists and virtually all politicians. The rest of us need to take another look at the pile of boards on the aft deck of the Titanic and get to work on our personal lifeboats. Now.

Civilization Collapse 3.0

Off the keyboard of George Mobus

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Published on Question Everything on May 17, 2015

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jenga_collapse

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What is Working?

I started a kind of list. I had been tracking a number of institutions (like higher education) and organizations (like the US government) and casually chronicling their growing dysfunction. The list was getting long and the seriousness of the dysfunctionalities was getting extreme. It occurred to me that it would be easier to keep a list of those institutions and organizations (including geo-political and economic regions, countries, cities, etc.) where things seemed to be going well.

I define “ well” as conditions where the processes of the systems seem to be functioning and the people involved are happy and productive. What has become disconcerting for me is that I am having problems finding examples to add to this list. In fact, the list has exactly zero items on it. My initial assumption was that we would find the number of dysfunctional items would exceed the number of functional ones, which would suggest that the net of human happiness would probably be negative; a finding consistent with the hypothesis that civilization is in the throes of collapse, but still at an early stage.

In addition to a simple additive list, we should probably weight the items by the magnitude of their impact on individuals' lives. For example, a commercial organization where the real wages of workers have been going down while the work load put on those workers has been increasing would have a direct and clearly felt impact on those individuals, whereas a dysfunction in city government that affected garbage collection might be an annoyance but not a cause for deep concern in the short run. The US Congress is possibly one of the most dysfunctional governance institutions/organizations on the planet (followed all too closely by the Supreme Court and the Presidency) given its enormous resources and historical context. Their inability to grasp the real nature of the economic woes and to find solutions that will help, for example, the working poor, is having a major negative impact on human happiness, but it is insidious and subtle in how it plays out. Discerning exactly how it works is a lot like trying to ascertain how global warming is “causing” any particular weather catastrophe. We know the causal links exist but tracing them through all of the connections in a complex network of relations is a daunting task.

When I started enumerating institutions and organizations at multiple scales that were showing clear evidence of dysfunction it became clear that I would be at it indefinitely. So I started to search for evidence of non-dysfunctional instances. With the exception of a few well-run corporations that are in still high demand markets and where their CEOs are not taking exorbitant paychecks at the expense of the workers, I was having trouble coming up with any truly good examples. A few Northern European countries still seem stable and their citizens seem, on the whole, to be content. But even there there are ominous clouds gathering. For example the rise of extreme right-wing political parties that have found a platform on anti-immigration responses to the increasing influx of Islamic refugees from the Middle East and Northern Africa (designated as the MENA region) portends power struggles within the governments of those countries. There have already been civil unrest incidents and some violence that has been linked to anti-immigrant sentiments.

So I am rather at a loss to say much about where things are going well. I cannot find much that is working. But that may just be me. One could reasonably argue that I am, after all, biased and will tend to ignore evidence against my basic hypothesis, that civilization must necessarily collapse due to the decline of net free energy (i.e. peak oil combined with declining energy return on investment — EROI — and still growing populations). I am probably not immune to such selective bias. Thus I put it to you, the readers, to let me know of any evidence of some reasonably impactful institutions or organizations that seem to be working and contributing positively to human happiness (please also include estimates of the magnitude of such impact). As I was writing this one possible example did come to mind, if I allow that some kinds of religious experiences are positive (and I do even if I do not believe in most of what religions teach about an ethereal world). The current Pope of the Catholic faith (Francis), it seems to me, has done some worthwhile things that could have a positive impact on the followers of that religion, if not on other states owing to their leaders paying deference to what the Holy See says (e.g. calls for peace). But I reserve judgment of the effectiveness of his reign on the Church. For example, will he ferret out gross behaviors like child sex abuses or financial corruption in the Vatican's dealings?

If you have any contributions please make them in comments here. Let's see what sort of list we come up with. But please do not post examples of dysfunction. We already know so many it would be an act of waste of bandwidth.

Economists' View the “New Normal”

Meanwhile if we just examine the state and trends of the global economy we get a basic picture of the developing collapse. An article in today's New York Times Business section by Tyler Cowen, a professor of economics at George Mason University “Signs of a Shakier New Normal”, May 17, 2015, brought into focus a variety of comments made by a number of neoclassical economists of late (including, from time to time, the titular representative of ‘liberal’ economists, Paul Krugman) that we have entered a new kind of economic situation that they don't quite understand but have labeled “the new normal.” I suppose they are trying to subtly say that they expect the current set of conditions to continue indefinitely into the future. But, their reasons for saying so have nothing to do with their understanding the dynamics of the real economy and making predictions based on their bogus models. They are just tacitly admitting that something unusual is happening and it has persisted long enough now to be acknowledged as possibly permanent.

While the US government and a variety of media talking heads are hailing the “recovery” the reality of life for the vast majority of Americans does not demonstrate recovery. They continue to grow poorer, budgets are stretched even for those who have jobs, the real cost of living is still going up even in spite of the recent relief in energy costs, in short for most people there is no recovery. And that is what these economists are referring to (academically) as the new normal.

If the old normal was living a life in which incomes grew and outpaced inflation, material wealth grew and made life more enjoyable (questionable), and the future looked brighter still for the next generation, then indeed the current outlook is “new.” For most of the last 300 years life for western/northern economies, fueled by increasing access to fossil energies, has generally always looked to be improving. Now that energy is in decline we have a new reality to face. My children are struggling now to keep their heads above water and have dim prospects for ever rising to the upper middle class status that would have been their “birthrights” (please note the scare quotes!) due to my status from the mid twentyth century rapidly growing wealth production and the sheer luck of having been born into the white middle class that had grown out of the economic expansion after WWII.

Unless humanity discovers a new high-EROI source of energy with the right power and convenience properties sans the pollution problems associated with fossil fuels the future is not bright for anyone (no pun intended).

The “Why” Hasn't Changed

I have been writing about the problem we face for many years now. While the signs of a collapse scenario are now coming into sharp relief throughout the world, the basic fundamental reason for the collapse of global civilization that I have belabored over that time has not changed. Civilization is facing increasing declines in net free energy per capita. Free energy (also called exergy) is that which enables useful economic work, i.e. producing food, shelter, etc. Of course it can also be used to build frivolous products and services (e.g. i-Pads, phones, watches, giant home entertainment centers, etc.) Many people today will not see these as frivolous (must have my ability to send an instant tweet) until they think about how the energy used has been diverted from doing useful work, like getting food to those who have little. The problem for us is that we live with a shrinking pie, not a growing one. So each new slice takes away some from others. We are in a zero-sum game with an increasing number of players entering all the time. And yet we believe we are still rich. We fully believe we can put that iPhone on our credit card with impunity. That is we do until it is time to pay the bills.

In spite of my writing (which includes work in my new book on systems science) about this fundamental problem the idea doesn't seem to get much purchase with the politicians and neoclassical economists who still see the world economy as being able to grow exponentially (meaning compound) measured in dollar value of gross domestic product, GDP, (or gross global product, GGP, once all these trade deals are in place!) To me this has always been an astounding example of sheer idiocy and complete ignorance of how the Universe works. Nothing grows infinitely. Not even cancers can grow forever because they destroy their host bodies in trying to do so. How, I wonder, did these supposedly smart people ever get so stupid. Economists are supposed to learn a form of calculus and they certainly have access to all of the literature of system dynamics. How then can they just ignore basic physics and systems theory to continue to believe that a growing economy is a healthy economy? Of course I've answered my own question with my work on the nature of sapience and the lack of wisdom in our species Homo sapiens.

Perhaps it has to do with another reality that seems more immediate. The other part of the problem of per capita decline in energy is the increase in population that drives the “need” for growth of the economy. The simple fact is that as long as we keep making more people while working hard to prevent their demise the population will continue to grow and put increasing stresses on the resources we extract from the Earth. Look at what we are doing in the extraction of tight oil (fracking shale deposits), bituminous (tar) sands (mining), and mountain top removal for coal. These are very expensive and very low EROI operations (not to mention environmentally destructive) that clearly indicate how desperate we are for fossil energy. But we need that energy to support growing more jobs to accommodate the increasing number of people who need work. Population growth is also subject to limits but crashing into those is almost always painful for any species that reaches or exceeds the carrying capacity of its environment. And while we humans have seemingly moved our carrying capacity upward through technology, that route has its own limits as well. You can't apply Moore's law to energy or general equipment. And even Moore's law has practical limits. Any study of the current situation with respect to drinking water, soil erosion, mineral supplies, etc. will show that we have, in fact, reached very close to natural limits in several different areas.

Lower per capita energy translates into lower per capita real wealth since less real work can be accomplished per unit of time. For a brief time from the mid 1900s to the crash in 2008-9 we fooled ourselves into thinking we had somehow transcended the need to produce real wealth with the explosion of the use of credit to finance current consumption. This move is tricky and does not immediately appear to be problematic. Everyone basically understands the use of credit in monetary terms. You borrow an amount of money to finance something and you pay back the principal with interest to pay for the use of someone else's money over time. The theory has always been that you use the money to invest in some money-making or money-saving venture and because the economy is growing you will be earning more than enough to pay it back with interest. But the notion that this same mechanism could be applied to strictly consumption behaviors (trading up to bigger houses, buying bigger cars, and lots of fun stuff) was novel and completely unexamined critically. We jumped into it just because we could. Or at least we thought we could.

This did work as long as the economy was expanding and there would be more profit in the future. But what happens when you take out loans that either do not go to investments in profit-making or saving ventures but to finance frivolous entertainments? Or what happens when even investments in profit-making ventures fall flat because of higher than anticipated costs and thus lower profits?

Recessions happen because some of these credit financed investments have failed to provide the expected return on investment and thus investors and bankers become leery (rightly so) and withhold capital at a time when the economy has come to rely on credit to keep things going. Depressions happen when everybody loses confidence in everything.

The relation of credit and energy is a little harder to grasp. But that is only because credit also distorts the relation between money and energy. As I have written many times, the origin of money was as an information carrying token system used to regulate the flow of exergy into desired work processes. When you buy something with real money (however tokenized) you are directing the current or future flow of energy into the process that produced that something. The banking credit system, however, distorts the size of the money supply through fractional reserve banking practices that artificially inflates the supply, at least for a while. The less actual reserves are required the more distorted the money supply becomes and the illusion of having more energy available encourages investment in those frivolous efforts. But since costs (in both money terms and energy terms) are real in any work process, and profits derive from driving down costs, there has been a concerted effort to reduce them by shifting costs to externalities (pollution) and off-shoring labor (to lower energy lifestyle populations) all conveniently enabled by technologies in transportation (container ships) and telecommunications (off-shoring service jobs). By finding cheaper alternatives to getting work done, our high-energy civilizations have been able to hide the declining local net energy and continue to borrow against the future, even while that future will never support paying off the debts.

This strategy, not entirely unconsciously developed, could not hold. The costs of energy have been steadily climbing since the 1980s due to declining EROIs. Some of this has been masked by the very same debt-based financing practices applied to the extractive industries. But even that charade is rapidly coming to exposure. When the fracking revolution flooded the US markets with oil and drove the price of oil downward it did so rapidly leaving the financial condition of oil producers exposed. The costs of producing the next barrel of oil was too high to allow sustaining further exploration and drilling. Moreover already producing wells were declining much more rapidly than happens in conventional wells, with total output much less per well than with conventional wells. Companies have been diminishing their development and capital expenditures are down significantly in the oil and gas businesses and as there will be rapid diminshment of supply before much longer you can imagine what this will ultimately do to the prices for oil and gas. What has seemed like a reprieve from high energy prices will come to a crashing halt as energy prices reflect rapidly depleting supplies. Of course with a return to very high prices, the extractive companies that managed to survive will try to get back into the business (say in the Arctic Ocean), but the continuing decline in EROI of those plays will simply cause the same feedback phenomena to recur. This roller coaster ride will end more likely with the cars going off the tracks than a gentle stop.

One more clever but very unwise invention has masked the real story on the economy and the relation between money and energy. Over the last several decades we have witnessed what has been called the financialization of the economy. This really means the growth of speculative investments through bonds and stocks (initially) and more recently by a slew of “instruments” that purport to provide value through the management of portfolio risk. The fundamental belief in financialization is that money begets more money directly. In theory you no longer have to wait for profits to be made by productive enterprises; you can reap a reward by just moving funds around between stocks — buy low, sell high. Well, as I said above, investment in productive processes either do generate more energy per unit time or help us save energy leading to the effects of profit. The original stock and bond markets were set up to facilitate this kind of investment. But of recent times the stock market, in particular, has turned into a casino where gamblers are paid to gamble with other peoples' money. Returns on investment no longer depend on companies making profits and paying dividends. Money is made on trades. GDP increases with transactions even when no real wealth is produced. As with fractional reserve banking this whole business tends to distort the relation between energy and money making it seem that you really don't need to produce anything (other than financial services), you can gamble your way to wealth.

The financial markets have turned into a giant Ponzi scheme. There is no real wealth at the base. Profits are created out of smoke and mirrors. The financial sector crash of 2009 was nothing more than a bursting of the bubble with one important difference. In this case the power of the financial giants was such that they could, without shame, go to the government with hands out and argue that they were too big to fail; that failure would bring the whole economy down. So they were bailed out. People worse than robber-barons walked away with fortunes under the protection of the United States government and the Federal Reserve (in collusion) while the rest of the nation anted up to pay the bills. And what is now different as a result? What lessons did we learn about this shady industry? Apparently none. The recent “Dodd-Frank Wall Street Reform and Consumer Protection Act” has been severely criticized for its ambiguity and weakness that essentially lets Wall Street firms pretty much do as they please still (one of those examples of an institutional failure writ large).

An interesting question that a number of people who see this charade for what it is ask, “Why aren't people up in arms about this nonsense?” Why are we not lynching the hyper-robber-barons? One possible answer is that we have been conditioned so deeply to believe in the neoliberal capitalism model and believe that we, ourselves, might one day be a beneficiary of its largess so that we are prevented from seeing the evils it fosters. We want ours too.

In truth the bandits were probably right to claim that collapse of the banking system would lead to a collapse of the economy. The government acted to prevent another depression to avert the kind of suffering that took place in the 1930s. Were they right to do so? It is the terrible irony of our situation that by preventing such a situation they have merely put off the inevitable for a short time more. In reality there is suffering now. It is perhaps more diffuse and lower key than what was seen in the 1930s but it is still happening. Moreover, by kicking the can down the road they have simply ensured that the next bubble burst, and there will be one before much longer, will be even worse.

The problem with our politicians, economists, and basically just about everyone else, is that they just can't get their heads around the reality of what the economy actually is and what rules truly govern it. They have grown so used to thinking in neoclassical economics, neoliberal capitalistic, and ideological terms that they simply have no way to recognize reality when it slaps them in the face. They will continue to want to return to a “healthy” growth-based economy where it is possible in theory for everyone to get rich. And so they (which includes everyone who buys into this claptrap) will never do the right things to transition societies into low-energy, simpler lifestyles consistent with diminishing energy. They will never introduce notions of population control geared to humanely reduce the size of the population commensurate with a minimum acceptable per capita share of net free energy. And so we can expect chaos to ensue as the reality pounds our civilization further into oblivion.

Advice

I'm afraid I have little to give. Who would take it anyway? My guess is that younger families should probably try to decouple from society as best they can. Grow your own food, and all of that. I've given suggestions in the past about what sort of plan might succeed, but it is based on radical decoupling that most people will simply not believe is necessary. For myself I am too old to worry about it. I'll just observe for as long as I can. My kids (the ones struggling to stay afloat) never listen to my advice anyway so they're going to have to find their own way.

Just keep monitoring the major trends in the major institutions and organizations. Use your best judgment as to when you should take action, if any. Think now about what action you might be able to take and how you can maximize your success (whatever that is going to mean).

And good luck.

 

Muskular Magic

From the keyboard of James Howard Kunstler
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Originally Published on Clusterfuck Nation May 11, 2015
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Elon Musk, Silicon Valley’s poster-boy genius replacement for the late Steve Jobs, rolled out his PowerWall battery last week with Star Wars style fanfare, doing his bit to promote and support the delusional thinking that grips a nation unable to escape the toils of techno-grandiosity. The main delusion: that we can “solve” the problems of techno-industrial society with more and better technology.

The South African born-and-raised Musk is surely better known for founding Tesla Motors, maker of the snazzy all-electric car. The denizens of Silicon Valley are crazy about the Tesla. There is no greater status trinket in Northern California, where the fog of delusion cloaks the road to the future. They believe, as Musk himself often avers, that Tesla cars “don’t burn hydrocarbons.” That statement is absurd, of course, and Musk, who holds a degree in physics from Penn, must blush when he says that. After all, you have to plug it in and charge somewhere from the US electric grid.

Only 6 percent of US electric power comes from “clean” hydro generation. Another 20 percent is nuclear. The rest is coal (48 percent) and natural gas (21 percent) with the remaining sliver coming from “renewables” and oil. (The quote marks on “renewables” are there to remind you that they probably can’t be manufactured without the support of a fossil fuel economy). Anyway, my point is that the bulk of US electricity comes from burning hydrocarbons, and then there is the nuclear part which is glossed over because the techno-geniuses and politicians of America have no idea how they are going to de-commission our aging plants, and no idea how to safely dispose of the spent fuel rod inventory simply lying around in collection pools. This stuff is capable of poisoning the entire planet and we know it.

The PowerWall roll out highlighted the “affordability” of the sleek lithium battery at $3,500 per unit. The average cluck watching Musk’s TED-like performance on the web was supposed to think he could power his home with it. Musk left out a few things. Such as: you need the rooftop solar array to feed the battery. Figure another $25,000 to $40,000 for that, depending on whether they are made in China (poor quality) or Germany, or in the USA (and installation is both laborious and expensive). Also consider that you need a charge controller and inverter to manage the electric flow and convert direct current (DC) from the sun into usable alternating current (AC) for your house — another $3,500. So, the cost of hanging a solar electric system on your house with all its parts is more like fifty grand.

What happens when the solar panels, battery, etc., reach the end of their useful lives, say 25 years or so, when there is no more fossil fuel (or an industry capable of providing it economically). How will you fabricate the replacement parts? By then the techno-wizards will have supposedly “come up with” a magic energy rescue remedy. Stand by on that, and consider the possibility that you will be disappointed with how it works out.

What gets me about Tesla’s various products and activities is that, when all is said and done, they are meant to extend the fatal rackets of contemporary life, especially car dependency and the suburban development pattern. Car dependency can and probably will fail on the financial basis, not on the question of how you run the car. The main economic problem we face is the end of growth of the kind we’re used to, the kind that generates real capital and enables bank lending. It is already happening and has led to fewer loans for fewer qualified borrowers. It will also lead to the end of government’s ability to pay for fixing the elaborate hierarchy of paved highways, roads, and streets that the cars have to run on. Imagine the psychic pain of the Silicon Valley billionaire driving his $87,000 Tesla P85D down a freeway that the State of California hasn’t been able to repair in five years.


James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.

 

Overview of Our Energy Modeling Problem

Off the keyboard of Gail Tverberg

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Published on Our Finite World on April 23, 2015

oilwell

Discuss this article at the Energy Table inside the Diner

We live in a world with limits, yet our economy needs growth. How can we expect this scenario to play out? My view is that this problem will play out as a fairly near-term financial problem, with low oil prices leading to a fall in oil production. But not everyone comes to this conclusion. What were the views of early researchers? How do my views differ?

In my post today, I plan to discuss the first lecture I gave to a group of college students in Beijing. A PDF of it can be found here: 1. Overview of Energy Modeling Problem. A MP4 video is available as well on my Presentations/Podcasts Page.

Many Limits in a Finite World

We live in a world with limits. These limits are not just energy limits; they come in many different forms:

2 We are reaching limits in many ways

All these limits work together. We can work around these limits, but the workarounds are higher cost–for example, substituting less polluting energy resources for more polluting energy resources, or extracting lower grade ores instead of high-grade ores. When lower grade ores are used, we need to process more waste material, raising costs because of greater energy use. When population rises, we must change our agricultural approaches to increase food production per acre cultivated.

The problem we reach with any of these workarounds is diminishing returns. We can keep increasing output, but doing so requires disproportionately more inputs of many kinds (including human labor, mineral resources, fresh water, and energy products) to produce the same quantity of output. This creates higher costs, and can lead to financial problems. This phenomenon is one of the major things that a model of a finite world should reflect.

 

Economists Views

Economists developed their views of the economy long ago, when limits seemed to be far in the distance. Thus, the models they built do not reflect the expected impact of limits. They are missing variables that would be needed to adjust for changes in the economy’s behavior as limits are reached.

3 Economists put together models

4 Economy will adapt

The story in Slides 3 and 4 tends to be true if we are far from limits, but is it really true when we are close to limits? Perhaps diminishing returns as we approach limits changes the results.

5 What is the real story

World Oil Situation as We Approach Limits

Perhaps we can get some indication of how diminishing returns are affecting the economy by looking at historical oil supply and prices. Up until 1970, US oil production grew quite steadily.

6 US oil production

After 1970, oil production suddenly began to decline. Oil companies did not expect such a decline; they assumed that oil production would rise endlessly. Once oil production began to decline, oil companies quickly began trying to find ways to fix their problems. One of these approaches was quickly to ramp up production in areas that they knew contained oil, but hadn’t previously been drilled. These included Alaska (northern United States), Mexico, and the North Sea. Oil production in these areas is now in decline.

Several ways were also found to reduce oil usage. These included change from oil to alternate fuels for electricity generation and home heating, and offering smaller, more fuel-efficient cars. With this combination of approaches, oil prices were brought down, most of the way to the $20 level (Slide 7).

The inflation adjusted level of oil prices is important because oil is the single largest source of energy use in both the US and world economy. If oil prices are cheap, it easy to grow food cheaply, and manufacturing and transport can be done cheaply. Because of this, the economy tends to grow. If oil prices rise, economic growth tends to slow, because the cost of many types of goods (including oil products, food, and building new homes) tends to rise faster than wages. It becomes more expensive to replace infrastructure such as roads and pipelines as well. The higher cost of oil effectively acts as a “tax” inhibiting economic growth.

7 World oil supply

Oil prices again reached a high level in the early 200os as we again began to reach limits of the amount of oil that could be extracted at the then-available price. This time we weren’t able to cut back on world demand, so prices tended to stay high. Instead, the big change made was in oil supply, with higher oil prices enabling (after a several years time-lag) greater production both from US oil from shale formations (called “tight oil” in Slide 6 above) and from the oil sands in Canada.

The question becomes: can the economy really function adequately on $100+ barrel oil? Or do the negative feedbacks from these high oil prices have too adverse an impact on economic growth?

8 Now oil price is too low

Slide 8 shows more detail regarding production and prices for recent years. We see that oil prices were generally rising up until mid 2008, and then dropped steeply. Prices rose again after several types of economic stimulus were added. More government spending was added, interest rates were dropped to very low levels and a program called quantitative easing (QE) began.

Prices stayed at a level a little over $100 barrel from January 2011 though mid-2014. More recently, oil prices have dropped to a little more than half of their previous level. This decline in oil prices appears to correspond to a time when world debt is not rising as rapidly: the US stopped its QE program, and China’s debt no longer rising as rapidly. Thus, some of the economic stimulus that helped hold oil prices up is disappearing.

The problem we are now encountering is not the high price problem that economists thought would bring on more supply. Instead, we are encountering a problem with oil prices that are too low for oil producers to make a profit. Such low oil prices can quite possibly bring down world oil production, because investment in oil production is no longer profitable. A person might ask: Is the low price situation we saw in 2008 and are encountering again in 2014-2015 what diminishing returns really looks like? Is the problem we encounter as we reach limits one in which oil prices drop too low, rather than rise too high?

In 2008, huge stimulus efforts were required to bring oil prices were brought back up to the $100+ level. Perhaps one point raised by economists (Slide 3) was correct: Maybe there is a connection between economic growth and oil demand. Perhaps the issue as we reach limits is that world economic growth sinks too low, and it is because of this slow growth that wages stagnate, debt stops rising quickly, and oil (and other commodity) prices drop too low.

Now let’s look at what some early energy researchers have said.

M. King Hubbert 

Many believers in Peak Oil theory consider M. King Hubbert to be the originator of their theory. It seems to me, though, that Peak Oilers have inadvertently picked up some of the economists’ theories, and mixed them with Hubbert’s theories.

9. M. King Hubbert

10 M. King Hubbert Model

11 Model applies when there is perfect replacemnt12 Hubbert understood need for perfect replacment

13 Believers in peak oil

It seems to me that the only way a Hubbert Curve might happen is if oil prices stay high, as we approach limits. That way, as much oil as possible can be extracted. If oil prices fall too low, then the decline may be much quicker. If low oil prices are a problem, above ground problems such as governments of oil exporting nations collapsing, or rising debt defaults leading to bank failures, may be a problem.

Dennis Meadows and Donella Meadows

Dennis Meadows led early computer modeling efforts at MIT regarding limits of a finite world. His wife, Donella Meadows, led the write-up effort regarding this model in a 1972 book called “Limits to Growth”. The model looked at physical quantities of resources, expected amounts of pollution, and expected population trends. The base model suggested that the world would start reaching limits in roughly the current timeframe.

16 Meadows Limits to Growth

In fact, more recent analyses suggest that the base model is more or less on track.

I don’t think that we can count directly on this analysis, however.

18 How will the situation work out

Charles Hall

Prof. Charles Hall has been one of the recent thought-leaders with respect to oil limits and how they might play out. He started work in the early 1970s as an ecologist, studying the energy patterns of fish. When he read about the possibility of energy shortages that might occur in the 1972 book Limits to Growth, he tried to adapt an approach used for studying energy patterns of fish to the world of energy production. The result was new way of measuring the efficiency of a particular energy product, called Energy Return on Energy Invested (EROEI).

20 Energy Return on Energy Invested

This idea was an advance when it was first developed, but it has a number of practical difficulties. One of these difficulties is that its usefulness is tied to a particular view of how oil limits will affect us, namely that prices will rise, and this will allow a slow transition to alternative fuels that are less favorable in terms of EROEI. On Slide 21, this is Item (2).

21 Two different modelsAt this point, it is my view that the EROEI approach to analyzing energy products can be misleading and needs updating. Energy extraction is much more complicated than the energy use of fish swimming upstream. The EROEI approach, besides being tied to the Peak Oil view of how limits will occur, is difficult to calculate. Different researchers get quite different answers, when analyzing the same energy product.

Furthermore, EROEI looks at a piece of energy costs (those involved with production at the well head), but how this piece relates to the total varies from one type of energy to another. It lumps together cheap energy and expensive energy. There are several other issues as well, with the result being that in practice, low EROEI doesn’t necessarily correspond to expensive to produce, and high EROEI doesn’t necessarily correspond to low cost to produce.

I should point out that the same problem exists with a wide range of similar metrics including Life Cycle Analysis, Energy Payback Period, and Net Energy. In practice, what seems to happen is that if an energy type is high-priced, the use of one of these metrics is used to justify its production, anyhow. Low EROEI (for example, of biofuels) does not seem to be a barrier to production, even though it was the hope of Prof. Hall and other EROEI researchers that this would be the case.

My Involvement in Energy Analysis

25 What exactly is the story

26 Correctly forecast 2008 collapse

I became acquainted with Prof. Lianyong Feng in 2009, when he attended the Biophysical Economics Conference in Syracuse, New York, held by Prof. Charles Hall, and heard me speak.

27 Photo of Gail Tverberg, Charles Hall, Prof. Feng

How Do Oil Limits Really Affect the Economy?

This is the question I have been working on. I will try to explain some of my findings in the next several sessions.

Early researchers were handicapped because the issue of oil limits crosses many different fields of research. They took approaches from their own areas of study, and worked with them. These approaches offered partial insight into the problem, but didn’t completely answer what might happen in the future.

It was not obvious to early researchers which parts of economists’ theories were wrong. I have had the benefit of seeing how the system works in practice in several periods: in 1973-1974, in 2008-2009, and now in 2014-2015. I have also been fortunate enough to find a number of recent studies that add new insights as to how the system really works. So I have taken a step back and developed at the least the start of a new theory, which is different from EROEI theory. This is what I will discuss in the next few sessions.

A little explanation behind this series of lectures and my four week stay in China is perhaps in order. When I was in China, Prof. Feng discussed with me some of his intent behind asking me to give this series of lectures. Prof. Hall is now retired, and there is no obvious replacement for him. Prof. Feng would like me to take a more active role is figuring out in which direction energy research should now be headed, both for his own staff, and for others around the world. A better understanding of how the system works could theoretically help researchers everywhere.

Do Central Bankers Recognize there is NO GROWTH?

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Published on the Doomstead Diner on April 26, 2015

Off the keyboard of RE
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Everywhere in the Political World you hear the phrase "Return to Growth", the Holy Grail for resolving the economic woes of the world.

http://gujarati.oneindia.com/img/250x90/2014/06/17-himalayas-glaciers.jpgWith Growth, the Greeks got no problems, they can pay off the Mole Hill of debt they owe to everybody.  With Growth, the FSoA can pay off the MT. EVEREST of debt owed to everybody.  Growth is GOOD.  It solves all problems.

Sadly of course, Infinite Growth on a Finite World is impossible, and as vast as the resources of the Earth may have seemed a century or two ago, an Exponentially growing population of Homo Saps has managed to burn through most of the good easy to get at stuff, and while burning through it load up the environment with the waste such consumption produces.  We are essentially DIGESTING the Planet, and leaving it loaded with the excrement from said consumption.

Problem in the Near Term here though is that the Monetary System we used to access and distribute all these resources itself is also predicated on perpetual growth, and when the growth stops, so also stops the Monetary system.  Except, not quite right away.  Everybody and every thing DEPENDS on the monetary system to keep functioning, and we have Geniuses up there at the top running the show who endeavor to make SURE it keeps functioning, no matter what reality is telling us here.

How ARE they keeping this running?  Two acronyms for you here which tell it all, ZIRP & NIRP.  Those are the modern bankstering acronyms for ZERO INTEREST RATE POLICY and NEGATIVE INTEREST RATE POLICY.

From Zero Hedge:

Earlier today, we were quite shocked when we heard two statements by central bankers uttered during a press briefing in Washington. The first comes from the ECB's Mario Draghi:

DRAGHI: LOW RATES FOR LONG PERIOD INCREASE FINANCIAL STABILITY RISKS

The second: from his supposed nemesis, if only for public consumption and not during the BIS' bimonthly meetings in Basel, Bundesbank head Jens Weidmann, who said a carbon copy replica of what Draghi had said minutes prior:

WEIDMANN SAYS LOW INTEREST RATES INCREASE FIN STABILITY RISKS

We were "shocked" because for once, we agree with central bankers. And to get a sense of just how right the two central bank heads are we go to Bank of America which overnight released a report in which it said that as of this moment, "53% of all global government bonds are yielding 1% or less (Chart 3)."

Let that sink in for a second.

And while you are contemplating that, here is another fact from Bank of America:

The global narrative remains maximum liquidity (Chart 2) & minimal interest rates. And it’s impossible to be max bearish with such an extravagant monetary backdrop.

Central bank assets now exceed $22 trillion, a figure equivalent to the combined GDP of US & Japan

So yes, low rates for a long period of time most certainly "increase financial stability risks" – the central planners are certainly correct about that. But next time they make that remark, perhaps someone from the media can ask Messrs Draghi or Weidmann the following question:

does the fact that central banks now collectively own nearly a third of global GDP in government bonds and equivalent assets – an amount that is greater than the GDP of first and third largest global economies, have anything to do with "low rates" and the fact that "financial stability risks" as of this moment have never been higher?

Oh, and good luck with that "renormalization."

Now, EVERYBODY KNOWS Money is supposed to "Make Money" in some kind of virtual perpetual motion machine.  If you save a small pile of the stuff for your retirement, your supposed to get a "decent return" which in the olden days was something like 5-10% depending on how much "risk" you were willing to take on your "investments".  Real risk averse people like my Mom who was a child during the Great Depression wouldn't invest in the Stock Market, too risky.  She put her little pile into CDs, considered one of the safest places to park your cash, which gave a slightly higher return than a typical Savings Account.  She probably collected an average return of around 3% over the years she was retired for this pile.

These days though, nobody including the Central Banks that issue out the money expects to get any return on it, they expect to LOSE money. If you are well connected enough, the Bank will PAY YOU to borrow money from them.  That's what a Negative Interest Rate means.  On the other side of the coin, if you happen to be someone with enough surplus income to actually save some of it, if you drop it in the bank for them to keep it "safe", they'll charge you for the priviledge of keeping your money "safe" with them.

So, basically the whole monetary system we have come to believe in is completely ass-backwards now, and what this really is is a recognition that Growth has stopped, and in fact reversed to contraction.  I hate that Newzspeak term "degrowth".  We're not "degrowing", at best we're shrinking and maybe DIEING.

Obviously, the super smart folks running the monetary system KNOW that there is no growth here in any real terms, but to keep the monetary system operational they need to present the ILLUSION of Growth.  Every last Politician and Technocrat…Wait!  Let me digress here for a moment on this "Technocrat" thing!

"Technocrat" is another nice Newzspeak Euphimism for a Fascist Apparatchik.  Prior to about 1930 this word didn't even fucking EXIST, and it didn't get much play after it was invented until the 1960s

technocrat_ngramFrankly, if Google's nGram stat system was updating this term from 2008 to today, I bet you dollars to doughnuts that "Technocrat" has reached still more dizzying heights in the world of NewzSpeak.  Notice how the word is a confabulation of the Positively Held notions and words of Technology & Democrat?  Technology is GOOD.  A Technocrat  must be SMART too.  Democratic principles are GOOD.  A Technocrat must care about Democracy, because it's right there in the name, right?  Here's a typical Technocrat:

http://images.bwbx.io/cms/2012-09-05/0905_mario_draghi_630x420.jpg

Super Mario Dragon

Do you think this former Goldman Bankster gives a flying fuck about "democracy"?  Of course he doesn't.  All he gives a shit about is keeping the system running here so he can stay at the top of the heap.  Far as his Technical Knowledge goes, he's as fucking clueless as everybody else running this show.   They don't have a solution to the problems we face, because short of a massive dislocation, probable World War and copious Death & Destruction, there really isn't a solution that works for everybody.  SOMEBODY (or really many somebodies) will get completely FUCKED here!  Super Mario's job is to make sure that isn't himself or any of his friends at Goldman.

He's not a stupid guy of course, so he certainly knows by now that there is no real Growth anywhere on the horizon for anybody, but in order to keep the system running, the ILLUSION of Growth must be maintained at all costs, and the costs are steep indeed.  So Super Mario and the rest of the CB Apparatchiks out there jawbone Growth, but even with all the Free Money dished out to the well connected, they tacitly acknowledge there is no Growth with a Zero Interest Rate.  How can you "grow" your personal little pile of Savings if you get no interest on it?  If the Bank or Bonds you use to park your money have a NEGATIVE interest rate, your pile doesn't grow over time, it shrinks.  Currently both Swissie and Kraut Goobermint Bonds are Negative Interest Rate "investments".  So why does anybody drop their money into this dogshit?  Because these Bonds are perceived as a "safe haven" when the inevitable Crash that Everybody Knows is coming arrives and the Magically Levitated Stock Market finally faces The Last Margin Call TM.

The evidence that there is no Growth is all over the place of course, all you have to do is look at the declining number of people in the Labor force…

http://www.ritholtz.com/blog/wp-content/uploads/2012/12/part1202121_big.gif

…or the total Miles Driven and Gas Konsumed by the no longer working…

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…or the CRASHING count of Oil Rigs across Frackerville

Oil_Rig_Collapse

Watch Four Years of Oil Drilling Collapse in Seconds (Bloomberg)

Click the link to view the full Interactive Map

http://www.whatamimissinghere.com/wp-content/uploads/2010/08/Bubble-Debt-Crisis-500x354.jpgHow was all that drilling financed to begin with?  With a lot of DEBT, that's how, which is about the only thing left that IS Growing, and Growing Exponentially.

Since the "Investors" out there couldn't get any kind of return on anything else, they started pitching out funny money at the drillers, "chasing yield"  as the saying goes.  Problem of course with this is that the folks who borrowed this funny money are in the process of Going Outta Biz.  Those loans aren't going to be paid back anymore than the pile of Student Debt will be paid off either.

Currently, of the somewhere around $1.3T in Student Debt, fully 1/3rd is currently delinquent or in arrears.

From Zero Hedge:

It’s no secret that America has a $1.3 trillion student debt problem and as we’ve outlined on a few occasions recently, the actual delinquency rate for student borrowers is far higher than the (also high) 18% that’s generally reported because as The St. Louis Fed recently pointed out, it’s important to look not at delinquencies over total student loans but at delinquencies over loans in repayment and when you do the math on the latter you discover that once America’s best and brightest come out of deferment and forbearance, one in three quickly fall 30 days or more behind on their payments. In other words, the real delinquency rate (i.e. the rate for those who are actually required to make payments) is closer to 30%.

And while the Obama administration debates more “efficient” ways to allow for the discharge of this mountainous pile of bad loans in bankruptcy proceedings, some folks saw their student debt ABS put on review for downgrade at Moody’s which cites default risk on nearly $3 billion worth of paper. As a reminder, these are the deals and tranches affected:

http://www.hyde.edu/wp-content/uploads/2012/04/churchill.jpgNow, since this nonsense of ever escalating levels of debt and ever decreasing quantities of available resource has been ongoing and working (sort of, for .01% of the Population), clearly TPTB have deluded themselves into believing they can keep this Ponzi running in perpetuity.  Just KEEP ISSUING OUT MORE DEBT!

Problem of course is that the debt is only being issued out to .01% of the population, so consumption is shrinking and until they start issuing out the Funny Money to J6P to buy the junk on sale at Walmart at Low, Low Prices Every Day, it will keep shrinking.  The Central Banksters can Jawbone growth from now until the cows come home, but it won't get J6P increasing consumption, which represents about 70% of the GDP.

Eventually, as already is the case with the oil price, you get a crash in the prices and the losses get recognized.  Oil isn't like the Housing market, where you can keep all the unsold and foreclosed on McMansions in hidden inventory for years on end while you wait for a "rebound" in demand.  There's a limited amount of above ground storage space for Oil, and once it is all filled up you have to dump inventory at whatever price you can get for it until you can get all the production shut in to limit the supply to match the ever decreasing demand.

The Saudis are taking advantage of this situation to try and drive everybody else outta biz faster, by INCREASING rather than decreasing their production.  They're aware the prices are never going to go back up, so they're doing a Final Liquidation Sale. "Everything Must Go! 90% off all Merchandise!"

The ETP Model developed by the Hill's Group has been remarkably accurate in predicting the downward pressure on the price of Oil, and the conclusions drawn are inescapable.  Below, from the 4th Update to the ETP Model:

The price of petroleum is controlled by two factors:1) The cost of production.
2) The $ amount that the end consumer (the NEGs) can afford to pay for it.What the end consumer pays must be sufficient to cover the cost of production. All production cost must be borne by the end consumer, who includes the end buyer, and the societal cost required to produce petroleum, and its products.The Petroleum Price Curve, shown below, reflects the two factors that have, and will continue to control petroleum prices. The ETP derived Cost Curve is constructed from the ETP model, and has mapped the price of petroleum since 1960 with a correlation coefficient of 0.965. It is the most accurate pricing model that has ever been developed, (see report)*.The Maximum Consumer Price curve was also developed from the ETP model. It represents the maximum price that the end consumer can pay for petroleum. It is based on the observation that the price of a unit of petroleum can not exceed the value of the economic activity that the energy it supplies to the end consumer can generate.
A more complete explanation of how the Maximum Consumer Price curve was formulated is show in chart# 160 below:

depletion2022003.jpg

The two Maximum affordable price curves labeled 71% (black), and 62% (light blue) are skewed logistic curves. There is no explicit mathematical equation to describe them. They are derived numerically, and the dots represent values for specific years. The 71% curve is the maximum theoretical energy that can be extracted from a unit of 37.5° API crude. Its value is derived from the combustion equations of hydrocarbons. The 62% curve is the average energy extracted from the same hydrocarbon by the end user. It passes through the  ETP derived price curve at the inflection point of the ETP curve in year 2012. 2012 was the energy half way point for petroleum production. It was the year when it required one half of the energy content of petroleum to produce the petroleum, and its products.
The individual points are generated from the equation:  $/barrel = (Energy delivered – ETP value/ BTU/$) * 42.Energy delivered = 140,000 BTU/gal *0.62 (140,000 BTU/gal – the energy content of 37.5° API crude)
ETP value is derived from the ETP function
BTU/$ is taken from the BTU/$ graph – Graph# 12

The Maximum Consumer Price curve is curtailed at 2020 at $11.76/ barrel. At this point petroleum will no longer be acting as a significant energy source for the economy. Its only function will be as an energy carrier for other sources. Production will continue as long as producers can realize the lifting costs at existing fields. E&D expenditures, and field maintenance costs will have been curtailed. All production from that point forward will be from legacy fields only. The economic impact that will result from the energy lost to the general economy is beyond the scope of this report.

 

The energy content of a unit of petroleum is fixed by its molecular structure. The energy to produce a unit of petroleum, and its products increases with time as a result of the entropy production of the PPS (Petroleum Production System). The energy remaining for use by the general economy declines, and the economic activity that the petroleum can power also declines. Chart# 161 below shows the historical, and projected economic activity in 2014 dollars that a barrel of petroleum (37.5° API crude) has, and will be able to power.
 
Historically, petroleum has been a primary beneficiary to the economy. The economic activity that it powered was greater than the cost of the petroleum. Its historical effect can be seen in Graph# 25 (World GDP vs Cumulative Production). That benefit is now declining, and by the early 2020's an increased use of petroleum will no longer add to GDP. It will become more cost effective for society to begin limiting its use of petroleum as the use of petroleum transitions from a GDP enhancer to a GDP reducer.

The Hills Group isn't alone in having modeled this crash, Steve Ludlum on Economic Undertow modeled it also when he noticed two converging and irreconcilable trends, the increasing cost of what it takes Drillers to extract the Oil and Natural Gas vs. the decreasing price the customers can afford to pay.  Back in August of 2012 Steve published the first of his Triangle of Doom TM charts predicting the crash in Oil prices.

TriangleofDoomWe all know what occurred in November of 2014:

Triangle-of-Doom-1101141

…and here's the LATEST in Triangle of Doom Charts…

Triangle-of-Doom-041515

 

The rest, as they say, is History.  Steve predicted TO THE MONTH the collapse in the Oil Price, so when you read in the MSM "Who Cooda Node?" this would occur, you can tell them we knew.

Where does it go from here?  First off, as is obvious above here, Drillers are going Bankrupt and Outta Biz, the smaller operators first.  Rig counts in the Bakken and Marcellus drop daily (see the interactive map from Bloomberg above), and the most expensive to extract Oil is getting shut in first.  The biggest companies and largest exporters like the Saudis with the deepest pockets will last the longest, but they also inevitably will succumb to the downward spiraling demand from increasingly impoverished consumers.  As noted in the Hills Group Report, by 2020 Oil will be a negligible part of the economy as the cost to extract versus the price that can be paid to burn it becomes uneconomic for everyone.  It may even occur before that, since many enterprises driven by Oil such as Refineries can only operate at large scale.  Once refineries start shutting in, it doesn't matter if there is still some Oil left in the ground or a few people still with functioning money who could buy it.  It simply will not be available at ANY price.

How will our society function without Oil and it's products?  Simply stated, IT WON'T.  Not in its current form anyhow.  What sort of new society we will transition into and how we will cope with the many problems resultant from this kind of radical change is an open question.  The only thing you can say for certain is the transition will not be an easy one, and that life a decade into the future will not resemble much the life we are still living now, at least if you haven't yet fallen off the Economic Cliff.

The Dominoes are falling as we speak.  It is only a matter of time before it Comes to a Theater Near You.


 

 photo mr_know-it-all_zpsdea49f76.jpgMore Rogue Economist  Articles & Rants:

Money Valve I, Money Valve II, Money Valve III, Money Valve IV,David Korowicz Podcast:Financial Contagion & Tipping Points,Financial WWIII, Of Heat Sinks & Debt Sinks: A Thermodynamic View of Money,Theory of Everything I, Theory of Everything II, Energy-Money Equilibrium I, Energy-Money Equilibrium II, Energy-Money Equilibrium III,Da Fed: Central Banking According to RE,Kurrency Kollapse,Large Public Works Projects I,Large Public Works Projects II,Large Public Works Projects III,Waste Based Society I, Waste Based Society II, Waste Based Society III,Smokin' Economista Crack,Demand Destruction, Swissie Capitulation,Energy & Banking Criminal Racketeering,Economic Ebola,Competitive Currency Devaluation & Deflation,Inflation, Deflation & FOOD!,Financial WWIII: Secessions, Sanctions & Anti-Dollars, Anti-Dollars III: Fining Putin,Anti-Dollars II,Anti-Dollars,Eurobanksters Pray for Jesus,Wealth Confiscation & Destruction,Monetary Kabuki,Peak Credit,Fictional Wealth & Putin's Billions,Student Loan Forgiveness,Deflation Doom,The Death of Debt,Emerging Markets & Peripheral Currency Collapse,Tower of Babel Moment,Submerging Markets,Musical Dollars,Energy, Money & Gold,History & Future of Coinage & Money,The Future of Money,Whither Gold?,Conduits,The Crucifixion of Money,Banks: Unsafe at Any Speed,More Musings on Money,Liquidity Traps & Asset Class Sinkholes,Small Bizness in the Sea of Irredeemable Debt,Now Why Don't They SHOP?,Debt Monetization Economics,Financing the Industrial Revolution,Manufacturing Money,Capital Controls,F7 Print Button in Lockup,Moving Beyond Capitalism,On Dignity & Comparative Wealth,Avalanche Theory of Debt Cascade Failure,The Concepts of Money & Capital,Dollar-Oil Nexus,Hyperinflation vs. Deflation: Rebutting FFOA,Hyperinflation vs. Deflation Continued,Energy, Money & Oil: Inter-relationships,Banksters go ALL IN,History of Economic Collapse & the End of the Age of Oil,Capital Flight & Unions: 40 years of History in the FSoA,Hyperinflation or Deflation?,In the Debtrix, there is no Red Pill,

Map

Do it for Denmark

logopodcastOff the microphone of RE

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Aired on the Doomstead Diner on March 10, 2015

http://blog.joins.com/usr/t/on/tony4328/1206/4fd9db96f255c.jpg

Discuss this article at the Podcast Table inside the Diner

http://th05.deviantart.net/fs70/PRE/f/2012/160/1/c/great_feelings_with_nina_agdal_by_massivegts-d52v49r.jpghttps://chivethebrigade.files.wordpress.com/2014/11/nina-agdal-danish-girl-920-94.jpghttp://rocknrollpeople.com/magazine/wp-content/uploads/2014/01/536946_210346879110561_1182020640_n.jpg

Tune in to the full list of Diner Rants & Interviews on the Diner Soundcloud Channel!

Featuring interviews with Steve Ludlum, Gail Tverberg, Ugo Bardi, Nicole Foss, David Korowicz, George Mobus, John David Hughes, Albert Bates and many more….

Snippet:

…In the last rant, I went ballistic on the Economista Clowns & Jokers who must be Smoking Crack to come up with the numbskull ideas of impoverishing people to stimulate growth and lending more money to already bankrupt borrowers as a solution for economic collapse. This was inspired by the FACT that one of the World Class Economistas currently making policy on the global level, one Douglas McWilliams of CEBR was documented on camera really smoking crack in a London Crack house, wasted to beat the band.

http://profile-pics-cdn.xvideos.com/videos/profiles/profthumb/79/ed/11/beezbone--ym/profile_1_big.jpgFor today, the latest in hilarity is the Danish Ad Campaign, “Do it for Denmark”, designed to encourage Danish girls to start getting PREGNANT! They are supposed to go out on Vacation and find willing foreigners to inseminate them and then return to Denmark to bring new Great Danes into the world, so that they can pay taxes to support the current crop of aging Great Danes! LoL.

Charitable folks that Diners are, several have already stepped up to the Plate as Volunteers here to keep Danish social security programs solvent. Given our aging demographic, we also will purchase our own Viagra to make this possible! It’s a gift to the Danish People, and hopefully the cost of the Viagra can be deducted from the income tax as a Charitable Contribution to needy Danish Girls. LoL…

For the rest, LISTEN TO THE RANT!!!

Here’s the last rant on Crack Smoking Economistas, in case you missed it…

Peak Food is Here. Peak People Next.

From the keyboard of Thomas Lewis
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If we could get photosynthesis to run by moonlight, we would have a chance of supporting the “projected” increase in world population, which as we all know will continue to increase forever, no matter what. Wait, what? (Photo by Sammydavisdog/Flickr)

If we could get photosynthesis to run by moonlight, we would have a chance of supporting the “projected” increase in world population, which as we all know will continue to increase forever, no matter what. Wait, what? (Photo by Sammydavisdog/Flickr)

First published at The Daily Impact  February 3, 2014

When an organism never stops growing, reason calls it “cancer.” When an organism stops growing upon reaching maturity, reason says it has reached its peak. In nature, this is good and normal, as is the following eventual decline and death. In industrialism, peak is a dirty word, to be denied, preferably never even discussed, along with such alien concepts as decline and  death.

Yet even the richest and most powerful humans cannot defy nature for long. She is implacable, and her ruling is that every system, every organism, every enterprise, matures — which is to say it reaches its peak — and then begins to die. This is true for everything from starfish to stars. So it’s time to be surprised all over again at a new study that shows that global industrial food production has, um, matured. As in, peaked.

The study, published in the journal Ecology and Society, investigated the notion that the concept of peak oil — the time when the development of a resource stops growing, plateaus, and then begins to decline — applies to other resources we need in order to to live. The results were stunning. Not only does the growth of all industrial exploitation of resources reach a maximum (followed by inevitable decline), but virtually all the resources that supply us with food have already done so.

Clarifying note: “Peak” something, as in oil, is commonly understood to be the point at which production levels off, the plateau preceding the decline. Here it is used somewhat differently, to mean the period of time in which the production of the resource was growing at its fastest rate. Therefore, in the years following the peak, the resource might still increase year-to-year, but by ever smaller amounts until decline sets in.

Thus when this study says the world reached peak corn in 1985, peak rice in 1988, peak milk and peak wheat in 2004, peak chicken in 2006 and peak soy in 2009, it means that since those years the production of the commodity has been growing more slowly, and is not keeping up with the demand curve of an ever-increasing population. Of the 21 commodities they studied, 16 reached peak production between 1988 and 2008, a breathtakingly short period of time. It suggests, rather than spot shortages and isolated crises, that the world’s food-production system is being overwhelmed.

There is ever increasing evidence that this is so. Yet we continue to see, everywhere, the feckless sentence: world population is expected to reach nine billion by 2050. Because growth goes on, no matter what. But to do that, food production would have to double. That of course would require more fertile land to till, more water for irrigation, more fuel for cultivation, more fertilizer…and all of those things have peaked. It would also bring more pollution, more topsoil loss, more toxicity and more genetic mutilation.

And so we sail on toward the place where constricted supplies meet a heedlessly growing population and the necessary corrections are made by famine and war. There’s another way to say that we refused to recognize the natural concept of reaching our peak: we never grew up.

 

***

 

Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

 

 

The GDP-Energy Tie

Off the keyboard of Gail Tverberg

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Published on Our Finite World on February 5, 2015

oilwell

Discuss this article at the Energy Table inside the Diner

Charts showing the long-term GDP-energy tie (Part 2 – A New Theory of Energy and the Economy)

In Part 1 of this series, I talked about why cheap fuels act to create economic growth. In this post, we will look at some supporting data showing how this connection works. The data is over a very long time period–some of it going back to the Year 1 C. E.

We know that there is a close connection between energy use (and in fact oil use) and economic growth in recent years.

Figure 1. Comparison of three-year average growth in world real GDP (based on USDA values in 2005$), oil supply and energy supply. Oil and energy supply are from BP Statistical Review of World Energy, 2014.

Figure 1. Comparison of three-year average growth in world real GDP (based on USDA values in 2005$), oil supply and energy supply. Oil and energy supply are from BP Statistical Review of World Energy, 2014.

In this post, we will see how close the connection has been, going back to the Year 1 CE. We will also see that economies that can leverage their human energy with inexpensive supplemental energy gain an advantage over other economies. If this energy becomes high cost, we will see that countries lose their advantage over other countries, and their economic growth rate slows.

A brief summary of my view discussed in Part 1 regarding how inexpensive energy acts to create economic growth is as follows:

The economy is a networked system. With cheap fuels, it is possible to leverage the expensive energy that humans can create from eating foods (examples: ability to dig ditches, do math problems), so as to produce more goods and services with the same number of workers. Workers find that their wages go farther, allowing them to buy more goods, in addition to the ones that they otherwise would have purchased.

The growth in the economy comes from what I would call increasing affordability of goods. Economists would refer to this increasing affordability as increasing demand. The situation might also be considered increasing productivity of workers, because the normal abilities of workers are leveraged through the additional tools made possible by cheap energy products.

Thus, if we want to keep the economy functioning, we need an ever-rising supply of cheap energy products of the appropriate types for our built infrastructure. The problem we are encountering now is that this isn’t happening–more energy supply may be available, but it is expensive-to-produce supply. Our networked economy sends back strange signals–namely inadequate demand and low prices–when the cost of energy products is too high relative to wages. These low prices are also a signal that we are reaching other limits of a networked economy, such as too much debt and taxes that are too high for workers to pay.

Looking at very old data – Year 1 C. E. onward

Some very old data is available. The British Economist Angus Maddison made GDP and population estimates for a number of dates between 1 C. E. and 2008, for selected countries and the world in total. Canadian Energy Researcher Vaclav Smil gives historical energy consumption estimates back to 1800 in his book Energy Transitions – History, Requirements and Prospects.

If we look at the average annual increase in GDP going back to the Year 1 C. E., it appears that the annual growth rate in inflation-adjusted GDP peaked in the 1940 to 1970 period, and has been falling ever since. So the long-term downward trend in world GDP growth has lasted at least 44 years at this point.

Figure 2. Average annual increase in GDP per capita, based on work of Angus Maddison through 2000; USDA population/real GDP figures used for 2000 to 2014.

Figure 2. Average annual increase in inflation-adjusted GDP, based on work of Angus Maddison through 2000; USDA population/real GDP figures used for 2000 to 2014.

A brief synopsis of what happened in the above periods is as follows:

  • 1 to 1000 – Collapse of several major civilizations, including the Roman Empire. Metal was made using charcoal from wood, but this led to deforestation and soil erosion. Egypt and the Middle East had extensive irrigation of crops using river water. Some trade by ship. Most of the population were farmers.
  • 1000 to 1500 – Early use of peat moss for heat energy for industrialization, particularly in Netherlands, leading to increased trade. Continued use of wood in cold countries, with deforestation issues.
  • 1500 to 1820 – European empire expansion to the New World and to colonies in Africa, allowing world population to grow. Britain began using coal. Netherlands added wind turbines beside greater use of peat moss.
  • 1820 to 1900 – Coal allowed metals to be made cheaply. Parts of farm work could be transferred to horses with greater use of metal tools. Coal allowed many types of new technology including hydroelectric dams, trains, and steam powered boats.
  • 1900 to 1940 – Expanded use of coal, with beginning use of oil as a transportation fuel. Depression was during this period.
  • 1940 to 1970 – Post war rebuilding of Europe and Japan and US baby boom led to hugely expanded use of fossil fuels. Antibiotic use began; birth control pills became available. Food production greatly expanded with fertilizer, irrigation, pesticides.
  • 1970 to 2000 – 1970 was the beginning of the great “oops,” when US oil production started to decline, and oil prices spiked. This set off a major push toward efficiency (smaller cars, better mileage) and shifts to other fuels, including nuclear.
  • 2000 to 2014 – Another big “oops,” as oil prices spiked upward, when North Sea and Mexican oil began to decline. Much outsourcing of manufacturing to countries where production was cheaper. Huge financial problems in 2008, never completely fixed.

Growth in GDP in Figure 2 generally follows the pattern we would expect, if fossil fuels and earlier predecessor fuels raised GDP and the great “oopses” during the 1970-2000 and 2000-2014 periods reduced economic growth.

Population Growth vs Growth in Standard of Living

GDP growth is composed of two different types of growth: (1) population growth and (2) rise in the standard of living (or per capita GDP growth). We can look at these two kinds of growth separately, using Maddison’s data. My discussion earlier about cheap energy having a favorable impact on the amount of goods an economy could create relates primarily to the second kind of growth (rise in the standard of living). There would be a carry-over to population growth as well, because parents who have more adequate resources can afford more children.

If we compare the population growth pattern in Figure 3 with the total GDP growth pattern shown in Figure 2, we notice some differences. One such difference is the lower population growth rate in the 2000-2014 period. Compared to the period before fossil fuels (generally before 1820), the population growth rate is still exceedingly high.

Figure 3. Average annual increase in world population, based on work of Angus Maddison through 2000; USDA population figures used for 2000 to 2014.

Figure 3. Average annual increase in world population, based on work of Angus Maddison through 2000; USDA population figures used for 2000 to 2014.

If we look at world per capita GDP growth by time-period (Figure 4), we see practically no growth until the time of fossil fuels–in other words, 1820 and succeeding periods.

Figure 4. Average annual increase in GDP per capita, based on work of Angus Maddison through 2000; USDA population/real GDP figures used for 2000 to 2014.

Figure 4. Average annual increase in GDP per capita, based on work of Angus Maddison through 2000; USDA population/real GDP figures used for 2000 to 2014.

In other words, in these early periods, civilizations were often able to build empires. Doing so seems to have allowed greater population and more building of cities, but it didn’t raise the standard of living of most of the population by very much. If we look at the earliest periods, (Years 1 to 1000; 1000 to 1500, and even most places in 1500 to 1820), the average per capita income seems to have been equivalent to about $1 or $2 per day, today.

I earlier showed how world per capita energy consumption has grown since 1820, based on the work of Vaclav Smil (Figure 5).

Figure 5. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent divided by population estimates by Angus Maddison.

Figure 5. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent divided by population estimates by Angus Maddison.

It is clear from Figure 5 that the largest increase in energy consumption came in the 1940 to 1970 period. One thing that is striking is that world population took a sharp upward turn at the same time more fossil fuel use was added (Figure 6).

Figure 6. World population growth, based on data of Angus Maddison.Figure 6. World population growth, based on data of Angus Maddison.

While this increase in population holds for the world in total, analyzing population growth by country or country grouping yields very erratic results. This is true all the way back to the Year 1. If we look at percentages of world population at various points in time for selected countries and country groups, we get the distribution shown in Figure 7.  (The list of country groups shown is not exhaustive.)

Figure 7. Share of world population from Year 1 to 2014, based primarily on estimates of Angus Maddison.Figure 7. Share of world population from Year 1 to 2014, based primarily on estimates of Angus Maddison.

Part of what happens is that economic collapses (or famines or epidemics) set population back by very significant amounts in local areas. For example, Maddison shows the population of Italy as 8,000,000 in the Year 1, but only 5,000,ooo in the Year 1000, hundreds of years after the fall of the Roman Empire.

Per capita GDP for Italy dropped by half over this period, from about double that of most other countries to about equivalent to that of other countries. Thus, wages might have dropped from the equivalent of $3.oo a day to the equivalent to $1.50 a day. None of the economies were at a very high level, so most workers, if they survived a collapse, could find work at their same occupation (generally farming), if they could find another group that would provide protection from attacks by outsiders.

If we look at the trend in population shown on Figure 7, we see that the semi-arid, temperate areas seemed to predominate in population in the Year 1. As peat moss and fossil fuels were added, population of some of the colder areas of the world could grow. These colder areas soon “maxed out” in population, so population growth had to slow down greatly or stop. The alternative to population growth was emigration, with the “New World” growing in its share of the world’s population and the “Old World” contracting.

Each part of the world has its own challenges, from Africa’s problems with tropical diseases to the Middle East’s challenges with water. To the extent that work-arounds can be found, population can expand. If the work-around is cheap (immunization for a tropical disease, for example), population may be able to expand with only a small amount of additional energy consumption.

One point that many people miss is that Japan’s low growth in GDP in recent years is to a significant extent the result of low population growth. In the published GDP figures we see, no distinction is made between the portion that is due to population growth and the portion that is due to rise in the standard of living (that is, rise in GDP per capita).

Growth in Per Capita GDP in the “Advanced Economies” 

As noted above, the big increase in per capita energy use shown in Figure 5 came in the 1940 to 1970 period. No breakdown by country is available, but this period includes rebuilding period after World War II for Europe and Japan, and the period with a huge increase in consumer debt in the United States. Thus, we would expect those three country/groups would benefit disproportionally. In fact, we see very large increases in per capita GDP for these countries, as fossil fuels were added, particularly oil.

Figure 8. Average increase in per capita GDP for the United States, Western Europe, and Japan, based on work of Angus Maddison.

Figure 8. Average increase in per capita GDP for the United States, Western Europe, and Japan, based on work of Angus Maddison for 2000 and prior, and USDA real GDP and population data subsequent to that date.

These three economies (Western Europe, USA, and Japan) are all fairly high users of oil. If we look at long-term world oil production versus price (Figure 9), we see that growth in consumption was rising rapidly until about 1970.

Figure 9. World oil consumption vs. price, based on BP Review of World Energy data after 1965, and Vaclav Smil data prior to 1965.

Figure 9. World oil consumption vs. price based on BP Review of World Energy data after 1965, and Vaclav Smil data prior to 1965.

In fact, if we calculate average annual increase in oil consumption for the periods of our analysis, we find that they are

  • 1900 to 1940 – 6.9% per year
  • 1940 to 1970 – 7.6% per year
  • 1970 to 2000 – 1.5% per year
  • 2000 to 2013 – 1.1% per year

Growth in oil production “hit a wall” in 1970, when US oil production unexpectedly stopped growing and started declining. (Actually, this pattern had been predicted by M. King Hubbert and others). Oil prices spiked shortly thereafter. The situation was more or less resolved by making a number of changes to the economy (switching electricity production from oil to other fuels wherever possible; building smaller, more fuel efficient vehicles), as well as ramping up oil production in places such as the North Sea, Alaska, and Mexico.

Oil prices were brought down, but not to the $20 per barrel level that had been available prior to 1970. Most of the infrastructure (roads, pipelines, electrical transmission lines, schools) in the USA, Europe, and Japan had been built with oil at a $20 per barrel level. Changing to a higher price level is very difficult, because repair costs are much higher and because an economy that uses very much high-priced oil in its energy mix is not competitive with countries using a cheaper fuel mix.

Figure 10. Percentage of energy consumption from oil, for selected countries/groups, based on BP Statistical Review of World Energy 2014 data.

Figure 10. Percentage of energy consumption from oil, for selected countries/groups, based on BP Statistical Review of World Energy 2014 data.

In the 2007-2008 period, oil prices spiked again, leading to a major recession, especially among the countries that used very much oil in their energy mix. With these higher prices, the leveraging impact of oil in bringing down the cost of human energy was disappearing. All of the “PIIGS” (countries with especially bad financial problems in the 2008 crisis) had very high oil concentrations, up near Greece on the chart above. Japan’s oil consumption was very high as well, as a percentage of its energy use. When we looked at the impact of the recession, the countries with the highest percentage of oil consumption in 2004 had the worst economic growth rates in the period 2005 to 2011.

Figure 11. Average percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

Figure 11. Average percent growth in real GDP between 2005 and 2011 for selected groups, based on USDA GDP data in 2005 US$.

Getting back to Figure 9, after the financial crisis in 2008, oil prices stayed low until the United States began its program of Quantitative Easing (QE), helping keep interest rates extra low and providing extra liquidity. Oil prices immediately began rising again, getting to the $100 per barrel level and remaining about at that level until 2014. The combination of low interest rates and high prices encouraged oil production from shale formations, helping to keep world oil production rising, despite a drop in oil production in the North Sea, Alaska and Mexico. Thus, for a while, the conflict between high prices and the ability of economies to pay for these high prices was resolved in favor of high prices.

The high oil prices–around $100 per barrel–continued until United States QE was tapered down and stopped in 2014. About the same time, China made changes that made debt more difficult to obtain. Both of these factors, as well as the long-term adverse impact of $100 per barrel oil prices on the economy, brought oil price down to its current level, which is around $50 per barrel (Figure 10). The $50 per barrel price is still very high relative to the cost of oil when our infrastructure was built, but low relative to the current cost of oil production.

Figure 12. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

Figure 12. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

If a person looks back at Figure 9, it is clear that high oil prices brought oil consumption down in the early 1980s, and again for a very brief period in late 2008-early 2009. But since 2009, oil consumption has continued to rise, thanks to high prices and the additional oil from US shale.

The low prices we are now encountering are a message from our networked economy, saying, “No, the economy cannot really afford oil at this high a price level. It looked like it could for a while, thanks to all of the financial manipulation, but this is not really the case.” Meanwhile, we see in Figure 8 that for the combination of the EU, USA, and Japan, growth in per capita GDP has been very low in the period since 2000, reflecting the influence of high oil prices on these economies.

Growth in Per Capita GDP for Selected Other Economies

In recent years, per capita GPD growth has shifted dramatically. Figure 13 below shows increases in GDP per capita for selected other areas of the world.

Figure 13. Average growth in per-capita GDP for selected economies, based on work of Angus Maddison for Year 1 to 2000, and based on USDA real GDP figures in 2010 US$ for 2000 to 2014 .

Figure 13. Average growth in per-capita GDP for selected economies, based on work of Angus Maddison for Year 1 to 2000, and based on USDA real GDP figures in 2010 US$ for 2000 to 2014

The “stand out” economy in recent growth in GDP per capita is China. China was added to the World Trade Organization in December 2001. Since then, its coal use, and energy use in general, has soared.

Figure 14. China's energy consumption by source, based on BP Statistical Review of World Energy data.

Figure 14. China’s energy consumption by source, based on BP Statistical Review of World Energy data.

If we calculate the growth in China’s energy consumption for the periods we are looking at, we find the following growth rates:

  • 1970 to 2000 – 5.4% per year
  • 2000 to 2013 – 8.6% per year

A major concern now is that China’s growth rate is slowing, in part due to debt controls. Other factors in the slowdown include the impact pollution is having on the Chinese people, the slowdown in the European and Japanese economies, and the fact that the Chinese market for condominiums and factories is rapidly becoming “saturated”.

There have been recent reports that the factory portion of the Chinese economy may now be contracting. Also, there are reports that Chinese coal consumption decreased in 2014. This is a chart by one analyst showing the apparent recent decrease in coal consumption.

Figure 15. Chart by Lauri Myllyvirta showing a preliminary estimate of 2014 coal consumption in China.

Figure 15. Chart by Lauri Myllyvirta showing a preliminary estimate of 2014 coal consumption in China.

Where Does the World Economy Go From Here?

In Part 1, I described the world’s economy as one that is based on energy. The design of the system is such that the economy can only grow; shrinkage tends to cause collapse. If my view of the situation is correct, then we need an ever-rising amount of  inexpensive energy to keep the system going. We have gone from trying to grow the world economy on oil, to trying to grow the world economy on coal. Both of these approaches have “hit walls”. There are other low-income countries that might increase industrial production, such as in Africa, but they are lacking coal or other cheap fuels to fuel their production.

Now we have practically nowhere to go. Natural gas cannot be scaled up quickly enough, or to large enough quantities. If such a large scale up were done, natural gas would be expensive as well. Part of the high cost is the cost of the change-over in infrastructure, including huge amounts of new natural gas pipeline and new natural gas powered vehicles.

New renewables, such as wind and solar photovoltaic panels, aren’t solutions either. They tend to be high cost when indirect costs, such as the cost of long distance transmission and the cost of mitigating intermittency, are considered. It is hard to create large enough quantities of new renewables: China has been rapidly adding wind capacity, but the impact of these additions can barely can be seen at the top of Figure 14. Without supporting systems, such as roads and electricity transmission lines (which depend on oil), we cannot operate the electric systems that these devices are part of for the long term, either.

We truly live in interesting times.

China and India: Accelerating to the Finish Line

From the keyboard of Thomas Lewis
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The air in Delhi, shown here in 2011, like the air in Beijing, is barely breathable by humans. Yet these two countries, with their 2.6 billion people, have just begun to burn fossil fuels. (Photo by je poirrier/Flickr)

The air in Delhi, shown here in 2011, like the air in Beijing, is barely breathable by humans. Yet these two countries, with their 2.6 billion people, have just begun to burn fossil fuels. (Photo by je poirrier/Flickr)

First published at The Daily Impact  December 5, 2014

Hopium addicts and a few novelists nurture the convenient belief that while the 1.4 billion people of China and the 1.2 billion people of India struggle lustfully to live as luxuriously as do the 300 million people of the United States, they will manage to do so in a manner somehow less wasteful of energy and natural resources, less destructive of the living web of life, than we have done. The belief is convenient because, while there is not a whisker of evidence to suggest it is true, holding it permits the believer to carry on with business as usual.

Much has been made of the “historic” agreement reached between China and the United States at the recent APEC meeting in Beijing, stipulating that in the next 10 years or so, both countries are going to do something or other about carbon emissions (i.e. pollution), so help them. Yet the Chinese did not begin to attack the air pollution in Beijing, which may be the worst in the world, until the eve of the meeting; then and only then did it become a national priority, not because it was bad but because it looked bad.

They ordered factories upwind of the capital shut down, closed businesses and schools in the city and banned half the region’s cars from driving, all to look good, knowing that as soon as the meeting was over, so were the restrictions. It did not work very well, of course, the world is not a machine that responds immediately to the pulling of a few levers. And one of the reasons it did not work was that, as an investigating committee discovered on venturing into the region where the factories had been ordered to close, they did not. Screw Beijing, there were targets to meet, bonuses to be made, orders to fill. So much for how much better they are going to be at regulating pollution.

China still pretends that it is cracking down on pollution, even while building dirty, coal-burning electric plants as fast as it can — it opens a new one every seven to 10 days and as of two years ago had 363 projects under way. It already burns six times as much coal as does the United States, is the world’s largest importer of coal, and coal is the source of the majority of its air pollution.

India, on the other hand, is in the process of dropping all pretenses that it is combatting pollution. Within days of the election last summer of the new pro-business, pro-growth prime minister Narendra Modi (who was almost immediately received and extolled in a state visit to Washington), India’s industrialists got the word: environmental rules were about to be relaxed and in the meantime, feel free to ignore them.

Since then a government commission has recommended that government inspections of the performance of factories in controlling pollution be replaced with a system of voluntary compliance in which everyone promises to obey the rules and report themselves if they don’t. Approval of new projects, no matter how destructive, has become not only virtually automatic, but has been accelerated to warp speed: a recent meeting of the National Board for Wildlife smiled upon 150 wildlife-threatening  applications in two days, spending up to 30 minutes on each.

Neither China nor India has any intention of improving upon the path to prosperity that we have shown them. As we seem to believe that God has favored us, so they seem to believe that Krishna and Mao have bestowed upon them the right to burn and degrade and destroy anything that can contribute to their temporary well being.

The problem is that there is not that much left to burn. Hoping that the world’s two largest and poorest populations are going to be more restrained in their instant gratification. more successful in reining in greed, than we have been, well, that is hopium indeed.

 

***

 

Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

 

 

Eight Pieces of Our Oil Price Predicament

Off the keyboard of Gail Tverberg

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Published on Our Finite World on October 22, 2014

oilwell

Discuss this article at the Energy Table inside the Diner

A person might think that oil prices would be fairly stable. Prices would set themselves at a level that would be high enough for the majority of producers, so that in total producers would provide enough–but not too much–oil for the world economy. The prices would be fairly affordable for consumers. And economies around the world would grow robustly with these oil supplies, plus other energy supplies. Unfortunately, it doesn’t seem to work that way recently. Let me explain at least a few of the issues involved.

1. Oil prices are set by our networked economy.

As I have explained previously, we have a networked economy that is made up of businesses, governments, and consumers. It has grown up over time. It includes such things as laws and our international trade system. It continually re-optimizes itself, given the changing rules that we give it. In some ways, it is similar to the interconnected network that a person can build with a child’s toy.

Figure 1. Dome constructed using Leonardo Sticks

Figure 1. Dome constructed using Leonardo Sticks

Thus, these oil prices are not something that individuals consciously set. Instead, oil prices reflect a balance between available supply and the amount purchasers can afford to pay, assuming such a balance actually exists. If such a balance doesn’t exist, the lack of such a balance has the possibility of tearing apart the system.

If the compromise oil price is too high for consumers, it will cause the economy to contract, leading to economic recession, because consumers will not be forced to cut back on discretionary expenditures in order to afford oil products. This will lead to layoffs in discretionary sectors. See my post Ten Reasons Why High Oil Prices are a Problem.

If the compromise price is too low for producers, a disproportionate share of oil producers will stop producing oil. This decline in production will not happen immediately; instead it will happen over a period of years. Without enough oil, many consumers will not be able to commute to work, businesses won’t be able to transport goods, farmers won’t be able to produce food, and governments won’t be able to repair roads. The danger is that some kind of discontinuity will occur–riots, overthrown governments, or even collapse.

2. We think of inadequate supply being the number one problem with oil, and at times it may be. But at other times inadequate demand (really “inadequate affordability”) may be the number one issue. 

Back in the 2005 to 2008 period, as oil prices were increasing rapidly, supply was the major issue. With higher prices came the possibility of higher supply.

As we are seeing now, low prices can be a problem too. Low prices come from lack of affordability. For example, if many young people are without jobs, we can expect that the number of cars bought by young people and the number of miles driven by young people will be down. If countries are entering into recession, the buying of oil is likely to be down, because fewer goods are being manufactured and fewer services are being rendered.

In many ways, low prices caused by un-affordability are more dangerous than high prices. Low prices can lead to collapses of oil exporters. The Soviet Union was an oil exporter that collapsed when oil prices were down. High prices for oil usually come with economic growth (at least initially). We associate many good things with economic growth–plentiful jobs, rising home prices, and solvent banks.

3. Too much oil in too short a time can be disruptive.

US oil supply (broadly defined, including ethanol, LNG, etc.) increased by 1.2 million barrels per day in 2013, and is forecast by the EIA to increase by close to 1.5 million barrels a day in 2014. If the issue at hand were short supply, this big increase would be welcomed. But worldwide, oil consumption is forecast to increase by only 700,000 barrels per day in 2014, according to the IEA.

Dumping more oil onto the world market that it needs is likely to contribute to falling prices. (It is the excess quantity that leads to lower world oil prices; the drop in price doesn’t say anything at all about the cost of production of oil the additional oil.) There is no sign of a recent US slowdown in production either.  Figure 2 shows a chart of crude oil production from the EIA website.

Figure 2. US weekly crude oil production through October 10, as graphed by the US Energy Information Administration.

Figure 2. US weekly crude oil production through October 10, as graphed by the US Energy Information Administration.

4. The balance between supply and demand is being affected by many issues, simultaneously. 

One big issue on the demand (or affordability) side of the balance is the question of whether the growth of the world economy is slowing. Long term, we would expect diminishing returns (and thus higher cost of oil extraction) to push the world economy toward slower economic growth, as it takes more resources to produce a barrel of oil, leaving fewer resources for other purposes. The effect is providing a long-term downward push on the price on demand, and thus on price.

In the short term, though, governments can make oil products more affordable by ramping up debt availability. Conversely, the lack of debt availability can be expected to bring prices down. The big drop in oil prices in 2008 (Figure 3) seems to be at least partly debt-related. See my article, Oil Supply Limits and the Continuing Financial Crisis. Oil prices were brought back up to a more normal level by ramping up debt–increased governmental debt in the US, increased debt of many kinds in China, and Quantitative Easing, starting for the US in November 2008.

Figure 3. Oil price based on EIA data with oval pointing out the drop in oil prices, with a drop in credit outstanding.

Figure 3. Oil price based on EIA data with oval pointing out the drop in oil prices, with a drop in credit outstanding.

In recent months, oil prices have been falling. This drop in oil prices seems to coincide with a number of cutbacks in debt. The recent drop in oil prices took place after the United States began scaling back its monthly buying of securities under Quantitative Easing. Also, China’s debt level seems to be slowing. Furthermore, the growth in the US budget deficit has also slowed. See my recent post, WSJ Gets it Wrong on “Why Peak Oil Predictions Haven’t Come True”.

Another issue affecting the demand side is changes in taxes and in subsidies. A change toward more taxes such as carbon taxes, or even more taxes in general, such as the Japan’s recent increase in sales tax, tends to reduce demand, and thus give a push toward lower world oil prices. (Of course, in the area with the carbon tax, the oil price with the tax is likely to be higher, but the oil price elsewhere around the world will tend to decrease to compensate.)

Many governments of emerging market countries give subsidies to oil products. As these subsidies are lessened (for example in India and in Brazil) the effect is to raise local prices, thus reducing local oil demand. The effect on world oil prices is to lower them slightly, because of the lower demand from the countries with the reduced subsidies.

The items mentioned above all relate to demand. There are several items that affect the supply side of the balance between supply and demand.

With respect to supply, we think first of the “normal” decline in oil supply that takes place as oil fields become exhausted. New fields can be brought on line, but usually at higher cost (because of diminishing returns). The higher cost of extraction gives a long-term upward push on prices, whether or not customers can afford these prices. This conflict between higher extraction costs and affordability is the fundamental conflict we face. It is also the reason that a lot of folks are expecting (erroneously, in my view) a long-term rise in oil prices.

Businesses of course see the decline in oil from existing fields, and add new production where they can. Examples include United States shale operations, Canadian oil sands, and Iraq. This new production tends to be expensive production, when all costs are included. For example, Carbon Tracker estimates that most new oil sands projects require a price of $95 barrel to be sanctioned. Iraq needs to build out its infrastructure and secure peace in its country to greatly ramp up production. These indirect costs lead to a high per-barrel cost of oil for Iraq, even if direct costs are not high.

In the supply-demand balance, there is also the issue of oil supply that is temporarily off line, that operators would like to get back on line. Libya is one obvious example. Its production was as much as 1.8 million barrels a day in 2010. Libya is now producing 800,000 barrels a day, but was producing only 215,000 barrels a day in April. The rapid addition of Libya’s oil to the market adds to pricing disruption. Iran is another country with production it would like to get back on line.

5. Even what seems like low oil prices today (say, $85 for Brent, $80 for WTI) may not be enough to fix the world’s economic growth problems.

High oil prices are terrible for economies of oil importing countries. How much lower do they really need to be to fix the problem? Past history suggests that prices may need to be below the $40 to $50 barrel range for a reasonable level of job growth to again occur in countries that use a lot of oil in their energy mix, such as the United States, Europe, and Japan.

Figure 4. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

Figure 4. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

Thus, it appears that we can have oil prices that do a lot of damage to oil producers (say $80 to $85 per barrel), without really fixing the world’s low wage and low economic growth problem. This does not bode well for fixing our problem with prices that are too low for oil producers, but still too high for customers.

6. Saudi Arabia, and in fact nearly all oil exporters, need today’s level of exports plus high prices, to maintain their economies.

We tend to think of oil price problems from the point of view of importers of oil. In fact, oil exporters tend to be even more affected by changes in oil markets, because their economies are so oil-centered. Oil exporters need both an adequate quantity of oil exports and adequate prices for their exports. The reason adequate prices are needed is because most of the sales price of oil that is not required for investment in oil production is taken by the government as taxes. These taxes are used for a variety of purposes, including food subsidies and new desalination plants.

A couple of recent examples of countries with collapsing oil exports are Egypt and Syria. (In Figures 5 and 6, exports are the difference between production and consumption.)

Figure 5. Egypt's oil production and consumption, based on BP's 2013 Statistical Review of World Energy data.

Figure 5. Egypt’s oil production and consumption, based on BP’s 2013 Statistical Review of World Energy data.

Figure 6. Syria's oil production and consumption, based on data of the US Energy Information Administration.

Figure 6. Syria’s oil production and consumption, based on data of the US Energy Information Administration.

Saudi Arabia has had flat exports in recent years (green line in Figure 7). Saudi Arabia’s situation is better than, say, Egypt’s situation (Figure 5), but its consumption continues to rise. It needs to keep adding production of natural gas liquids, just to stay even.

Figure 7. Saudi oil production, consumption and exports based on EIA data.

Figure 7. Saudi oil production, consumption and exports based on EIA data.

As indicated previously, Saudi Arabia and other exporting countries depend on tax revenues to balance their budgets. Figure 8 shows one estimate of required oil prices for OPEC countries to balance their budgets in 2104, assuming that the quantity of exported oil is pretty much unchanged from 2013.

Figure 8. Estimate of OPEC break-even oil prices, including tax requirements by parent countries, from APICORP.

Figure 8. Estimate of OPEC break-even oil prices, including tax requirements by parent countries, from APICORP.

Based on Figure 8, Qatar and Kuwait are the only OPEC countries that would find $80 or $85 barrel oil acceptable, assuming the quantity of exports remains unchanged. If the quantity of exports drops, prices would need to be even higher.

Saudi Arabia has set aside funds that it can tap temporarily, so that it can withstand a lower oil price. Thus, it has the ability to withstand low prices for a year or two, if need be. Its recent price-cutting may be an attempt to “shake out” producers who have less-deep pockets when it comes to weathering low prices for a time. Almost any oil producer elsewhere in the world might be in that category.

7. The world really needs all existing oil production, plus more, if the world economy is to grow.

It takes oil to transport goods, and it takes oil to operate agricultural and construction equipment. Admittedly, we can cut back world production oil production with lower price, but this gets us into “a heap of trouble”. We will suddenly find ourselves less able to do the things that make the economy function. Governments will stop fixing roads. Services we take for granted, like long distance flights, will disappear.

A lot of people have a fantasy view of a world economy operating on a much smaller quantity of fossil fuels. Unfortunately, there is no way we can get there by way of a rapid drop in oil prices. In order for such a change to take place, we would have to actually figure out some kind of transition by which we could operate the world economy on a lot less fossil fuel. Meeting this goal is still a very long ways away. Many people have convinced themselves that high oil prices will help make this transition possible, but I don’t see this as happening. High prices for any kind of fuel can be expected to lead to economic contraction. If transition costs are high as well, this will make the situation worse.

The easiest way to reduce consumption of oil is by laying off workers, because making and transporting goods requires oil, and because commuting usually requires oil. As a result, the biggest effect of a cutback on oil production is likely to be huge job layoffs, far worse than in the Great Recession.

8. The cutback in oil supply due to low prices is likely to occur in unexpected ways.

When oil prices drop, most production will continue as usual for a time because wells that have already been put in place tend to produce oil for a time, with little added investment.

When oil production does stop, it won’t necessarily be from high-cost production, because relative to current market prices, a very large share of production is high-cost. What will tend to happen is that production that has already been “started” will continue, but production that is still “in the pipeline” will wither away. This means that the drop in production may be delayed for as much as a year or even two. When it does happen, it may be severe.

It is not clear exactly how oil from shale formations will fare. Producers have leased quite a bit of land, and in some cases have done imaging studies on the land. Thus, these producers have quite a bit of land available on which a share of the costs has been prepaid. Because of this prepaid nature of costs, some shale production may be able to continue, even if prices are too low to justify new investments in shale development. The question then will be whether on a going-forward basis, the operations are profitable enough to continue.

Prices for new oil development have been too low for many oil producers for many months. The cutback in investment for new production has already started taking place, as described in my post, Beginning of the End? Oil Companies Cut Back on Spending. It is quite possible that we are now reaching “peak oil,” but from a different direction than most had expected–from a situation where oil prices are too low for producers, rather than being (vastly) too high for consumers.

The lack of investment that is already occurring is buried deeply within the financial statements of individual companies, so most people are not aware of it. Dividends remain high to confuse the situation. By the time oil supply starts dropping, the situation may be badly out of hand and largely unfixable because of damage to the economy.

One big problem is that our networked economy (Figure 1) is quite inflexible. It doesn’t shrink well. Even a small amount of shrinkage looks like a major recession. If there is significant shrinkage, there is danger of collapse. We haven’t set up a new type of economy that uses less oil. We also don’t have an easy way of going backward to a prior economy, such as one that uses horses for transport. It looks like we are headed for “interesting times”.

China: Falling Faster

From the keyboard of Thomas Lewis
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Sunset in Shanghai. Except that’s not the horizon the sun is sinking behind, it’s the pollution layer. (Photo By Suicup via Wikimedia Commons)

Sunset in Shanghai. Except that’s not the horizon the sun is sinking behind, it’s the pollution layer. (Photo By Suicup via Wikimedia Commons)

First published at The Daily Impact  August 28, 2014

 

It is increasingly likely that our ailing Western industrialized economy will be preceded in collapse by that of China, whose degradation of the natural web of life has been far faster and more profound than ours. Every six months or so I check on China’s disintegration, plowing through metric tons of punditry on its Miracle-Grow GDP, its rising military power, its imperial ambitions — to come upon a patient in ICU, nearly comatose. If America is Dead Man Walking with respect to food, water, air and soil quality, China is The Walking Dead. [Really? I have to explain that? One is about a man about to die, the other about a zombie, already dead.]

China’s warp-speed industrialization, which blasted off in the 1990s, has destroyed its natural infrastructure “on a scale and speed the world has never known,” says director Jennifer Turner of the China Environment Forum at the Woodrow Wilson International Center for Scholars. The intention was to follow our American model of progress to prosperity; the unintended consequence has been to become a model for us of how quickly the industrial age can crash.  

Life is still tenable in China, but only if the following rules are strenuously obeyed;

1. Don’t Breathe the Air. Air pollution in China has become legendary. Half the coal burned in the world is consumed by China’s generating plants and factories, and the resulting pollution regularly brings major cities to a standstill, making it impossible to drive or go outside, thus to open schools or businesses. A recent study by its own Shanghai Academy of Social Sciences ranked Beijing’s air as the second worst among the world’s major cities and labelled the city as barely habitable. Since then the government has begun a war on coal, vowing to shutter hundreds of coal-burning power plants. Turns out, though, it’s building bigger ones to replace them, and coal burning is expected to increase for the foreseeable future.

2. Don’t Touch the Water. Over half of China’s lakes and reservoirs are too polluted for human use; over half of China’s groundwater is too polluted for human use; and over half of China’s rural residents do not have safe drinking water. According to an editor of The Economist,which did a report on China’s water, “There are large parts of the urban water supply which are not only too dangerous to drink—they are too dangerous to touch.” 400 major cities are short of water, 110 of them seriously. More than half of the 50,000 rivers that existed 20 years ago are simply gone — used up.

3. Don’t Eat the Food. What may be the worst environmental threat of all — soil contamination — has just recently emerged from the fog of official denial and secrecy (or maybe it was just the air pollution). It has only recently come to light that the toxic emissions of thousands of hastily-built, unregulated chemical, ceramic and similar factories have so saturated their surrounding soils with carcinogens that China has an estimated 450 “cancer villages,” whose entire populations have been sickened by food grown in the toxic soil and laced with heavy metals such as mercury and cadmium.

But the problem of soil contamination is hardly limited to nearby villages. A recent government survey, dribbled into public view by a frightened and reticent government, indicates that nearly 20 per cent of China’s farmland is contaminated with heavy metals. As a result, the food supply is riddled with contaminated rice and other grains. According to one Greenpeace researcher in-country,”Every consumer in China is exposed to this kind of pollution.”

To review, then: a country whose capital city is barely habitable, half of whose water is unusable, 20 per cent of whose farmland is unusable, whose demand for ever more coal and oil to burn is insatiable, is being discussed as a rising global power and a threat to the American Empire.

Right up there with Bangladesh.

 

***

Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.

 

 

That Was Then, This is Now

From the keyboard of James Howard Kunstler

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birdseye_buffalo 3x7
Originally Published on Clusterfuck Nation  June 9, 2014

I was in Buffalo, New York, over the weekend at the annual conclave of New Urbanists — a movement started in the 1990s to rescue American towns and cities. The scale of desolation of that city is not as spectacular or vast as Detroit’s, but the visible symptoms of the illness are the same. One of the events was a bicycle tour of Buffalo’s neglected East Side, where maybe 80 percent of the houses are gone and the few that remain stand amid spring wildflower meadows and the human density per acre appears too low even for successful drug-selling.

The old economy is gone and is replaced now by a “social services economy,” meaning government checks, SNAP cards, and purposelessness. There were zero signs of commerce there block after block, not even a place to buy potato chips. So, as it works out, the few remaining denizens of this place must spend half their waking hours journeying to a food store. How they make that journey is hard to tell. There were almost no cars anywhere nor buses to be seen. Before long surely the people will all be gone, too, ending a chapter in American urban history.

At one edge of the East Side neighborhood stood the hulking, gigantic remnants of the Larkin soap company, a haunted brick behemoth plangent with silence, ailanthus trees sprouting from the parapets and birds nesting in the gigantic, rusted ventilation fans. The administration building of this deeply paternalistic company was famously designed by Frank Lloyd Wright, completed in 1906, and demolished in 1950 — a blink of an eye. It is considered the architect’s lost masterpiece. The site became a parking lot and now is just an empty asphalt pad with mulleins and sumacs spiking up in the pavement.

At its height of success a hundred years ago, the Larkin Company provided a stupendous bounty of social support services for its 4,500 employees: a dental office at nominal prices, dedicated rooms at local hospitals, an on-premises branch of the city library, subsidized night school classes, gyms, lounges, sports clubs, a credit union, insurance plans, and more. The people could ride streetcars all over the “Electric City,” as Buffalo styled itself because of its fortunate proximity to the bonanza of hydro power from Niagara Falls.

A hundred years ago, Buffalo was widely regarded as the city of the future. The boon of electrification made it the Silicon Valley of its day. It was among the top ten US cities in population and wealth. It’s steel industry was second to Pittsburgh and for a while it was second to Detroit in cars. Now, nobody seems to know what Buffalo might become, if anything. It will be especially interesting when the suburban matrix around it enters its own inevitable cycle of abandonment.

I’m convinced that the Great Lakes region will be at the center of an internally-focused North American economy when the hallucination of oil-powered globalism dissolves. Places like Buffalo, Cleveland, and Detroit will have a new life, but not at the scale of the twentieth century. On this bike tour the other day, I rode awhile beside a woman who spends all her spare time photographing industrial ruins. She was serenely adamant that the world will never see anything like that era and its artifacts again. I tend to agree. We cannot grok the stupendous specialness of the past century, and certainly not the fact that it is bygone for good.

When people use the term “post-industrial” these days, they don’t really mean it, and, more mysteriously, they don’t know that they don’t mean it. They expect complex, organized, high-powered industry to still be here, only in a new form. They almost always seem to imply (or so I infer) that we can remain “modern” by moving beyond the old smoke and clanking machinery into a nirvana of computer-printed reality. I doubt that we can maintain the complex supply chains of our dwindling material resources and run all those computer operations — even if we can still manage to get some electricity from Niagara Falls.

In my forthcoming novel A History of the Future (third installment of the World Made By Hand series), two of my characters journey to Buffalo a couple of decades from now. They find a town with its back turned to abandoned monuments of the industrial age. All the action is on the Lake Erie waterfront where trade is conducted by sailing ships at the scale of Sixteenth century, but with an identifiable American gloss. I’d be surprised if one in a thousand educated people in this country (including the New Urbanists) can take that vision seriously. But do you suppose that the executives of an enterprise like the Larkin Company in 1915 would have ever imagined the desolation of Buffalo a mere 99 years later?

***

James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.

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Piketty Dikitty Rikitty

Off the keyboard of James Howard Kunstler

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haves and have nots
Originally Published on Clusterfuck Nation  April 28, 2014

The debate over Thomas Piketty’s new book Capital in the Twenty-First Century is as dumb as every other issue-set in the public arena these days — a product of failed mental models, historical blindness, hubris, and wishful thinking. Piketty’s central idea is that wealth will continue to accumulate and concentrate among individual rich families at ever-greater rates and therefore that nation-states should take a number of steps to prevent that from happening or at least attempt to correct it.

The first mistake of Piketty fans such as New York Times op-ed ass Paul Krugman is the assumption that the dynamic labeled “capitalism” is an ism, a belief system that you can subscribe to or drop out of, depending on your political correctitude. That’s just not true. So-called capitalism is more like gravity, a set of laws that apply to and describe the behavior of surplus wealth, in particular wealth generated by industrial societies, which is to say unprecedented massive wealth. The human race never saw anything quite like it before. It became both a moral embarrassment and a political inconvenience. So among the intellectual grandiosities of modern times is the idea that this massive wealth can be politically managed to produce an ideal equitable society — with no side effects.

Hence, the bold but hapless 20th century experiment with statist communism, which pretended to abolish wealth but succeeded mainly in converting wealth into industrial waste and pollution, while directing the remainder to a lawless gangster government elite that ruled an expendable mass peasantry with maximum cruelty and injustice.

In the other industrial nations, loosely called “the west,” the pretense to abolish wealth altogether never completely took, but a great deal of wealth was “socialized” for the purpose of delivering public goods. That seemed to work fairly well in post-war Europe and a bit less-well in the USA after the anomalous Eisenhower decade when industrial labor enjoyed a power moment of wage arbitrage. Now that system is unraveling, and for the reason that Piketty & Company largely miss: industrial economies are winding down with the decline of cheap fossil fuels.

Piketty and his fans assume that the industrial orgy will continue one way or another, in other words that some mysterious “they” will “come up with innovative new technologies” to obviate the need for fossil fuels and that the volume of wealth generated will more or less continue to increase. This notion is childish, idiotic, and wrong. Energy and technology are not substitutable with each other. If you run out of the former, you can’t replace it with the latter (and by “run out” I mean get it at a return of energy investment that makes sense). The techno-narcissist Jeremy Rifkins and Ray Kurzweils among us propound magical something-for-nothing workarounds for our predicament, but they are just blowing smoke up the collective fundament of a credulous ruling plutocracy. In fact, we’re faced with an unprecedented contraction of wealth, and a shocking loss of ability to produce new wealth. That‘s the real “game-changer,” not the delusions about shale oil and the robotic “industrial renaissance” and all the related fantasies circulating among a leadership that checked its brains at the Microsoft window.

Of course, even in a general contraction wealth will still exist, and Piketty is certainly right that it will tend to remain concentrated (where it isn’t washed away in the deluge of broken promises to pay this and that obligation). But he is quite incorrect that the general conditions we enjoy at this moment in history will continue a whole lot longer — for instance the organization of giant nation-states and their ability to control populations. I suppose it’s counter-intuitive in this moment of the “Deep State” with all its Orwellian overtones of electronic surveillance and omnipotence, but I’d take the less popular view that the Deep State will choke to death on the diminishing returns of technology and that nation-states in general will first degenerate into impotence and then break up into smaller units. What’s more, I’d propose that the whole world is apt to be going medieval, so to speak, as we contend with our energy predicament and its effects on wealth generation, banking, and all the other operations of modern capital. That is, they’ll become a lot less modern.

As all this occurs, some families and individuals will hang onto wealth, and that wealth is apt to increase, though not at the scales and volumes afforded by industrial activities. Political theorizing a la Marx or Thomas Piketty is not liable to deprive them of it, but other forces will. The most plausible framework for understanding that is the circulation of elites. This refers to the tendency in history for one ruling elite to be overturned and replaced by another group, often by violence, and then become the new ruling elite. It always happens one way or another, and even the case of the Bolsheviks in Russia during the industrial 20th century can be seen this way.

In any case, just because human affairs follow certain patterns these days, don’t assume that all these patterns will persist. I doubt that the Warren Buffets and Jamie Dimons of the world will see their wealth confiscated via some new policy of the Internal Revenue Service — e.g. the proposed “tax on wealth.” Rather, its more likely that they’ll be strung up on lampposts or dragged over three miles of pavement behind their own limousines. After all, the second leading delusion in our culture these days, after the wish for a something-for-nothing magic energy rescue remedy, is the idea that we can politically organize our way out of the epochal predicament of civilization that we face. Piketty just feeds that secondary delusion.

 

***

James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.

 

Shooting the Elephant

Off the keyboard of Jason Heppenstall

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Elephant

Published on 22 Billion Energy Slaves on April 14, 2014

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When I started penning this blog a few years ago the idea that we might have reached some fixed limit of oil production and all that entails for our rapacious industrial civilisation seemed rather preposterous to most people. What’s changed in the interim? Not much, by most accounts. Those who accept the reality did so ages ago, and those who tune out reality continue to do so, lumping anyone who mentions ‘peak oil’ into the same mental category as Space Lizards and Mayan prophesies.

There aren’t many rewards attached to being a blogger writing about the grinding reality of the limits to growth and pointing out the presence of a large elephant in the middle of the sitting room becomes quite tiresome. Cornucopian believers send you poisonous emails, friends quietly get married without telling you and you spend those small hours before the sun’s rays lighten the eastern horizon wondering quietly “What if I’m the mad one and you can have infinite growth on a finite planet?” After all, the newspapers are full of pronouncements of ‘the recovery’, with more people buying new cars than ever before, m/b/trillionaires thronging the streets of London and the stock markets testing ever greater heights. Yes, there are the occasional dark clouds in an otherwise sunny sky, such as the recent NASA-funded report concluding that industrial civilisation is doomed, and the latest IPCC report which stated that … ummm, global GDP may be reduced by a tiny fraction by 2100 due to global warming (so, actually let’s not bother doing anything then!)

So anyway, amidst all of the white noise perhaps it’s time to sweep away the clutter from the desk and get back to basics with a pared-down recap of the situation we face and why it actually matters.

Peak oil snuck past us

Let’s deal with peak oil first of all. Yep, that old bugbear that won’t go away – no matter how much guff is pumped out by the mainstream media who take their cues from industrial PR flacks and lobbyists. Listening to it, we might imagine that there’s enough oil to go round for the next few decades or centuries. But they’re wrong. As Kurt Cobb points out, actual production levels of regular ol’ crude oil hit a plateau of 67 million barrels per day in 2005 and, despite a bit of minor fluctuating, was at the exact same level in 2012, the latest year we have figures for. And that is despite the ‘boom’ in tight oil in the US and, more importantly, more money being flung at the industry than the average person can imagine.

So, in the last eight or so years, despite rocketing demand from China, India et al. combined with the throwing of mega sums of money at the industry, the amount of crude we can get out of the ground has remained stuck, while the price has risen several fold. How did they get away with hiding this? Simple – they just included all sorts of ‘oil-like fuels’ such as biodiesel into the mix and hoped nobody would notice. Let’s not forget that oil companies always like to inflate their figures so as to attract new investment. An honest oil company who says ‘Actually we didn’t produce as much as we said we had, and next year it will be even lower,’ is an oil company that will shortly be out of business.

Conclusion: Big fat industry lies can only mask reality for so long. Peak oil has been hidden from our view for too long.

High oil prices matter

For the last century or more, economic growth has occurred on the back of cheap oil. We, a single species among millions, have burned through most of the Earth’s accessible store of cheap fossilised sunlight. 99.9% of economists never thought that this would matter because they barely gave it a thought. Instead, we built a global civilisation that simply cannot continue to function unless it is constantly growing on the back of cheap fossil fuels. Now that the oil price seems stuck at around $100 a barrel, meaningful growth has stopped. Instead of productive economic activity we now simply have the growth of the money supply. Some countries, such as the UK, have managed to create the illusion that their economies are growing, but if you strip out the billions added in quantitative easing, Chinese and Russian casino money and the dubious gains of the stock market then an entirely different and more honest picture emerges.

There are now about 99 dollars/pounds/yen of credit/debt for every ‘real’ dollar/pound/yen. It is the mother of all credit bubbles and even if it partially pops it will take down a huge chunk of the global economy with it. The question is not if but when it will pop.

But because all of our economic systems have no reverse gear, this means future payments will not be honoured, no matter how much they are promised. In reality, negative economic growth means no new lending for business, no investments and no pensions for the masses. What will you do if your pension is sharply reduced or taken away just before you retire?

Conclusion: Economic growth is dead for most people and living standards are declining accordingly. The ‘recovery’ is simply the paper wealth rich getting richer at the expense of everyone else, as well as the entire system they depend upon for their wealth. You will probably not get a pension and your kids will be slaves to debt. This is what peak oil looks like.

Peak oil hits

‘So what?’ say environmentalists. Oil is evil and solar panels are good. We can transition to a world of clean energy and life can continue much as it has but everything will be more pleasant. Except that it can’t and won’t. Peak oil means that from now on in there will be less and less energy available to us. And like a falling tide that reveals all the rocks hidden on the beach, falling energy supplies mean that those who control power will do their best to consolidate that power. This means more privatisations of institutions that were previously considered off-limits, more squabbles over resources and more self-cannibalisations of societies.

Furthermore, we face diminishing complexity in our techno-obsessed cultures. Less concentrated readily-available energy means business slows down and companies go bust. The thousands of components that make up a tablet computer, for example, are produced in a web of specialised factories spanning the globe. Add a credit crash, a currency war or a bog-standard economic panic and the whole ultra-complex just-in-time model for producing an iPad shatters into a million little useless pieces.

What is a million times more complex than an iPad? A national electricity grid. To keep all that electricity flowing from the wall sockets takes an enormous amount of complexity and the whole system relies on global supply chains functioning perfectly. Add renewable power into the mix and we’re okay for a certain percentage, but beyond that the grid becomes unstable due to the inevitable unwillingness of wind, sun and waves to conform to our precise human desires. An unstable electrical grid means industry is unable to operate and relocates, causing more economic damage as it does so. In actual fact, it may not even be possible at all, because renewable energy systems rely on a very high level of socio-economic complexity – the kind that only concentrated forms of energy can provide.

Conclusion: Renewable power is great on a small scale, but we can’t power an industrial scale civilisation on it. 

Too high, too low – but never just right

What does peak oil look like from the top? At the moment we are existing in a kind of oily no-man’s land. Oil prices are too high to allow economic growth to happen, but too low to make it profitable to produce the stuff in the first place. That’s why big companies such as Shell are walking away from the North Sea, the Arctic and the US. All of the low-hanging fruit has been picked and it is just the hard-to-reach stuff at the top of the tree which is available. Oil companies cannot make a profit if it costs them $150 to extract a barrel of oil using all the latest technology and drilling techniques, which they will then only be able to sell for $100.

Conclusion: Expensive oil kills economies. Cheap oil kills oil companies. Dead oil companies don’t produce oil. Less available oil kills growth-based economies. Rinse and repeat and this is what peak oil looks like.

Grabbing what’s left

As the US struggles with a moribund economic situation, unpayable debts, high-level corruption and falling access to real energy supplies – it is becoming ever more desperate. Just like George Orwell shooting an elephant in Burma to maintain face in front of a mocking crowd:

“I perceived in this moment that when the white man turns tyrant it is his own freedom that he destroys. He becomes a sort of hollow, posing dummy, the conventionalized figure of a sahib. For it is the condition of his rule that he shall spend his life in trying to impress the “natives,” and so in every crisis he has got to do what the “natives” expect of him. He wears a mask, and his face grows to fit it. I had got to shoot the elephant. I had committed myself to doing it when I sent for the rifle. A sahib has got to act like a sahib; he has got to appear resolute, to know his own mind and do definite things. To come all that way, rifle in hand, with two thousand people marching at my heels, and then to trail feebly away, having done nothing — no, that was impossible. The crowd would laugh at me. And my whole life, every white man’s life in the East, was one long struggle not to be laughed at.”

Is there any way of seeing John Kerry posturing over Ukraine or Obama with his red lines not looking like Orwell’s ‘hollow posing dummy’? Because Ukraine is not about freedom or democracy or any of the other words that are subject to the laws of diminishing credibility, but about energy. Ukraine is all about getting a natural gas fix to Europe’s needy energy markets and the power play between east and west threatens to crush Ukraine like a nut between two grind stones. The US didn’t spend all that money installing a friendly government only to see it be overthrown – even if it did mean cosying up with some unsavoury people. And Putin may be the largest shark circulating the floundering figure of Uncle Sam, but he is not the only one.

We must ask ourselves – would we be willing to risk a major war over fossil fuels if those same fossil fuels were as abundant as many claim they are? Just why are US energy majors such as Chevron and Exxon salivating about fracking natural gas in Ukraine?

Conclusion: Increasing hostilities over who has access to the remaining fossil fuels, combined with a changing worldwide power dynamic as one big growling dog faces down another is the new reality. This is what peak oil looks like.

What to do about it

As I’ve been writing here on these pages for a while, there is no single action that you or I can take which will steer this ship away from its suicidal course. Our systems of governance are a system for ensuring that we are only ever ruled by sociopaths, so the best course of action to take is to avoid them and the systems they have created. This system is not reformable, so the best thing to do is help build a new paradigm that can run in parallel until the old one inevitably expires. What this means in practice is disassociating yourself as much as possible from a global economic system that is collapse-prone and which does not have your interests at heart. You need to learn to cover the basics of food, fuel and shelter for you and your family, and learn new ways of living that are in harmony with nature as much as possible.

This doesn’t mean, as I’ve repeatedly said, filling a bunker with tins of corned beef and guns, but instead requires that you get out there and make some friends with a community of people who share the willingness to put in the work rather than just talking about it on internet forums. Get hold of a bit of land, if you can, and practice permaculture. Share stuff. Teach what you have learned to others. Write about it, talk about it, but most importantly do it. Every day thousand more are tossed onto the scrap heap by an economic system which is isn’t fit for purpose. Try not to join them.

If you find that depressing – don’t. There are some silver linings to this cloud – such as our inability to fry the atmosphere. If you come along for the ride then you’ll likely be fitter, happier and your brain will not be frazzled by working a 60 hour week to pay off endless debts with no prospect of an easy retirement at the end of it. That, at least, has to be worth something.

Oil Limits and the Economy: One Story, Not Two

Off the keyboard of Gail Tverberg

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Published on Our Finite World on March 21, 2014

oilwell

Discuss this article at the Energy Table inside the Diner

The two big stories of our day are

(1) Our economic problems: The inability of economies to grow as rapidly as they would like, add as many jobs as they would like, and raise the standards of living of citizens as much as they would like. Associated with this slow economic growth is a continued need for ultra-low interest rates to keep economies of the developed world from slipping back into recession.

(2) Our oil related-problems: One part of the story relates to too little, so-called “peak oil,” and the need for substitutes for oil. Another part of the story relates to too much carbon released by burning fossil fuels, including oil, leading to climate change.

While the press treats these issues as separate stories, they are in fact very closely connected, related to the fact that we are reaching limits in many different directions simultaneously. The economy is the coordinating system that ties together all available resources, as well as the users of these resources. It does this almost magically, by figuring out what prices are needed to keep the system in balance—how much materials of which types are needed, given what consumers can afford to pay.

The catch is that the economic system is not infinitely flexible. It needs to grow, to have enough funds to (sort of) pay back debt with interest and to make good on all the promises that have been made, such as Social Security.

Energy use is very closely tied to economic growth. When energy consumption becomes slow-growing (or high-priced—which  is closely tied to slow-growing), it pulls back on economic growth. Job growth becomes more difficult, and governments find it difficult to get enough funding through tax revenue. This is the situation we have been experiencing for the last several years.

We might think that governments would be aware of these issues and would alert their populations to them.  But governments either don’t understand these issues, or only partially understand them and are frightened by the prospect of what is happening. The purpose of my writing is to try to explain what is happening in terms that people who are used to reading the Wall Street Journal or Financial Times can understand.

I am not an economist, so I can’t speak to the question of what economists are saying. I do know that what economists say tends to change from time to time and from researcher to researcher. For example, in 2004, the International Energy Agency prepared an analysis with the collaboration of the OECD Economics Department and with the assistance of the International Monetary Fund Research Department (Full Report, Summary only). That report said, “.  . . a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second year of higher prices. Inflation would rise by half a percentage point and unemployment would also increase.” This finding is consistent with the issues I am concerned about, but I expect that not all economists would agree with it. Oil prices are now around $100 per barrel, not $35 per barrel.

The Tie of Oil and Other Forms of Energy to the Economy

Oil and other forms of energy are used to power the economy. Historically, rises and falls in the use of oil and other types of energy have tended to parallel GDP growth (Figure 1).

Figure 1. Growth in world GDP, compared to growth in world of oil consumption and energy consumption, based on 3 year averages. Data from BP 2013 Statistical Review of World Energy and USDA compilation of World Real GDP.

There is disagreement as to which is cause and which is effect—does GDP growth lead to more oil and energy demand, or does the availability of cheap oil and other types of energy power the economy? In my view, the causality goes both ways. Oil and other types of energy are needed for economic growth. But if people cannot afford oil or other types of energy products, typically because they don’t have jobs, then energy use will drop. And if oil prices drop too low, we will be in real trouble because oil production will stop.

How Oil Limits Work

People tend to think of limits as working in the same manner as having a box with a dozen eggs. Once the last egg is gone, we are out of luck. Or a creek dries up from lack of rainfall. The water is no longer available, so we have lost our water source.

With the benefit of the economy, though, limits are more complicated than this. If we live in today’s economy, we can purchase another box of eggs if we run short of eggs, assuming markets provide eggs at a price we can afford. If the creek runs dry, we can figure out a different approach to getting water, such as buying bottled water or hiring a tanker to get water from a source at a distance and bringing it to where it is needed.

Oil limits are a kind of limit we often hear concerns about. Being able to drill oil wells at all and refine the oil into products of many kinds requires a complex economy, one that can educate engineers working in oil extraction and can build paved roads, pipelines, and refineries. The economy needs to be able to produce high tech equipment using raw materials from around the world. Thus, there must be an operating financial system that allows buyers at one end of the globe to purchase materials from the other end of the globe, and sellers to have the confidence that they will be paid for contracted products.

If a company wants to extract oil, it can almost always figure out places where this theoretically can be done. If a company can gather together all of the things it needs—trained workers; enough high tech extraction equipment of the right type; enough pollution-fighting equipment, to prevent oil spills and spills of radioactive water; and leases on land where drilling is to done, then, in theory, oil can be extracted.

In fact, the big issue is whether the extraction can be done in a sufficiently cost-effective manner that the whole economic system can be supported. Even if the cost of extraction “looks” fairly cheap, such as in Iraq, or in some of the older installations elsewhere in the Middle East, the vast majority of the revenue that is generated from oil extraction (often as much as 90%) goes to support the government of the country where the oil is extracted (Rogers, 2014). This revenue is needed for many purposes: desalination plants to provide water for the people; food subsidies, especially when oil prices are high because food prices will tend to be high as well; new ports and other infrastructure; and revenue to provide jobs and programs to pacify the people so that the government will not be overtaken by revolt.

A major issue at this point is the fact that most of the easy-to-extract oil is already under development, so companies that want to develop new projects need to move on to locations that are more difficult and expensive to extract (Bloomberg, 2007). According to oil industry consultant Steven Kopits, the cost of one major category of oil production expenses increased by an average of 10.9% per year between 1999 and 2013. In the period between 1985 and 1999, these same expenses increased by 0.9% per year (Kopits, 2014) (Tverberg, 2014).

When production costs are higher, someone loses out. It is as if the economy is becoming less and less efficient. It takes more people, more energy products, and more equipment to produce the same amount of oil. This leaves fewer people and less energy products to produce the goods and services that people really want, putting a squeeze on the economy. The economy tends to grow less quickly because part of the goods and services available are being channeled into less productive operations.

The situation of the economy becoming less and less efficient at producing oil is called diminishing returns. A similar problem exists with fresh water in many parts of the world. We can extract more fresh water, but it takes deeper wells. Or we have to ship in water from a distance, using a pipeline or trucks. Or we need to use desalination. Water is still available but at a higher per-gallon price.

Diminishing Returns is Like a Treadmill that Runs Faster and Faster

There are many ways we can reach diminishing returns. One easy-to-illustrate example relates to mining metals. We usually extract the cheapest-to-extract ores first. An important cost consideration is how much waste material is mixed in with the metal we really want–this determines the ore “grade.” As we are gradually forced to move from high-grade ores to lower-grade ores, the amount of waste material grows slowly at first, then dramatically increases (Figure 2).

Figure 2. Waste product to produce 100 units of metal

We know that this kind of effect is happening right now. For example, the SRSrocco Report indicates that between 2005 and 2012, diesel consumption per ounce of refined gold has doubled from 12.7 gallons per ounce to 25.8 gallons per ounce, based on the indications of the top five companies. Such a pattern suggests that if we want to extract more gold, the price of gold will need to rise.

The economy is affected by all of the types of diminishing returns that are taking place (oil, fresh water, several kinds of metals, and others). Even attempting to substitute “renewables” for nuclear and fossil fuels electricity production acts as a type of diminishing returns, if such substitution raises the cost of electricity production, as it seems to in Germany and Spain.

If the total extent of diminishing returns is not very great, increased efficiency and substitution can act as workarounds. But if the combined effect becomes too great, diminishing returns acts as a drag on the economy.

Oil Increases are Already Higher than the Economy Can Comfortably Absorb

For oil, we can estimate the historical impact of increased efficiency and substitution by looking at the historical relationship between growth in GDP and growth in oil consumption. Based on the worldwide data underlying Figure 1, this has averaged 2.0% to 2.4% per year since 1970, depending on the period studied. Occasional years have exceeded 3%.

The problem in recent years is that increases in the cost of oil production have been much higher than 2% to 3%. As mentioned previously, a major portion of oil extraction costs seem to be increasing at 10.9% per year. To make this comparable to inflation adjusted GDP increases, the 10.9% increase needs to be adjusted (1) to take out the portion related to “overall inflation” and (2) to adjust for likely lower inflation on the portion of oil production costs not included in Kopits’ calculation. Even if this is done, total oil extraction costs are probably still increasing by about 5% or 6% per year—higher than we have historically been able to make up.

According to Kopits, we are already reaching a point where oil limits are constraining OECD GDP growth by 1% to 2% per year (Kopits, 2014) (Tverberg, 2014). Efficiency gains aren’t happening fast enough to allow GDP to grow at the desired rate.

A major concern is that the treadmill of rising costs will speed up further in the future. If it is hard to keep up now, it will be even harder in the future. Also, the economy “adds together” the adverse effects of diminishing returns from many different sources—-higher electricity cost of production, higher metal cost of production, and the higher cost of oil production. The economy has to increasingly struggle because wages don’t rise to handle all of these increased costs.

As one might guess, when economies hit diminishing returns on resources that are important to the economy, the results aren’t very good. According to Joseph Tainter (1990), many of these economies have collapsed.

Why Haven’t Governments Told Us About these Difficulties?

The story outlined above is not an easy story to understand. It is possible that governments don’t fully understand today’s problems. It is easy to focus on one part of the story such as, “Shale oil extraction is rising in response to higher oil prices,” and miss the important rest of the story—the economy cannot really withstand high oil (and water and electricity and metals) prices. The economy tends to contract in response to a need to use so many resources in increasingly unproductive ways. We associate this contraction with recession.

We have many researchers looking at these issues. Unfortunately, most of these researchers are focused on one small portion of the story. Without understanding the full picture, it is easy to draw invalid conclusions. For example, it is easy to get the idea that we have more time for substitution than we really have. Financial systems are fragile. The world financial system almost failed in 2008, after oil prices spiked. We are still in very worrisome territory, with many countries continuing a policy of Quantitative Easing and ultra low interest rates. We may have only a few months or a year or two left for substitution, not 40 or 50 years, as some seem to assume.

Of course, if governments do understand the worrisome nature of our current situation, they may not want to say anything. It could make the situation worse, if citizens start a “run on the banks.”

The other side of the issue is that if governments and citizens don’t understand the full story, they may inadvertently do things that will make the situation worse. They certainly won’t be looking long and hard at what collapse might look like in the current context and what can be done to mitigate its impacts.

Houston, We’ve Got a Problem…

Off the keyboard of Gail Tverberg

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Published on Our Finite World on March  11, 2014

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Discuss this article at the Economics Table inside the Diner

Reaching Debt Limits: With or without China’s problems, we have a problem

Credit Problems are a Very Current Issue

In the past several years, the engine of world’s growth has been China. China’s growth has been fueled by debt. China now seems to be running into difficulties with its industrial growth, and its difficulty with industrial growth indirectly leads to debt problems. A Platt’s video talks about China’s demand for oil increasing by only 2.5% in 2013, but this increase being driven by rising gasoline demand. Diesel use, which tracks with industrial use, seems to be approximately flat.

The UK Telegraph reports, “Markets hold breath as China’s shadow banking grinds to a halt.” According to that article,

A slew of shockingly weak data from China and Japan has led to a sharp sell-off in Asian stock markets and the biggest one-day crash in iron ore prices since the Lehman crisis, calling into question the strength of the global recovery.

The Shanghai Composite index of stocks fell below the key level of 2,000 after investors reacted with shock to an 18pc slump in Chinese exports in February and to signs that credit is wilting again. Iron ore fell 8.3pc.

Fresh loans in China’s shadow banking system evaporated to almost nothing from $160bn in January, suggesting the clampdown on the $8 trillion sector is biting hard.

Many recent reports have talked about the huge growth in China’s debt in recent years, much of it outside usual banking channels. One such report is this video called How China Fooled the World with Robert Peston.

Why Promises (and Debt) are Critical to the Economy

Without promises, it is hard to get anyone to do anything that they really don’t want to do. Think about training your dog. The way you usually do this training is with “doggie treats” to reward good behavior. Rewards for desired behavior are equally critical to the economy. An employer pays wages to an employee (a promise of pay for work performed).

It is possible to build a house or a store, stick by stick, as a person accumulates enough funds from other endeavors, but the process is very slow. Usually, if this approach is used, those building homes or stores will provide all of the labor themselves, to try to match outgo with income. If debt were used, it might be possible to use skilled craftsmen. It might even be possible to take advantage of economies of scale and build several homes together in the same neighborhood, and sell them to individuals who could buy the homes using debt.

Adding debt has many advantages to an economy. With debt, a person can buy a new car or house without needing to save up funds. These purchases lead to additional workers being employed in building these new cars and homes, adding jobs. The value of existing homes tends to rise, if other people are available to afford them, thanks to cheap debt availability. Rising home prices allow citizens to take out home equity loans and buy something else, adding further possibility of more jobs. Availability of cheap debt also tends to make business activity that would otherwise be barely profitable, more profitable, encouraging more investment. GDP measures business activity, not whether the activity is paid for with debt, so rising debt levels tend to lead to more GDP.

Webs of Promises and Debt

As economies expand, they add more and more promises, and more and more formal debt. In high tech industries, supply lines using materials from around the world are needed. The promise made, formally or informally, is that if more of a supply is needed, it will be available, at the same or a similar price, in the quantity needed and in the timeframe needed. In order for this to happen, each supplier needs to have made many promises to many employees and many suppliers, so as to meet its commitments.

Governments are part of this web of promises and debt. Some of the promises made by governments constitute formal debt; some of the promises are guarantees relating to debt of other parties (such as nuclear power plants), or of the finances of banks or pensions plans. Some of a government’s promises are only implied promises, yet people depend on these implied promises. For example, there is an expectation that the government will continue to provide paved roads, and that it will continue to provide programs such as Social Security and Medicare. Because of the latter programs, citizens assume that they don’t need to save very much or have many children–the government will provide funding sufficient for their basic needs in later years, without additional action on their part.

What is the Limit to Debt?

While our system of debt has gone on for a very long time, we can’t expect it to continue in its current form forever. One thing that we don’t often think about is that our system or promises isn’t really backed by the way natural system we live in works. Our system of promises has a hidden agenda of growth. Nature doesn’t  have a similar agenda of growth. In the natural order, the amount of fresh water stays pretty much the same. In fact, aquifers may deplete if we over-use them. The amount of topsoil stays pretty much the same, unless we damage it or make it subject to erosion. The amount of wood available stays pretty constant, unless we over-use it.

Nature, instead of having an agenda of growth, operates with an agenda of diminishing returns with respect to many types of resources. As we attempt to produce more of a resource, the cost tends to rise. For example, we can extract more fresh water, if we will go to the expense of drilling deeper wells or using desalination, either of which is more expensive. We can extract more metals, if we use as our source lower grade ores, perhaps with more surface material covering the ore. We can get extract more oil, if we will go to the expense of digging deeper wells is less hospitable parts of the world. We can even use substitution, but that will likely be more expensive yet.

A major issue that most economists have missed is the fact that wages don’t rise in response to this higher cost of resource extraction. (I have shown a chart illustrating that this is true for oil prices.) If the higher cost simply arises from the fact that nature is putting more obstacles in our way, we end up spending more for, say, desalinated water than water from a local well, or more for gasoline than previously. Much of the cost goes into fuel that is burned, or building special purpose equipment (such as a desalination plant or offshore drilling rigs) that will degrade over time. Our system is, in effect, becoming less and less efficient, as it takes more resources and more of people’s time, to produce the same end product, measured in terms of barrels of oil or gallons of water. Even if there are additional salaries, they are often in a different country, around the globe.

At some point, the amount of products we can actually produce starts shrinking, because workers cannot afford the ever-more-expensive products or because some essential “ingredient” (such as fresh water, or oil, or an imported metal) is not available. Since we live in a finite world, we know that at some point such a situation must occur, even if  the shrinkage isn’t as soon as I show it in Figure 2 below.

Figure 1. Author's image of an expanding economy.

Figure 1. Author’s image of an expanding economy.

Figure 2. Author's image of declining economy.

Figure 2. Author’s image of declining economy.

The “catch” with debt is that we are in effect borrowing from the future. It is much easier to pay back debt with interest when the economy is growing than when the economy is shrinking.  When the economy is shrinking, there is less in the future to begin with. Repaying debt from this shrinking amount becomes a problem. Even promises that aren’t formally debt, such as most Social Security payments, Medicare, and future road maintenance become a problem. With fewer goods available in total, citizens on average become poorer.

Governments depend on tax revenue from citizens, so they become poorer as well–perhaps even more quickly than the individual citizens who live in their country. It is in situations like this that richer parts of countries decide to secede, leading to country break-ups. Or the central government may fail, as in the Former Soviet Union.

Which Promises are Least Affected?

Some promises are very close in time; others involve many years of delay. For example, if I bring food I grew to a farmers’ market, and the operator of the market gives me credit that allows me to take home some other goods that someone else has brought, there are some aspects of credit involved, but it is very short term credit. I am being allowed to “run a tab” with credit for things I brought, and this payment is being used to purchase other goods, or perhaps even services. Perhaps someone else would offer some of their labor in putting together the farmers’ market, or in working in a garden, in return for getting some of the produce.

As I see it, such short term promises are not really a problem. Such credit arrangements have been used for thousands of years (Graeber, 2012). They don’t depend on long supply lines, around the world, that are subject to disruption. They also don’t depend on future events–for example, they don’t depend on buyers being available to purchase goods from a factory five or ten years from now. Thus, local supply chains among people in close proximity seem likely to be available for the long term.

Long-Term Debt is Harder to Maintain

Debt which is long-term in nature, or provides promises extending into the future (even if they aren’t formally debt) are much harder to maintain. For example, if governments are poorer, they may need to cut back on programs citizens expect, such as paving roads, and funding for Social Security and Medicare.

Governments and economies are already being affected by the difficulty in maintaining long term debt. This is a big reasons why Quantitative Easing (QE) is being used to keep interest rates artificially low in the United States, Europe (including the UK and Switzerland), and Japan. If interest rates should rise, it seems likely that there would be far more defaults on bonds, and far more programs would need to be cut. Even with these measures, some borrowers near the bottom are already being adversely affected–for example, subprime loans were problems during the Great Recession. Also, many of the poorer countries, for example, Greece, Egypt, and the Ukraine, are already having debt problems.

Indirect Casualties of the Long-Term Debt Implosion

The problem with debt defaults is that they tend to spread. If one major country has difficulty, banks of  many other countries are likely be to affected, because many banks will hold the debt of the defaulting country. (This may not be as true with China, but there are no doubt indirect links to other economies.) Banks are thinly capitalized. If a government tries to prop up the banks in its country, it is likely to be drawn into the debt default mess. Insurance companies and pension plans may also be affected by the debt defaults.

In such a situation of debt defaults spreading from country to country, interest rates can be expected to shift suddenly, causing financial difficulty for those issuing derivatives. There may also be liquidity problems in dealing with these sudden changes. As a result, banks issuing derivatives may need to be bailed out.

There may also be a sudden loss of credit availability, or much higher interest rates, as banks issuing loans become more cautious. In fact, if problems are severe enough, some banks may be closed altogether.

With less credit available, prices of commodities can be expected to drop dramatically. For example, during the credit crisis in the second half of 2008, oil prices dropped to the low $30s per barrel. It was not until after  QE was started in November 2008 that oil prices started to rise again. This time, central banks are already using QE to try to fix the situation. It is not clear that they can do much more, so the situation would seem to have the potential to spiral out of control.

Without credit availability, the prices of most stocks are likely to drop dramatically. In part, this is because without credit availability, it is not clear that the companies listed in the stock market can actually produce very much. Even if the particular company does not need credit, it is likely that some of the businesses on which it depends for supplies will have credit problems, and not be able to provide needed supplies. Also, with less credit availability, potential buyers of shares of stock may not be about to get the credit they need to purchase shares of stock. As a result of the credit problems in 2008, the Dow Jones Industrial Average dropped to $6,547 on March 9, 2009.

Furthermore, lack of credit availability tends to lead to low selling prices for commodities, making production of these commodities unprofitable. Production of these commodities may not drop off immediately, but will in time unless the credit situation is quickly turned around.

Can’t governments simply declare a debt jubilee for all debt, and start over again?

Not that I can see. Declaring a debt jubilee is, in effect, saying, “We have decided to renege on our past promises. In fact, we are letting others renege on their promises as well.” This means that insurance companies, pension plans, and banks will all be in very poor financial situation. Many who depend on pensions will find their monthly checks cut off as well. In fact, businesses without credit availability are likely to lay off workers.

If it is possible to start over, it will need to be on a much more restricted basis. Everyone will be poorer, so there won’t be much of a market for expensive new cars and homes. Instead, most demand will be for will be the basics–food, water, clothing, and fuel for heat. Unfortunately, it is doubtful that prices will be high enough, or the chains of supply robust enough, to again produce fossil fuels in quantity. Without fossil fuels, what we think of as renewables will disappear from availability quickly as well. For example, hydroelectric, wind and solar PV all work as parts of a system. If the billing system is unavailable because banks are closed, or if the transmission system is in need of repair because lines are down and the diesel fuel needed to make repairs is unavailable, electricity may not be available.

As indicated above, demand will be primarily for basics such as food, water, clothing, and fuel for cooking and heating. It will still be possible to use local supply chains, even if long distance supply chains don’t really work well. The challenge will be trying to shift modes of production to new approaches in which goods can be made locally. A major challenge will be training potential farmers, getting needed equipment for them, and transferring land ownership in ways that will allow food to be produced in ways that do not depend on fossil fuels.

Belief in credit will be severely damaged by a debt jubilee. The place where credit will be easy to reestablish will be in places where everyone knows everyone else, and supply lines are short. Debt will mostly be of the nature of “running a tab” when one type of good is exchanged for another. Over time, there may be some long-term trade re-established, but it is likely to be much more limited in scope than what we know today.

Conclusion

Long-term debt tends to work much better in a period of economic growth, than in a period of contraction. Reinhart and Rogoff unexpectedly discovered this point in their 2008 paper “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises.” They remark “It is notable that the non-defaulters, by and large, are all hugely successful growth stories.”

Slowing growth in China is likely to mean that world economic growth is slowing. This will add to stresses, making failure of the system more likely than it otherwise would be. We can cross our fingers and hope that Janet Yellen and other central bankers can figure out yet other ways to keep the system together for a while longer.

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