Peak Oil and the Financial Markets: A Forecast for 2008
Posted by Gail the Actuary on January 9, 2008 - 11:32am
At this time of year, we read many financial forecasts for the year ahead. Nearly all of these are written with the "filter" assumption of infinite growth. "Oil production problems are a temporary issue; after a short dip, the economy is likely to continue growing rapidly again. We may have a short recession, but we will soon be back to business as usual." Etc.
I think this filter is fundamentally in error, and leads to a mistaken impression with respect to where the world is headed. The world is changing in a very major way. Oil is in short supply, and this shortage is likely to get larger in the future. The pressure of short supply and rising prices adds a systematic bias that the financial community is not recognizing. This bias has as its basis the fact that it is becoming more and more difficult for both people and businesses to pay back loans, because of the rising costs of oil and food. This situation cannot be expected to go away. In fact, it is certain to get worse in years ahead, as oil supplies become tighter.
Besides the systematic bias, there is also a systemic risk, arising from the interconnectedness of all of the parts of the economy. This was well described in a post a few days ago called The Failure of Networked Systems. One of the issues in systemic risk relates to the financial system itself. If one party in the financial system fails, it increases the likelihood that other parties in the economic system will fail as well.
Another aspect of systemic risk is the close ties of the financial system to the rest of the economy. One example is the higher oil and food prices mentioned above that lead to a systematic bias toward higher defaults. Another is the fact that the lack of oil can be expected to impede economic growth, making the infinite growth model underlying the current economic system less sustainable, based on the economic model of Robert Ayres and Benjamin Warr. Another linkage is that of oil with ethanol. Higher oil prices leads to increased pressure to produce more ethanol, which further raises food prices, as demonstrated by Stuart Staniford in Fermenting the Food Supply.
(More below the fold)
Background
First, some definitions to go with the introduction, above.
Systematic bias occurs in a system when a process favors a particular outcome. Instead of errors being random, they are consistent and repeatable. One example might be a thermometer that consistently reads high. In the economy, systematic bias occurs when loans experience a greater and greater tendency toward defaults, because of changes in the system (rising oil prices) since the time when the probability of default was originally estimated. As another example, rising oil prices can also cause profits of individual companies to grow more slowly than expected (relative to base period experience) because of a contraction in general economic growth.
Systemic risk is risk relating to the interconnectedness of the system. A push on one part of the system will lead to a pull on another part of the system, leading to unanticipated failures. As an example, the failure of one bank may lead to other banks failing, because of counter party risk. There is significant reason to believe that the interconnectedness of the system is increasing over time, as food becomes used as a fuel, and as financial products become more complex. See The Failure of Networked Systems.
The financial community has designed many models. Some of these are used by "quants" in pricing the newer sliced and diced financial products. Others are used by insurance companies in pricing the risk of defaults on bonds and on mortgages.
The assumption that is made in these models is that historic experience can be used, with only minor adjustments, as a guide for pricing current products. This approach fails to recognize the greater risk now entering the system, due to systematic bias because of rising oil prices, and due to greater systemic risk, because of greater interconnectedness.
One way of describing these models is to say that they assume that defaults are "independent events" -- that is, there is no systemwide bias that would cause more and more defaults. This assumption of independence keeps insurance prices low, and makes the slicing and dicing of packaged securities work. Clearly, with the systematic bias and systemic risk that is now infecting the financial system, these assumptions are no longer valid.
Closely related to the assumption that events are independent is the assumption that distributions are "normal" - that is that they follow the Gaussian distribution. Benoit Mandelbrot has shown in The (Mis)Behavior of Markets that the actual tails of distributions are much "fatter" than implied by the Gaussian distribution. The bias introduced by the oil situation makes the normal distribution even less appropriate. For example, with higher oil prices, the number of defaults on bonds will be much greater than would be predicted, if one simply assumes that a normal distribution applied to past experience will be predictive of future experience.
If one looks at financial theories like the Capital Asset Pricing Model and the Black and Scholes Option Pricing Model, one discovers that they assume normal distributions and statistical independence. These models were not quite right before, because the underlying distributions are not really normal, as shown by Mandelbrot. Now that systematic bias and systemic risk are playing greater roles, the predictive value they had previously can be expected to further decline.
What's ahead?
I don't think we can know precisely. In the material that follows, I give my views as to how the financial situation may unfold in the year ahead, taking into account the issues discussed above.
1. Many monoline bond insurers will be downgraded in 2008, and some may fail.
Bond and mortgage insurers are likely to have difficulty because these coverages are written with the assumption that past default experience can be used as a guide to needed prices. If there is a systematic bias toward higher defaults, as there is today, prices will be too low.
Once bond insurers lose their AAA ratings, their coverage will be of little value. Rating agencies will rate the bonds based on the financial standing of the organization issuing the bond, instead of imputing the insurer's credit rating to the bond. This could mean widespread downgrades of bonds.
Warren Buffet is starting a new bond insurer. Even if this insurer stays strictly with municipal bonds and charges higher rates, I question the long-term viability of the company. It will be difficult to charge a price in 2008 that will reflect the real risk of default five or ten years from now, when oil supply will be much tighter than today.
2. More and more people influential in financial markets will begin to recognize peak oil.
We have already seen how oil markets act differently, once the sellers of oil realize that peak oil is not far away. Sellers of oil become more aggressive and demand more favorable terms. They realize that they have leverage, and begin to use it.
In 2008, it seems likely to me that financial markets will begin to recognize peak oil as well. Leading economists are now speaking openly about peak oil. On December 15, 2007, the WSJ quoted Alan Greenspan as saying that oil supply peaked lower and sooner than had been contemplated earlier. The Toronto Star quoted Jeff Rubin, chief economist of CIBC World Markets, as saying, "I just don't think we're going to see increases in conventional oil production any more. I think (peak oil) is here." With economists like Greenspan and Rubin talking openly about peak oil, it seems likely that some financial decision-makers will start thinking about the implications of peak oil for loans and other financial products. This seems especially likely if oil production remains relatively flat or declines in 2008.
3. Long term loans, including those for energy companies, are likely to become less available as awareness of peak oil rises.
Once financial markets begin to recognize peak oil, I expect lenders will be more wary of long-term loans, because of uncertainty that these loans will be repaid once world oil production has begun to decline. Interest rates are likely to rise. Marginal borrowers may not be able to find credit at all. All of these effects are likely to make the gridlock in loans progressively greater over time.
The Fed may attempt to lower interest rates, but as defaults grow and lenders become more aware of peak oil, the risk margin for defaults included in interest rates will tend to rise. Thus, the actual interest rates charged to consumers and businesses may not decline, even when the Fed lowers target interest rates.
I don't expect the recognition of peak oil in financial markets to be complete in 2008, especially if a credit crisis causes oil prices to drop. Once peak oil is fully recognized though (most likely when its effects are very apparent, and mitigation is clearly not working), long-term debt may become unavailable, even for governments.
4. There is likely to be a serious recession in 2008, deepening as the year goes on.
Oil and food prices are likely to continue to rise, leaving consumers with less to spend on loan payments and consumer purchases. Interest rate resets will further exacerbate mortgage problems. Defaults on mortgages will increase, and there will be increasing problems on loans of all types--including student loans, credit card debt, auto loans, commercial mortgages, and other commercial loans. Eventually, problems will even spread to state and municipal bonds.
More and more businesses will encounter financial difficulties, leading to defaults on loans. The failing businesses will lay off workers.
With declining home values, tax revenues for municipalities are likely to fall. This may lead to cutbacks in spending, furthering the economic contraction. It also increases the likelihood of defaults on municipal bonds.
5. At least several large banks will fail.
With bond and mortgage insurance downgrades and failures, and more and more defaults on loans of all types, it seems likely that many banks will get into financial difficulty. The FDIC and other government agencies will attempt to solve these problems, but it is not clear that they will be successful. One approach may be to relax capital requirements. Another may be to find a temporary way of valuing loans that does not fully reflect the extent of their problems.
At some point, the FDIC is likely to have to make good on its promised insurance coverage ($100,000 on most accounts, $250,000 on IRA accounts). The FDIC collects insurance premiums from the banks it insures, but if many banks fail, the FDIC does not have enough funds in its account to reimburse bank depositors at the guaranteed level.
I expect that some way around this difficulty will be found--for example, the FDIC may be allowed to borrow an unlimited amount with US government backing. This approach requires willing buyers for the new debt. Another approach might be to use monetary policy to make certain that banks have enough funds to cover withdrawals, even though they appear bankrupt. Either approach would likely be inflationary.
6. The amount of debt available to consumers is likely to decline.
To date, most of the decline in the availability of consumer debt has been in the area of mortgage loans. I expect that during 2008, the availability of other consumer debt will shrink as well. Part of the decline in debt availability is likely to be the direct result of rising default rates. The weakened financial condition of banks is also likely to reduce credit availability. With falling capital, banks will be less able to make loans and may tighten standards on loans they do make. Consumers with credit cards may find their debt limits rolled back. Home equity loan limits may also be lowered.
There is also a possibility that a large bank that issues many credit cards will get into financial difficulty. If this happens, it is not clear that a new lender will be found to issue credit cards to all of the previous card holders. FDIC insurance relates to deposits, not to credit availability, so there is no guarantee of a new credit card. Some individuals, particularly those with poor credit ratings, may find themselves being required to pay off old credit card debt, without any new source of credit.
7. Fannie Mae and Freddie Mac may need government assistance.
With rising default rates, the troubles of Fannie Mae and Freddie Mac are likely to continue. Both are likely to find it difficult to maintain adequate capital, and may need some sort of government intervention, if only to allow them to operate with less capital.
8. A new class of homes -- those "never to be sold" -- will emerge.
In 2008, the pool of buyers for homes is likely to become smaller, in part because of the shift away from the lax lending standards of the recent past. If prospective homeowners are required to prove adequate income to afford the homes they are purchasing, many people will qualify for a much smaller home, or none at all.
As peak oil becomes more apparent, this will further reduce the number of prospective homeowners. One reason is that people will be less able to travel to a summer or winter home, so will need only a single residence, instead of both a summer and winter residence. Another reason is with the high cost of heating oil, gasoline and food, there will be a greater incentive for extended families to live together.
The problem with selling the current number of homes to a progressively smaller number of prospective buyers is that some homes will not find buyers in any reasonable time frame. Some will eventually be torn down, often after being vandalized. As long as mortgages remain readily available, there is a fairly easy way around this difficulty. A prospective seller can take out the maximum mortgage available on a property, before putting it up for sale. Then, if no buyer can be found, the seller can cut his/her losses by mailing the keys to the mortgage company.
I expect that in the next year or two, mortgage companies will begin to realize that homeowners can use mortgages to cut their losses when selling a home. Because of this, I expect that mortgage companies will begin requiring at least a 20% down payment that on home purchases. Those refinancing homes will be limited to a total loan of 80% of the home's value. These practices are likely to further reduce the pool of prospective homeowners, making the sale of homes even more difficult.
9. Politicians will continue to make attempts to help homeowners, and perhaps other types of borrowers.
With rising interest rates, a declining economy, and tighter lending standards, it is unlikely that all the homes that have been built can remain occupied unless the government somehow allows people to remain in homes they cannot afford. If homes are remain unoccupied, there is of course the chance that they will be vandalized, and high-value materials removed.
Government "help" may even spread to other types of loans, such as college loans that cannot be repaid, due to unemployment. All of this government intervention is likely to make purchasers of debt securities very unhappy.
10. The amount of structured (sliced and diced) debt issued is likely to drop to close to zero.
During 2008, it will become increasingly clear that structured debt has too many problems to be a viable method for transferring debt from the issuer to multiple buyers. The mis-pricing noted at the beginning of this article is likely to become more apparent during 2008. This will add to the structured debt's other problems, including lack of front-end underwriting, optimistic bond ratings, high system costs, and reduced yields due to government intervention to help borrowers.
11. Besides banks, many other players in financial markets are likely to find themselves in financial difficulty in 2008.
Besides banks, financial markets include hedge funds, money market funds, insurance companies, pension funds and many special-purpose funds. I would expect difficulties to spread to many of these organizations, for a variety of reasons:
• The value of bonds and of structured debt held by these organizations is likely to decline, as more businesses and individuals have financial difficulty. Also, sales of securities during 2008 will help clarify the true value of some securities. Organizations will be forced to reflect market value, as it becomes clear.
• Credit ratings of many securities are likely to decline, because of financial difficulties of the companies issuing bond insurance. (See Point 1 above.) Insurance companies in particular are likely to find that some bonds no longer meets regulatory requirements. These will need to be sold, often at fire sale prices.
• Sellers of Credit Default Swaps (CDS) are likely to experience large losses. CDSs act like insurance policies against bond defaults. Organizations issuing CDSs have not charged enough to cover the type of systemic increase in risk that is now occurring. Organizations issuing CDSs are likely to find themselves with large losses. Purchasers of CDSs will often find that sellers are not able to make good on their promises.
• Debt is likely to be less available, or available at higher interest rates. Organizations using leverage, such as hedge funds, may find it difficult to maintain the same level of debt, and may even be forced to sell some of their assets, because of the lower availability of credit.
If some of these organizations fail, the extent to which government intervention can be expected is not clear. There is no particular reason to expect government intervention for hedge funds or money market funds. Pension funds and insurance companies have some types of guarantees, but the programs are not set up to handle multiple large failures.
12. The value of the dollar will fall relative to some currencies, causing the relative price of oil to rise.
I expect that Saudi Arabia and other oil-producing Middle Eastern countries will revalue their currencies relative to the dollar, causing the value of the dollar to decline. Because of this revaluation, the cost of oil will rise, despite the sharp economic downturn.
It is not as clear to me how the US dollar will fare relative to other currencies. Europe, Japan, and Canada are likely to have economic difficulties of their own relating to peak oil and to the falling value of homes. The shift among these currencies may be relatively smaller. I would expect the value of the dollar to fall relative to Chinese currency, given China's ability to use coal to produce exports.
13. The stock market probably will decline during 2008.
The combination of a recession and higher interest rates on corporate debt seems likely to result in a serious downturn in stock market values. Financial services companies particularly are likely to do poorly. There is still some possibility of an increase in stock market values, however, because of the large amount of "recycled oil" payments and the inflationary impact of additional governmental debt and lax monetary policy.
14. Prices are likely to rise in 2008 for food and energy products. Prices may decline for homes and non-essential goods and services.
Americans will find that more and more of their income is devoted to food and energy, leaving less for non-essential goods and services and debt payments. This same situation will exist in many countries around the world.
15. There is a chance that some type of discontinuity will make financial conditions suddenly take a turn for the worse.
Will the "wheels come off the economy"? I really don't know.
I think that there are a few things that may help prevent a major disruption during 2008.
First, things tend to happen fairly slowly. The economy has a fairly large amount of momentum, and this will tend to keep things at the current level. It will take a period of months for bond ratings to be lowered, and for this information to filter back to the balance sheets of banks and insurance companies. If some of the bond and mortgage insurers are actually insolvent, this will take even longer to sort out. Some of the potential problems I have alluded to may not appear until 2009 or later.
Second, regulators of various types have the power to change the rules as they go along. Regulators have the ability to overlook non-performing loans, and to lower capital requirements. They can lend money to banks, using as collateral securities most people would consider to be junk. They can create at least a certain amount of new money. In some cases, congressional approval may be required for these approaches, but if the alternative is banks and other businesses failing, congress is likely to go along with any proposed bailout plan.
Third, in order to keep things going, what is needed is to keep cash inputs and outputs working. To a significant extent, the problems we are having are balance sheet problems -- values of assets and values of liabilities. I expect to see more of what the Pension Benefit Guaranty Corporation is currently doing - paying benefits, even though liabilities are greater than assets. It may be possible to delay facing the truth a bit longer by optimistically valuing assets, using high discount rates on liabilities, and focusing on cash needed for today's transactions.
Eventually, it seems like something will happen to stop the parade. One possibility is that the United States will no longer find buyers for all the debt it issues. This will probably not happen until there is a general recognition of peak oil. Another is that financial system failures cascade in such a way that it is not possible to continue propping up the system. Another is that hyperinflation will take over. While one of these, or something else adverse may happen, I don't know that such an event will necessarily happen very soon.
Why is information about the financial system important to oil companies, and other companies in the energy field?
Having a functioning financial system is very important from the point of view of our oil production and distribution system. Oil companies need to be able to pay their workers. They need to be able to borrow money to start new projects. They need be able to make contracts with other companies for necessary services, like hiring drilling rigs. They need to be able to purchase oil from overseas, and to be able to pay for it using transaction methods that are not too disrupted. All of these may be problems, if there are too many bank failures, or other serious issues with the financial system. This has the potential to create a negative feedback mechanism which will further limit oil supply.
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Home Prices Must Fall Far to Be In Sync With Rents
The original article (as well as the data) can be found here:
http://morris.marginalq.com/
According to this model, it could take us up to 5 years to come back from this housing indigestion!
The rent-buy spread is out of whack for sure. Around here (close-in to transit and walkable community) they are building apartments in anticipation of rents remaining strong or increasing.
For a list of projects under construction/just approved see
http://www.arlingtonvirginiausa.com/index.cfm/5231
This is in a pretty small area (Arlington is the smallest county in the US I think)
I am interested in this because lots of people with money are making long term investments here and banks are lending here - right now. So, either everybody is making foolish decisions or it tells a different story at least in this local area.
The assumption is probably that the US government will continue BAU, and therefore even if the price of oil stays where it is (as unlikely as we can see that assumption may be), the local economy will continue running.
Conventional wisdom.
House prices are twice what they should be, given rents.
Therefor house prices will fall by half.
Unconventional wisdom.
What if rents fall? We could be forced by a falling dollar to go into import substitution mode and essentially require people to move to primary and secondary production areas like Michigan and Wyoming to have well paying jobs, the way we required them to leave Michigan and Wyoming and move to the metrocoastal areas during the service economy.
So rents could fall in the metrocoastal areas, leading house prices to adjuct not just down to the current rent, but to the future, lower rent.
House prices after inflation could go all the way back to the early sixties, when short order cooks in diners could afford to buy a starter house for a small family with a ten percent down payment and a twenty year term.
Happy Days Are Here Again, at least for short order cook type people. If you've got money that is invested in housing, or offices, or retail, or whatever in a metrocoastal environment, you could be in for a world of hurt. Some short order cook's family could be living in your house while you are living in his family's apartment.
Ahh but your assuming wages will remain high. They probably will fall as well. Given this you probably will see more housing broken up into apartments as happened to the large homes built in the 1800-1920 boom period. And yes we had a 70 year boom once before. During the first boom expansion into the west and land wealth where the primary driving force. The fairly low density of the suburban housing could probably be rectified with additional infill housing and extensions. Many homes could be converted to small businesses. I don't think you will see happy days but a demographic reversal the wealthy will move closer to work/downtown instead of paying high gas prices. The poor will be relegated to slums outside the cities. This is the demographics of basically all major metropolitan areas in the third world.
The problem is the McMansions are simply not worth maintaining and rents will be following real wages down.
Yes. Those ratios in the graph are so low they must be comparing dissimilar properties. You have to compare apples vs apples. For example the rent on a 3/2 1500 sq ft SFR in a good neighborhood versus the price of same. For prospective landlords, normal property pricing gives you a gross annual ROI of 10% to 12%. You need this much cash flow to pay for the property manager, taxes, insurance, and maintenance and still have a return better than bonds to compensate for the risk and worry of managing property. I find the misleading suggestion that landlords have never earned over 6% annual gross ROI in the last 48 years absurd in the extreme.
The problem since 2002 has been that rental property purchases became a Ponzi scheme driven by speculative greed. Stupid people bought properties that were "negatively geared". By this I mean that the rental income didn't even cover the costs of holding the property. In extreme cases, the rental income didn't even pay the taxes and insurance, much less provide any return on capital (if purchased with cash) or pay the mortgage (if purchased with debt, which is much more common). The whole business plan devolved into hoping to quickly flip the properties for a capital gain. Well, now the music has stopped.
So when should a renter stop renting and buy? Buying makes sense if one has adequate assets or a secure stable income AND the neighborhood is not deteriorating, AND one plans to live there for several years AND the cost of purchase is less than 120 months rent. These conditions are not met in most parts of the western world at the moment. I am currently renting a 2000 sq ft 4/2 new brick SFR in a good walkable neighborhood of New Zealand for USD 1300/month. If I wanted to buy the house, the price would be 320 months rent. The price needs to fall over 60% before buying makes any economic sense. Of note, this is the exact inverse of the 150% house price appreciation over the last 4 years. The entire easy credit driven property price bubble will be reversed.
The same logic applies to prospective landlords. In New Zealand, risk free six month government bonds pay 7.5%. Bank CDs pay over 9% (although banks can fail). There will be absolutely no reason for investors to purchase rental properties until the annual gross rental income is well over 10% ROI. The nimrod investors sitting on negatively geared properties with sub 4% yields will be unable to unload these albatrosses for what they paid for them. Couldn't happen to nicer people.
My only worry is having to move if the bank forecloses on my Donald Trump wannabe landlord. Then I would get a new rental house from another insolvent fracked borrower/failed flipper landlord, another possible foreclosure, rinse and repeat. Well that is still better than buying and taking a capital loss of USD 75,000 every year for the next four years.
Hey Micro,
Thanks for this clear headed strategy.
A young colleague of mine is now in the unenviable position of deciding whether to risk his entire savings in the purchase of his first house. However his pre approved credit standing of last year no longer qualifies him since this year Michigan real estate is now considered a declining market by lending institutions.
After only a year on the job, producing 20% of the down payment, on top of student loans, is quite a tall order.
I never give financial advice since I can barely manage my own but I can show him your excellent analysis guilt free!
Thanks too to Gail for her incisive forecast.
It takes more than a bit of courage to offer, in uncertain times, specific views of the future.
Nicely put, Microhydro.
However, you are comparing rental yields of less than 4% with NZ bond rates of 7.5%. Let's say you can get 8% at a decent NZ bank. That's today's rate. What's it likely to be in 2012?
Gail is suggesting that banks will become more and more risk adverse, and thus presumablly will also being offering higher interest rates in order to attract cash to shore up reserves.
I recall that in Australia in the early 90s you could get 12% on a term deposit. Suppose those days come around again? If your choice is between 12% interest from a bank or buying a house and then trying to find good tennants in the middle of a depression, you are probably going to want a 12%-15% gross rental yield. Which would suggest house prices at a quarter of today's level.
To those who say it can't happen - look at Japan. A country giving a good impersonation of a market that will stay dead for a generation.
I think you also have the issue of the empty or abandoned homes. I think we are already seeing stories of people taking up residence in them. Poor folks who cannot afford the rent may be able to drop out of the rent-paying system.
Well, I hate to burst *your* bubble, while the housing bubble fails to bust, meaning it's only fissling out a little air..
The above chart, in and of itself shows NOTHING. Sorry - instead, it has to be compared to interest rates. Just like stock valuation is a function of what one can get in interest on the market...
1st, interest rates:
Does the curve seem familiar??
2nd, let's superimpose interest with rent returns:
In order to try to figure out what "normal" is, let's say that interest rates and rents were "normal" during the middle of the 1990s and superimpose the two graphs again:
Conclusion: Housing in America is NOT that much overpriced. Falling rent rates (and rising house prices) are much a result of the semi price deflationary environment we are in.
Cheers, Dom
ps. The scenario which Gale is presenting WILL NOT happen in 2008. Bubbles will only burst, once liquidity dries up. Does that look like it has happened recently?
Guys, please read Clif
And weep at how wrong you are.
Dom, please read Mish,
Money Supply Trends Are Deflationary
and see how wrong you are.
had read it, wasn't convinced.
Oddly enough, Clif failed to bring tears to my eyes. Oh well, you can lead a horse to water, and all that.
:-)
I've been following the argumentation of the bears since long before the height of the dot.com boom. Since 2003 I've been following the real estate bubble. Told my brother to sell his apt. in DC after doubling price in just two years WAY too early. But that's no problem, cause you can hardly ever catch the peak of any bubble.
Wondered with Thurow SIX YEARS AGO, when the American house of cards (deficite spending, zero savings, etc..) is going
to crash and burn. Now I know why America's deficite spending, etc.. will continue to work for a good while !!!
Found McKillop 4 years ago - he said price rises in oil are GOOD for the overall economy (where there are most certainly losers). And what has happen in the last 4 years???
Peak Oil will be a real problem for America and the world. But not until production fall more than 1-2% per year. My analysis goes deap and can hardly be explained on the quick.
But my conclusion is: America's problems *probably* won't really start for another couple of years. Comparing now to the 1970s, we haven't even reached 1973, let alone the recesion of 1980..
Cheers from Munich,
Dom
McKillop said that within limits higher oil prices are GOOD for the overall economy. I don't have specific links, but as I recall his analysis led him to posit that around $100/bbl we would see the breaking point at which the benefits of higher price began to give away to the overall pressure that peak oil would exert on worldwide economy. Guess what???
I have never been impressed with Cliff Droke.
and if *I* recall correctly, his "within limits" had nothing to do with an absolute price, but with a shock or no shock. There has been no shock. Just price movement within a rising channel (left and came back in).
For me its obvious. High or rising resource prices make money flow - first to those who have the resources, but then to all the countries in the way of the flowing money. The end of the river is the US once again. The Euro-pond is not big enough to soak it all up yet, and that's why the Euro has been rising.
It is a ponzi game and will crash. But I think we're still a couple of years away. Unless, of course, there is some sort of shock. And I don't think this "housing bust" in slow motion is going to do the job - especially if the idea of bad valuation (see graphs above) doesn't stick. Rents are absolutely lower - but not relatively!!
No one said you have to like Clif.
But here's the point of Contrarian thinking: If the whole world is wining about the stock markets about to crash, and only a correction of 10% is in the game, then obvious the market does not agree with the "fear in the air". If everyone is saying it will fall, and it doesn't, then it will rise!
But this is only one very small part of the puzzle. After this decade, for instance, demographics are going to hit America like a sledge hammer! And like I'll say again and again, falling oil production of 1-2% will take a long time to do its damage. 4% (what I think will be after about 2015) will be another sledge hammer!
FWIW..
Greetings from Munich,
Dom
The problem arises when the cost of "investing" in a property is way beyond the income available. It appears that many of the creative mortgages involved fraud, and there is simply no way of paying back the borrowed money or intent to do so. Hence, the destruction of credit- deflation.
The rent/price ratio is fairly reliable as it adjusts for both price and wage inflation- of which there has been remarkably little.
...According to this model, it could take us up to 5 years to come back from this housing indigestion!
I would offer that since we are past peak, all Models of what it "Historically" (via charts, cycles, etc) are nearly completely worthless. I view peak oil as basically "The End of Growth" period.
There won't be a "Coming Back From" in this. Not for a long long while. Ever since the Financial Graphs with their various business cycles, ran into the Graphs of Post Peak Oil, ALL Traditional Financial graphs are suspect of a basic flaw of paradigms.
Post Peak, Finances will not work like Pre-peak finances.
Supply/demand paradigm for example.
I want to thank Nate Hagens for his contribution to this piece. He read earlier versions and provided valuable feedback.
Mucho kudos to you both.
Excellent synopsis. 8D
I agree. Good insights, Gail.
The Washington Post's economic writer (Pearlstein) has a suggestion for your #8 (Homes that will never be sold)
http://www.washingtonpost.com/wp-dyn/content/article/2008/01/08/AR200801...
I'm not sure if this is a good idea, but it is a very possible policy choice I think.
This would be a great time to convert overly-large urban single-family houses into 2-family, 3-family, or even multi-family houses. Not only are there lots of properties on the market at distressed prices, there are also lots of unemployed construction workers that would be very happy for the work.
The only problem with this is that it will increase even further the over-supply of houses.
I would agree with you, though, that this is the way to go, if we can pick houses that are in good locations (future jobs, transportation). Homes that are in bad locations may end up being torn down.
Another use for unneeded homes is to be retrofitted as small stores that people can walk to. This will leave many big box stores unneeded.
" Homes that are in bad locations may end up being torn down."
Or scavenged for supplies.
http://www.elpasotimes.com/living/ci_7866227
Would require zoning changes from single family to muti. and by-law changes for parking requirements , service levels for schools, EMS, etc. Expect NIMBY resistance from other owners as this would be perceived as lowering their values even more I suspect (though I do not agree)...
Zoning depends on the area, it is very different from one community to the next. I think that some people on this board are accustomed to living with very rigid zoning rules; it isn't that way everywhere. In my small town, the zoning rules are pretty lax, and there are whole counties nearby with no zoning at all.
When you get into the older areas of cities, typically you'll see more of a mix of permitted uses. It is in suburbia where you are most likely to find a very rigid zoning that would absolutely preclude the types of modifications I have suggested above.
My brother bought a coop just before an earlier downturn in the housing market. The local government decided that it was a great place to put section eight (welfare family types) into because they were new and the repair bills were small.
He mailed his keys back.
"Once financial markets begin to recognize peak oil,..."
Or once we see the tip of the iceberg...
I continue to believe that the current financial debacle began
with Katrina.
The assumption is that the starting point is now.
And, IMHO, the game began when the US went bankrupt in 1985 trying to
pay for VietNam and imports of oil from 1972 on.
We now have a Shadow Banking System with zero reserves.
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+Janua...
" ``Our modern shadow banking system craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever.''
Here Elaine and I have channeled the same Bill Gross article
with the same conclusions.
http://elainemeinelsupkis.typepad.com/money_matters/
"At every step, the people who create loans are removing themselves from the responsibility of making up the difference if the loan fails."
We're in a Depression now. We will not be told.
"Human Nature and False Reporting:
It will be in no ones best interest to factually report the reality of the decline of fossil fuels once it begins in earnest. Owners, producers, geologists, professional organizations, governments, corporations, retailers, the press — NONE will have any motivation to report reality.-perry arnett
I wouldn't go as far as you in describing our current situation, but I would agree that the balance of payments situation was a serious issue, even before our current mess. There were also serious issues with structured securities.
These are links to some of my earlier financial posts:
Economic Impact of Peak Oil Part 1: A Flashback
Economic Impact of Peak Oil Part 2: Our Current Situation
Economic Impact of Peak Oil Part 3: What's Ahead?
Part 2 is the post most relevant to our current situation.
The quality and clarity of the views expressed on The Oil Drum are simply astonishing. How this website attracts the quality of input it does just amazes me. There are so many wonderful minds slicing and dicing the consequences of Peak Oil, it's almost enough to give some hope. Thank you Gail, Matt and Nate!
I agree hugbo. It allows me to calculate my future much better.
This site is so much better than other Peak Oil sites as well. Much more measured and thoughtful.
As Nate said in that interview article that was here yesterday:
This is very applicable to other sites like lifeafterthecrash.net (Matt Savinar) or Kunstler.
So when people say I'm crazy, I say "no, look at theoildrum dot com; it has these guys, and they're really smart" - whenever I defend myself I come off sounding retarded :).
I agree as well. I'm mostly a lurker here, but was enlightened about the concept of peak oil after reading Simmons' Twilight in the Desert, shortly after it was published. For the next few months I really became mildly obsessed with the topic and read everything I could get my hand on. There is no site out there anything like TOD, none are even close as far as I'm concerned. While I do read the occasional "out there" opinion on this site, for the most part the responses are educated and very well thought out. The owners and editors here do a fantastic job.
Until Leanan gets her "dark muse" freak on and starts deleting your posts arbitrarily.
From Part 2:
"The United States is particularly vulnerable to problems because we are living beyond our means and because we are already straining our debt-based system to its limits. There is a significant possibility of a discontinuity of some type--either deflation or rapid inflation. There is even a possibility that our monetary system will fail completely, and need to be replaced.
The long period of economic growth in the past 60 years has lulled analysts of many types into believing that the favorable patterns associated with economic growth will last forever. It is pretty clear that these favorable patterns are in fact temporary. Peak oil, or the squeeze preceding peak oil,
"...is likely to result in a rapid change in the financial situation that may have more impact than the decline in oil production itself."
Synergies are causing Cascading Systems Failures.
That piece from Perry back in 2003ish was great. I have a copy on my hard drive. "Reasons for what I believe" or something like that. I remember him also saying that
The first tide will be moving to urban areas(named a few) for safety, etc, later they will find no safety there and the flow will be back out to the country....
Good stuff.
"...[when]United States will no longer find buyers for all the debt it issues. This will probably not happen until there is a general recognition of peak oil."
If you read that 5 times, perhaps the impact will be felt enough to predict that such recognition MUST be held back by [1] twisting, spinning and withholdng the truth and [2] outright suppression and attack on any effective dissemination of the truth.
Perhaps much of what is so obviously wrong [bubbles, scandalous credit terms, M3 money supply inflation, USDollar value destruction, etc] are the apparencies that cover the fact of collapsing oil supply.
Who would freely export oil knowing its future?
In fact, why would one want to export other sources of energy, like natural gas and even coal?
Uranium exports might be a little better, but would depend on a country's own ability to use it
I haven't even finished this article, and you've already fixed the best typo I have seen in a long time. 'Peak Oi' sounds a lot better than 'The Long Emergency' to me!
Do you think CERA is really predicting Peak Oi in 2037?
Thanks for a very thoughtful and useful piece.
Hearing (reading) you say that there is a lot of momentum in the system and things move slowly is at least hopeful -- the immediate hysteria and urge to panic can be allowed to subside.
Do interconnectedness models take into account possible elasticity in the interconnections? A net made of elastic fiber behaves very differently from a net made of rigid fiber when the net is deformed at any point. Similarly, an interconnected system with lots of mass and momentum like the "economy" could topple slowly, but inexorably if it is totally rigid (like a tree), or it could sort of slump into a new form (like a landslide). Neither would be great for the people in the path of collapse, but the non-rigid model at leasts holds out hope for some degree of diversion.
Rigidity can also lead to a sudden SNAP. I expect that discontinuity event in the not very distant future. Followed by bubble-vision tripe that building the bigger stone head will fix the problems. The masses will buy it, until things get worse.
Perhaps no one knows the tensile strength of the economy. But I agree, we may soon find out.
In our last big storm here on the North Coast some trees held, more fell over with roots sticking up in the air -- and many simply SNAPPED in two. It would have been hard to predict in advance which trees would behave in what manner.
whale- what is the bigger stone you see us building?
Easter Island comments, from a few days back. The closer to collapse the civilization came, the bigger stone heads they built, to appease/appeal to their gods. Finally, the largest stone head was left incomplete, as the collapse unfolded.
Neat little story.
Sorry, I kinda misconstrued your reply, had lunch dripping down my face.
The bigger stone, well, you know, MORE faith based capitalism, looser monetary policy, government bailouts for all around, etc., etc. Don't worry, iff the government does X all will be well!!!!
And the sheeple will GO for it, through several cycles likely. I can't believe two of the channels on my cable system still have Real Estate flipping shows!!!! How delusional can one get?
The Mogambo is certainly correct, we are all freakin' doomed.
we already built the bigger stone.
THE HUMMER
The metaphor does not necessarily mean literally build something big. It refers to the tendency for societies that run into trouble to keep doing what they were doing, only more so. The Easter Islanders built larger stone heads. For us...well, our god is capitalism, so I expect our response to trouble will be "more capitalism." NOCs should should let IOCs in. We should eliminate environmental regulations and "let the free market work." China should stop subsidizing petroleum. Etc.
Airplanes? (Check - see what Boeing and Airbus are doing)
SUVs? (Check - see Hummers)
Corporations? (Check - merger mania continues unabated)
Shopping Malls?
Megastores?
McMansions?
Ethanol plants?
Trade deficits?
Budget deficits/National debt?
T.O.D. in Nawleans?
Or other likely GW flooded areas.
...derivative financial instruments and fractional banking systems?
I agree. Recall Erik Severeid's comment that "The chief cause of problems are solutions" or something to that effect.
Which goes perfectly with Pogo's "We have met the enemy and they is us!"
Other ways to describe elasticity are "slack", "wiggle-room", and "willing to part with".
Consider those things that our current societal and cultural structure engender through energy, resources, and finance for 6.6 billion people.
Go talk one person out of a large car into a small car. Out of a small car into a train with lots of other smelly humans. Out of a big screen TV into no television at all. Out of using the Internet into interacting with the local community. Out of the dreams of unbounded progress and a consequence-free life into a reality of a feedback-laden finite existence. Just one person.
Then multiply that effort by a few billion.
Then go tell the few billion poor in the world that the dreams of life better than what they have now, that those dreams will never manifest.
How many people are willing to give up how many things, that's the amount of slack we have. That's how elastic the system is.
Everything has an upside, I guess :)
But it'd be better if you observe how one people actualy react to going without all those things. Talking is too easy, also, normaly people don't have an idea on what they'd do.
Most people adapt quite well to the cahnge, the don't become happy, but adapt. Of course the problems only increase when all people must change at the same time, that's a reason I haven't settled on a forecast.
I am afraid that interconnectedness is really not built into models. In recent years, the economy has moved in the direction of removing redundancy - for example, just in time inventories. It seems like there is not a whole lot of elasticity in the system, but this is difficult to measure.
As I commented on aeldric's article, I think our distribution system is highly inelastic. And since distribution is dominated by transportation, with transportation being dominated by oil, I think an oil discontinuity will have a very large effect, and very few people will be prepared for the magnitude of it. I think there is (was) more elasticity in the financial system, but a lot of that elasticity is already stretched pretty taut. I guess a sudden financial collapse is also possible. I just have no way of judging how taut it is, other than gut feeling.
Models are inherently simplifications of the real world. As such, they also have inherent limitiation. That doesn't mean that they are not useful, but one should always be very aware of those limitations.
That reminds me of an issue I heard on NPR (a few years ago) about brilliant people in the Reagan era using just in time inventories for hospitals - some sort of emergency happens, and wham no more supplies - go to the next hospital X number of miles away for that injury.
Needless to say, I believe this attempt at policy was short lived.
I suspect any failure will be amazingly rapid. Degradation will be slow, but failure rapid. I remember those Microsoft advertisements, about "0 degree of separation". That's the problem. A branch falls in Ohio and the computers shut down the system because the invisible degradation has put the entire system on the edge of failure. The system really has very little "mass" as a result of just-in-time performance optimization and efficient reduction of "redundancies".
FedEx isn't going to be able to replace its entire fleet of planes with more fuel efficient planes. Nor will they keep their current fleet airborne with only half the volume - despite the current 30% surcharges. I was discussing that with a client today - how his business (perishable seafood) can go from FedEx nationally to a range covered by two day trucking. But even that takes a lot of dry ice and the reliability will go way down. He just purchased a big band saw to cut up dry ice. I asked him what was the effect on his workman's comp. And he won't survive at half the volume.
cfm in Gray, ME
And he won't survive at half the volume.
Think about that for a moment folks. Volume, Volume, Turn up the Volume.
MANY, many operations today are only profitable at their CURRENT Volume levels.
I mentioned before here about watching one of those "How things are Made" TV channels, and watching plant after plant, operation after operation that they are optimized for their volume. A factory that produces 100,000 Twinkies per hour won't survive with order sizes of 5,000 per day.
And on.
MANY whole industries will fold with a decrease of volume of 10-15% I bet.
A Walmart location with 100 customers a day WON'T be in business very long.
However the mom/pop shops they put out of business may have.
Volume.
So currently they lose money on every sale, but they still make it up in volume? :-)
The problem is that margins are so razor thin that fixed costs cannot be met from small volumes. Rent on twinkie factory is a fixed cost just as the natural gas is to fire the ovens. You can't just turn down the heat becuase of the lower volume. You need a certain temperature to cook the Twinkies. You aslo can't just fire up half the oven becuse it hasn't been designed that way. The same goes for lighting the factory, powering te conveyors, compressors and boilers. All these energy inputs are designed inot the factory. The great advantage of volume of course is that once the fixed costs are paid for, the margin on every unit above the fixed cost is very high and on some products can approach very close to 100%.
With some products just having 10% more volume than the fixed costs can produce huge profits on large volumes. As soon as this volume surplus disappears either becassue a vital input is shorted, or you can't sell enough Twinkies, profits fall rather quickly and it is then that an understanding bank manager comes in quite handy. Lots of businesses operate this way due to seasonal variations. The factory farm is deserving of close study from the point of veiw of volume production and margins.
It is the elasticity in the market that will cause a lot of overproduction when the consuming sentiment does a dead cat and doesn't respond to suck up warehouses full of over produced crap that we will see factories shut down all over the world and consolidate even further to low cost countries like China.
Partially correct. You can run one line instead of three. One shift instead of 3. Rent is negotiable as are taxes, labor, and services etc when TSHTF. Our plants today are designed to manage production on a 24/5,6,or 7 day production schedule to maximize the utilization/return of the assets. Not saying unit costs won't increase but by and large the MARKETING costs for most significant brands approximate or exceed the production costs, and the COGS (cost of goods sold) a significant factor. I see the marketing area taking the biggest hits. Afterall the value of marketing arose from the ability to overproduce and thus the need to segment the market and sell more. In times of scarcity you dial back that need you need less sizzle and more tangible!
The extinction of big dinosaurs left lots of ecological niches waiting to be filled by all the small mammals scurrying around in the underbrush. Some see the demise of these corporate dinosaurs as a tragedy; those of us rooting for the blooming of millions of small, locally-owned business see this as an answer to prayer.
I presume that it's a simple matter of fixed costs vs. flexible (adjustable) costs. If a factory (or mine or deepwater offshore oil rig) has very high fixed costs in the form of rents, property taxes, utilities, depreciation, loan repayments, and so on, it may have to produce at full volume merely in order to break even. OTOH, if its costs consist mainly of raw materials, goods to be sold, employee salaries, and so on, it could cut way back and still remain profitable. Something to consider in making investments, I suppose.
BTW, many raw materials industries (mines, deepwater petroleum, oil sands, factory farms, etc.) would seem to be capital intensive (require large loans to get going) and have very high fixed costs. Ditto nuclear power plants, of course.
It is also a matter of how the manufacturing equipment is designed. I know very little about large-scale manufacturing equipment, but what I do know suggests that some machinery has to be run at a large minimum volume to be at all economical.
My (recently Chaper 11'ed) employer runs a photo processing lab with huge multi-stage photo processing equipment. They have processed up to 125 million 8x10 size sheets per year. I don't think this equipment could be run at 1/4 or 1/8 volume at all. All a moot point in this particular case because digital is eating their lunch.
It used to be that the only fish that people here in the mountains would ever eat would be the trout that they caught in the streams. Somehow, they managed to survive without fresh seafood airlifted in from the coasts.
I'm seeing a lot of people worrying about a lot of things that are not going to be the end of the world. I even see a big upside with this one: less pressure on ocean fisheries.
Admitted, some people are going to lose their livelihoods and will have to find something else to do. Join the club, it is going to be a big one.
"Won't survive at half the volume..."
Reminds me of the great Vernor Vinge and his idea of over-optimisation. He imagines a society that is as efficient as it can possibly get in producing food and consuming energy, has no waste at all, and a population to match.
One thing goes wrong and a billion people starve. Because there is no slack whatsoever in the system.
In our case, you have businesses competing with each other based on economies of scale, stealing market share by progressively cutting back the fat and offering lower prices. As sales increase you can progressively cut back your margins, offer better and better deals to customers, and still increase profits.
The supermarket business here in Australia runs on a 3% margin. But the bigger players still make a billion based on volume.
If you cut back on volume, but still have to pay the fixed costs, the only way to stay in business is to dramatically increase margins. If sales drop by 20%, but you are only able to cut your costs back by 5% becuase you still need staff and still pay rent, then you need to increase prices by 20% just to stay in business.
And what happens if people all through the supply chain suffer the same pressures?
You get an unwinding of economies of scale, an expansion in margins charged for the sake of survival. Or the smaller players simply go out of business,while the larger ones rationalise in order to preserve economies of scale.
But in markets where there are already just one or two dominant players this might not be possible.
And here's a picture of what that looks like. Imagine China and its partners in the lead and watch what happens ...
That’s the problem no one can really understand, in the sense of figure and predict.
The various systems - finance, energy, import (trade ..) , manufacture, industry, agri, are so tightly intertwined, co-dependent, and all stretched thin, that a glitch here or there has immediate ricochet or ‘butterfly’ effect. The effect is unpredictable, partly because it depends so much on human perception and reaction, that is, psychology, ideology, spin, and also Gvmt. control.
Where the tipping points or thresholds are is really impossible to say, as they will be triggered by things we can’t pin point right now, partly because the world has turned irrational.
Tom Cruise having twins, a tornado in January, a doubling of the price of Coke, a tiny, seen as ultimate or unacceptable rise in oil price, a skirmish in the straits of Ormuz, and many other trivial or non analyzed (that is, unknown) things can all have an impact..
And within all this indeterminacy, it is possible that some events have a positive impact.
http://business.reddit.com/info/64zx8/comments/
http://politics.reddit.com/info/64zxi/comments/
http://digg.com/business_finance/Energy_Risk_and_the_Markets_15_Things_t...
Thanks for your support.
Gail, Nice stuff.
I would say that #3, #4, #6, #10 all point straight to Deflation( A Decrease of Money/Credit Supply)
I cringed when reading #14. "Inflation .. for food, energy..."
INCREASED Prices for Food, and Energy. NOT INFLATION.
MONEY Supply will shrink, the availability(as pointed out in #10, #6) of credit will shrink. That IS Deflation I believe.
Don't perpetuate the common myth that inflation is a Price action. Price action is sometimes a Result of inflation.
Scarcity of food, energy I believe is not an Inflation/Deflation thing. It's a price thing in this case.
Yes, I'm in the Austrian camp of Economic models NOT the Chicago Model.
From Mish this morning.
Money Supply Trends Are Deflationary
There are no grounds for harping about inflation here as long as you you understand what inflation is.
http://globaleconomicanalysis.blogspot.com/2006/02/inflation-what-heck-i...
http://globaleconomicanalysis.blogspot.com/2008/01/money-supply-trends-a...
Respectfully
John
I'll change it.
Does this website want to reach the general public? Then it would be best to stay with definitions that are understood by the general public:
Inflation is the general rising of prices
Deflation is the general decline of prices
Compare the Consumer Price Index
the problem is that in 'general' prices of things we don't need will go down, so the 'core' inflation and CPI numbers will stay low or decline, while the things we need, like food and energy will become more expensive.
that's why one should use "price inflation" or "price deflation" and let the economists debate the meaning of the terms inflation and deflation..
Cheers, Dom
Wouldn't it be great in addition to "Reaching" the public it "Enlightened" the public with... VALID definitions?
Why perpetuate an inaccuracy that does NOT enlighten the populace to what Inflation/Deflation Really are and how they affect us?
Taking your course, lets let oil "depletion" and "decline" mean what the "General Public" understands them to mean?
No, I think here everyone is a stickler for using Depletion and Decline Correctly.
Let it be so with Inflation/Deflation.
If this site isn't about enlightenment and valid definitions, then it just perpetuates the current understanding/Misconceptions of things.
If true, then about 90% of us would quit coming here.
Or maybe just make a distinction between price inflation and money supply inflation.
I wouldn't change it. The Austrian-style definition of inflation is just confusing to the vast majority of people who aren't of that school. Most of us mean "changes in the CPI" or some similar measure when we say "inflation".
BTW I like this piece - your judgements are only a couple of notches away from mine.
You know, a lot of people have bills for the same services on the same credit cards. They can compare what they paid a year ago fairly easily.
You know, a lot of people have bills for the same services on the same credit cards. They can compare what they paid a year ago fairly easily.
They see a number last year and this year the number is bigger.
A person looks at a Thermometer yesterday and it read 50 today it's 60.
To me, Inflation is the temperature (as the amount of Heat), not the numerical reading on the thermometer.
You use one to measure and keep track of the other.
Now the only ones who get to use the "HEAT" energy are the ones at front of the line of the "Printing", ie CB's. Who gets "Cooked" by the heat? Us Frogs in the slowly warming water.
Wow! You actually said that?
Funny, your Peak Oil "message" is just as confusing to the vast majority of people who aren't of that school too. So, what are we to do? Guess there's only one thing to do, after all we know it's just the oil companies trying to gouge us, and those bastards are acting in cahoots with those Arabs that are just sitting on all that oil at our expense, just so they can be filthy rich, as if they aren’t already.
Since that’s what most of us mean when we talk about oil “prices” or something similar like gasoline or diesel or heating oil prices, guess it’s time to shut down TOD and move on as there’s just nothing to see here. According to the vast, and apparently confused, majority of people.
I wouldn't change it, either.
From Mish's blog on inflation:
Inflation defines the "because of". Prices rise because of more of the money in circulation chasing fewer goods.
As a simplified example, consider the small island nation of Floren. Floren has $20,000 in their teetering economy. They have available resources of 1,000 apples at $1 each, 500 gallons of gas at $4 each, 40 Ipods at $100 each, and 5 cars at $600 each. They also have $10,000 in various investment, lending, and derivative schemes in the market. War is brewing on the horizon with the nation of Guilder. The chairman of the Fed in Floren, Roberts, continually assures the country that all is well in the economy.
The market then crashes and $8,500 is wiped out. Disappears due to over-speculation and defaulted loans. Deflation in the money supply. The crash is accompanied by some physical dislocation that also destroys some physical stocks. After the ensuing chaos, there is virtually no interest in Ipods, less interest in cars and gas, and everyone scrambling to get available food.
People are up in arms about plans by the the Fed chairman's plans to inject boatloads of Guilder's liquidity to shore up Floren's stock market, now referred to as "The Fire Swamp". "The Dread Pirate Roberts Returns" screams one tabloid headline.
The total money supply in Floren is now $11,000. $1,500 is left in the market, with $9,500 chasing the remaining stocks of goods. They have 800 apples at $7.50 each, 250 gallons of gas at $4 each, 25 Ipods at $20 each, and 4 cars at $500 each.
The total money supply has deflated, but a larger proportion of the money supply is now chasing food, and a smaller proportion of the money is chasing everything else.
The total money supply has decreased from $20K to $11K. Deflation.
Before the crash, $4,000 were chasing 40 Ipods, now $500 are chasing 25 Ipods. The supply of money chasing Ipods has decreased. Deflation.
Before, a total of $5K was chasing gas and cars. Now a total of $3K is chasing gas and cars. Deflation, deflation.
Before, there was a total of $1,000 chasing 1,000 apples. After the crash, there was a total of $6,000 chasing 800 apples. Both the proportion of the money supply and the actual dollars spent on apples increased. Inflation. Inconceivable!
When we talk of "inflation" or "deflation", it depends whether we are talking about the economy as a whole, or just of sectors of the economy. Floren's economy experienced both inflation and deflation, depending on what we're looking at.
Our global economy will suffer similar effects to the fictional Floren above. When a lot of the money gets wiped out, the money supply will contract and businesses and industries less critical to survival will fold. The remaining money will chase more critical needs like food and energy.
Excellent illustration 710.
The discussion about the definition of inflation is an academic one.
The definition of inflation to both the individual and the economy as a whole is price increases in goods or services or both. The reasons underlying these price increases are not always caused by debasement and different areas of the economy can have different inflationary/deflationary impacts independent of the money supply.
Peak oil will cause deflation in real estate, non-essential consumer goods, inefficient automobiles, tourism, travel, and associated services and capital investment sectors that support these sectors.
Food and energy will be possibly inflationary depending on the level of the drop in demand. Less economic activity will mean less energy demand and even food could see an easing of demand, both diary and meat consumption is highly correlated with GDP.
Government spending will be inflationary as the increase in government spending leads to debasement.
So my belief is there will be an inflationary build-up leading to an economic depression that will quickly turn overall deflationary with isolated sectors remaining inflationary.
Maybe when you talk about inflation. When Mish talks about inflation he is explicit and cannot be misunderstood. Except by you, obviously.
From Inflation: What the heck is it? comes the following.
"Inflation is best described as a net expansion of money supply and credit."
"Deflation is logically the opposite, a net contraction of money supply and credit."
That's it. Nothing else. No this part of the economy or that part of the economy. No price rise of this and no price fall of that. In fact, no prices at all. You can talk about prices all you want. But Mish doesn’t and never has, nor ever will, discuss inflation in any other terms than money supply and credit. Please feel free to waffle and to quote selectively and out of context, but that will change nothing. A net increase (decrease) in money supply and credit is inflationary (deflationary). Stop misrepresenting others views you clearly do not understand.
MIsh is minor-league when it comes to understanding these things. Let's not quote him like some sort of guru. Puh-lease.
Just curious, who do you think has a good understanding of these things? Could you provide links? Thank you.
I don’t remember quoting him like a guru. But I don’t actually remember what I had for breakfast either so you could be right. Wait, I do remember what I had for breakfast, it’s all coming back to me now.
I remember, I simply asked 710 not to quote Mish out of context nor incorrectly. That's all. If I was looking for a guru to quote, I would simply search through all of your posts and choose your favourite. That would be sure to please. You at least.
Since you've got an issue with Mish, for whatever reason, please, who should I be quoting? Other than you of course, oh wise and omniscient guru.
I wait in the double twisted reverse butterfly position to receive your wisdom.
Very well. I'm glad you think you have answered the question.
Sorry, my fault. Mistakenly posted and walked out.
I didn't quote Mish out of context, nor did I quote him incorrectly. Mish's point was that the dictionary.com definition of inflation "puts the cart before the horse" and that definitions that use "because" are problematic because you never get at the "why".
Both of these assessments are wrong, and I attempted to show this. I'll have a better explanation for you next time, once I understand whether you have an actual problem with the story and explanation laid out, or if you are defending a cult of personality.
Because Mish's claim that "the natural state of affairs is decreasing prices because of increasing productivity (more goods produced by less labor) thereby causing a drop in prices over time" ... that's not even wrong, and I'm momentarily stumped as to how to respond.
And the claim that, "That's it. Nothing else. No this part of the economy or that part of the economy. No price rise of this and no price fall of that. In fact, no prices at all. You can talk about prices all you want. But Mish doesn’t and never has, nor ever will, discuss inflation in any other terms than money supply and credit" ... to assume that because of a lack of accurate information regarding proportions of money chasing different economic sectors, it makes the whole perspective wrong, or to even attempt to say that prices don't come into the equation, again, it's as if this idea was generated holographically in a spaceship orbiting Pluto because it has little if any relation to our real, day-to-day physical world.
It's the same story as losing your keys in the dark alley, but looking for them in the street because the light is better.
So you can say all you want that prices don't matter, and that all that matters is the net expansion in the money supply (how can you determine expansion without looking at the prices?), and then suggest it's a fact because because Mish says so. And it sounds like a cult of personality.
Your turn, goritsas.
As for the “cult of personality” assertion, I guess maybe you could be right. But it sure isn’t the Cult of Mish. It’s the Cult of von Mises, sometimes referred to as the Austrian School, but then you already knew that, didn’t you.
If you want to believe inflation is the result of rising prices, please carry on. Matters to me not one whit.
If you believe looking at prices is the means to determine if the supply of money and credit is expanding or contracting, welcome to my Pluto orbit. That’s even more loopy than anything I could come up with. Well done.
Your U.S. government can provide you with all the statistics you need to determine whether money supply or credit are expanding or contracting. And I can tell you right now, there’s not a single reference to “prices” anywhere to be found.
“Because Mish's claim that…”
One can have falling prices for something even in the throes of inflation. That’s a key point Mish tries to convey time and time again. Equally, rising prices can also occur during deflationary periods. Maybe it’s just a case of cognitive dissonance, but I simply don’t understand what you don’t understand about inflation (deflation) as defined by the Austrian school. Maybe you could explain it to me, because I sure don’t get it. I agree with von Mises, and by extension, Mish. Prices will do what prices will do. But rising (falling) prices are not the cause of inflation (deflation).
To close, as much as it grieves me to have to say it yet again, rising prices are not the cause of inflation, at least for Austrians. Maybe for Plutonians. The cause of inflation (deflation) is a net expansion (contraction) of the supply of money and credit. No need to refer to prices. No need to consider Florians. No need for personality cults (unless being of the Austrian or Chicago schools makes one a member of such a cult). You are free to use any definition you prefer, or even make up your own. I’ll stick with the Austrian definition, personally.
I wouldn't change it. The Austrian-style definition of inflation is just confusing to the vast majority of people who aren't of that school. Most of us mean "changes in the CPI" or some similar measure when we say "inflation".
Ah, Stuart, it seems like it wasn't just the "Austrian" school of thought. It was OUR definition to according to Websters.
Before, Greenspan, Rubin, Bernanke... that is.
What is the Real Definition of Inflation?
http://www.inflationdata.com/Inflation/Articles/Definitions.asp
Most of us mean...
BTW I like this piece - your judgements are only a couple of notches away from mine.
Stuart, If you grew up Pre-1980ish YOUR definition might have been different.
Maybe, just maybe you have been conditioned to think it's price.
Is there a neutral way to describe this then?
Prices for this and that go up, prices for that and this go down.
This action would work to increase the money supply, that action would decrease the money supply.
Velocity of money would increase/decrease as a result.
Value of the dollar would rise/fall relative to....
Can inflation and deflation never be mentioned and still get the points across? Would not using these terms improve clarity? Perhaps the terms inflation/deflation are used too generally for some, when they should refer to something more specific, and yet not everyone agrees on the proper scope of their application. Similarly, are you bullish or bearish?
My basic feeling is that rising monetary supply and inflation is likely, as long as TPTB can arrange it. If there is a major recession, the government is likely to want many programs to stimulate the economy. This, together with the trying to prevent FDIC and other defaults is likely to add to the money supply.
If the government cannot hold things together, there will be many bankruptcies. This could lead to massive deflation.
Helicopter Ben has already gone on record as saying that there will not be a re-run of the Great Depression on his watch, that the Fed will NOT allow the money supply to contract during an economic downturn.
Helicopter Ben can say a lot of things....
A little refresher about my case....
Biz failed, moved in with old friend (who can frankly use another hand around this place) my consumption, spending, whatever you call it, 1/10th what it was.
Told all my creditors to go fish - it's mathematically impossible to repay them.
CitiBank sent me an offer.... we'll forgive this $12000-odd debt for HALF .... just give us HALF....
Or as my buddy put it, "We'll let you pay only 6 million dollars instead of 12 million" lol.
No matter what Bernanke says, we are headed into a 1930s type Depression, for the same reasons.
If you don't pay them back (and you can't), then you owe money to the IRS because it's a forgiven loan and counts as income.
If you pay them back half, you still owe one third of the rest to the IRS.
Bankruptcy means the IRS doesn't assess you.
WNC, I have carefully read Bernanke's "helicopter" speach, twice. As I see it, he is merely 'jawboning'. That is, it appears that the Fed cannot create money, as is is a bank it can only lend against collateral or issue Federal Reserve Notes against collateral. During the last Depression, when people and businesses didn't want to borrow any more money, it was called 'pushing on string'. IMO Bernanke will soon get his turn to push on the string.
PLAN, PLANt, PLANet
Errol in Miami
The thing with prices and money creation: for a real understanding, David Hacket Fisher's The Great Wave is essential reading. In addition to simple money creation (which would tend to exert upward pressure on all prices equally), as well as business/credit cycles and war which do similar things, there are cycles of population pressures that create pressures on energy and food that are counter to the pressures on wages so that when workers are plentiful, food and energy are expensive and wages are low. Bad times bring low birth rates and the cycle reverses to high wages and low prices for energy and food. Good times bring large families and the cycle contines. It is a brilliant book which I encourage every TOD enthusiast to read due to its relevance to our concerns here. With the introduction of the Chinese and Indian worker into the global economy we are in a period of very many workers competing for energy and food and forcing down wages globally. This is in addition to peak oil (although throughout many of these cycles food supplies had built in peaks due to limited land and agricultural technology).
With honest money, we would be facing a serious deflation due to the failure of financial institutions. For a very nice analysis of the money multiplier effect in reverse during financial failures see Ben Bernanke's book "The Great Depression." However, this is fiat currency and prices will not fall, Ben has stated this uncategorically. Also, we are in a "Great Wave" demographic cycle with upward pressure on food and energy and downward pressure on wages. Add to this Peak Oil, and well, food and energy prices are not deflating like in the Great Depression.
Fisher's Great Wave is key to understanding what is going to happen. Interestingly, this book seems to have been fairly influential in the development of Kunstler's thinking about the consequences of Peak Oil as well. Personally, I do not think that it helps to define inflation as the creation of money and credit. That is too ideological and is supported by those who wish to prove their case by controlling the meaning of words, always easier than marshalling the facts. The change of prices is complex and multifaceted. Certainly, money creation is the key to the great hyperinflations, but for most people they don't really care about prices so long as their incomes outstrip their costs and obligations. This is why Fisher's book is so good. Inflation pushes and pulls depending on many factors.
Read it and be enlightened.
CLZ09 - Thanks for the tip. I've ordered the book from an Amazon reseller. Brand new. Half price. Although I'm no longer as sure as I used to be what "price" is. Guess I'll have to read and learn.
They can always monetize US govt debt. Also, they are not limited to playing with US banks now, they've got the whole globe to play with. If worst comes to worst, the US Treasury retains the right to literally print dollar bills.
Trust me on this one: the Fed can indeed find some way to inflate the money supply.
As an individual, I don't care about the money supply. I care about prices. This does not contradict the "Austrian school". But the fact that the value of my house is decreasing has no impact on me, since I don't plan to sell it, and even if I did, buying another house would get cheaper too. The fact that my food and fuel bills are increasing is affecting me greatly. Thus, not all prices are equally relevant to me. Same for you (but differently).
If your house falls in value enough, and you do not have other savings, your new house purchase will have to be financed 100%. The whole Ponzi scheme doesn't work nearly as well in reverse.
Assuming you have a large mortgage currently-probably doesn't apply in your case.
Thanks for an insightful and well-researched article. That's what makes plowing through some of the politics and philosophy and what not here worth-while! A real gem!
Gail, while I respect your work, I find this entire article after the recent fiasco with Stoneleigh and ilargi to be insulting, hypocritical, and childish beyond belief. For TOD to promote this work after kicking Stoneleigh and ilargi to the curb is incredible. I've spent 15 minutes trying to say something else about this situation but since I cannot find the words to say it politely, I will simply refrain from further comment at this time.
You are way off base, GreyZone; you do not know the whole story. Stoneleigh has not been kicked to the curb at all.
I will point you to a comment I made in the Drumbeat yesterday:
http://www.theoildrum.com/node/3483#comment-287753
Feel free to discuss it there, instead of here in Gail's post.
“You are way off base, GreyZone; you do not know the whole story.”
How do you know GreyZone doesn't know the whole story? At least that part of the story available to just the lowly readers of TOD.
It was just a little bit odd there’s furore and flap one day and, hey presto, a new finance key post the next! It’s almost like a miracle. Nah, much more like a contrivance.
But wait, there’s more! On the same day a post from TOD:Canada hits the big top. Posted by none other than Stoneleigh, to be sure. See, alls well that ends well. There’s no trouble in River City. Solidarity abounds. Just look, two posts after all.
“I will point you to a comment I made in the Drumbeat yesterday:”
How do you know GreyZone hasn’t already read the comment?
“Feel free to discuss it there, instead of here in Gail's post.”
Do as your told GreyZone. Good God man, it’s only for your own good, after all. TOD is championed by a small band of dedicated and infallible volunteers seeking to reach only nirvana and bring only enlightenment to those of us left behind. You should know that by now.
From the previously referred post:
“… some of the posts from TOD:C lately prompted complaints about their format, which in turn hurt our credibility.”
So, TOD is listening to its complainers but not its (clearly silent) compliments. Why is it nobody ever asks for supporters to come forth in cases like these? As long as were keeping our complainers happy all is good.
As for the assertion TOD’s creditability was being damaged, y’all are scientists and like facts and figures and all that jazz, where are they, you know, the facts and figures that demonstrate the damage to credibility issue? Likely they’re nonexistent. If so, guess all that “we’re scientists” and such is just malarkey after all.
Did the devoted and innocent volunteers actually bother to ask the readership about the issue? No. But they were willing to wade in with their own opinions and use whatever complaints to render the Finance Roundup dead. Whatever grandiosity your Mission Statement may speak of, the truth of the matter is TOD would be like just about every other site on the web if it wasn’t for the its readers. Unread.
We did what we thought was right, and no, you don't know the entire context, nor should you--it is an internal personnel matter and frankly none of your business.
We invite you to go elsewhere; it's good riddance to folks with horrible attitudes. You will not be missed.
This site not only is about energy and peak oil, but I think it might also be a microcosm of how society interacts when faced with all these changes.
Civil, respectful discussion is encouraged here, and attitudes like yours take away from the whole community.
I never asked, nor was interested in, the entire context. But to tell GreyZone he didn't know the whole story seemed fairly obvious. I mean, he wasn’t involved, so how could he know the entire context? However the situation did shake down, GreyZone's comment certainly left me with the impression the death of TOD:Canada Finance Roundup was a pretty darn sloppy affair. No matter what happened behind closed doors. As far as the public entrance was concerned, it looked the result of cowboy builders that didn’t know their Doric from their Ionic, let alone their Corinthian.
I'm not entirely sure how this particular comment was disrespectful nor uncivil. I shore'nuf failed to swear, nor take the name of thy Lord God in vain. I didn’t devolve into childish name calling (let alone adult name calling which is far more provocative). I may have been mean and ornery. I may have called you and your fellows integrity and motives into question, but I was never uncivil.
“This site not only is about energy and peak oil…”
Listen, I don’t think you can have it both ways. If this is true then put TOD:Canada Finance Roundup back. Bury whatever hatchets still remain unburied and put it back up. If not, then you’ve contradicted your position. Geeze, you’re starting to seem human. Damn, I hate it when that happens.
“…but I think it might also be a microcosm of how society interacts when faced with all these changes.”
I’d agree completely. I’d also refer you to your second paragraph. At a personal level you don’t even know me, so how could you miss me? The same goes for me. On the other hand, I didn’t know OilCEO and I do miss him. He was pretty damn funny. I miss JD in all his incarnations too. Still have opinions about him, but you gotta love the guy. Having said that, my “horrible attitude” may be a sign that something’s amiss. It may not. But only you and the rest of the gang can figure that one out.
I’m not entirely sure how my comment takes any more away than many of those I’ve read over the past two years or so. But if it tickles your fancy to believe it does, then please feel free to let it tickle.
I find authoritarianism a horrible attitude, maybe you should take the advise you gave to goritas?
You had a great idea in doing this site and have put in the work and I am sure everyone thanks you for that, but that aside, possibly it has grown beyond you. There are too many involved in this site for one person or even a select group to dictate the policies. I do not see that TOD could not be run as a corporation with voting rights to those who are members or 'shareholders'.
You say " but I think it might also be a microcosm of how society interacts when faced with all these changes." Yes and so why are you constantly marginalizing or eliminating parts in this microcosm, not much of a model if you hack away the parts that you don't like, would tend to make this rather organic model of the world a touch eccentric, no?
I feel we as a species may survive the effects we have had on this planet but if we do not go beyond the faults that have produced our predicament and merely go on as before, albeit diminished, there will be really very little value to this site.
As far as 'civility', I think to suggest goritas to leave,(whom I have found a positive contributor), merely as he has a disagreement with you, rather uncivil. I would not suggest you leave on that account, instead I would rather try to convince you that this site is better served running on more anarchic rather than despotic lines.
Look folks, this is hard: people have been insinuating that we had ill intent; we do not. That's hard to hear when you're trying to do what you think is right.
I can't tell you all that's going on because it's an internal staff situation--I wish I could, but I think that would be wrong--and it's really none of your business.
As I told GZ in a private email, we're doing what we think is right. I hope you can trust in that, and if you can't, well, I really am sorry.
“This site not only is about energy and peak oil…”
Listen, I don’t think you can have it both ways. If this is true then put TOD:Canada Finance Roundup back.
No likely not if the matters are personal but when the business seems to be have handled so badly as to result in a hardworking member of that staff to throw up his hands and appeal to us hoi ploy, it leaves a rather bad taste. As well in this case the decision seems to go against the general wishes for Stoneleigh to run a financial portion to his site. If Stoneleigh and illargi were willing to do the work I really don't understand the objection as it doesn't seem to preclude the main site from running any articles on finance it feels relevant. I don't see that function, for TOD Canada, as 'none of our business'.
You say
I do not think your good intentions are in question but I do question whether they were right intentions. That is a problem even for the most benevolent of authority driven societies. I would suggest spreading that risk in some manner.
BTW In the mission statement in part four, might the word 'obligatory' be more suitable than the word used 'necessary'. At least I hope so.
I was not involved in any way with the situation. I heard about it the same way readers did.
My post was more or less complete two weeks ago, but the editors only now got around to reviewing it, so it could be finalized for posting.
We have a lot more to worry about with the financial system than we do with peak oil. depending on what happens, we might even care about peak oil because they don't drive to work or hyperinflation or massive deflation destroys oil demand.
Maybe, for a time. But then when economy reloads, we are that much further down the depletion profile of existing older well, have reached water cut on horizontal wells, and new wells were not pursued as quickly as they would have been with high oil prices and easy credit. Tough financial times will also inhibit investment and financing for viable renewables that might help fill the gap. So a severe credit crunch now (and one could easily argue that it is already past severe) may seal in peak oil and make the plateau shorter and the ultimate decline rate higher. I am still curious if this is why the SEC floated the new reserve rules a few weeks back - to make it easier for marginal energy companies to get financing (vs higher booked reserves)
During those blogger calls with API this past summer I asked several times both in the call and subsequently by email if there might be any effects on oil industry from the credit crunch. I never got an answer; at the time the question seemed to me based only on a hunch. It's still not clear to me what the impact might be.
cfm in Gray, ME
I don't think this is a subject API, or for that matter the petroleum companies, have thought this through.
Financial impacts are one step removed from most people's thinking. If they are thinking of a decline in oil, they are thinking about making up for the 1% or 2% decline in output, not the indirect impacts, which may very well be greater.
The financial meltdown will be a kick in the nuts, leaving us incapacitated while peak oil straps us to the roof of the train of climate change which will run us off the cliff.
Well said.
The Long Transition continues.
oh goody, we're saved
NOW I understand.
Great!
I saw a TV commercial for the Chevy Volt today!
A commenter made some remarks about the "elasticity" of the financial system. There is some validity to this concept and I have a personal model (has nothing to do with my employment whatsoever) based upon this concept. Actually it relies upon the assumption of discrete-scale invariance of trading activity a la Mandelbrot. In this model framework, there are detectable "statistical vibrations" in the market that signal impending "breaks" - sudden shifts in market sentiment and behavior.
Currently I am strongly forecasting a "break" sometime between early March and mid April. I should be able to tighten this forecast considerably in the next week or so. It would be interesting if we could tie impending energy events into this time frame.
Fasten your seatbelts!
What's your definition of a 'break'?
Feels like we already had one (though I know we are just back to early last years levels)
There are huge positive feedback systems here. Financial stocks seem to be way ahead (in pricing in these defaults and losses) of the general market and main street. Credit tightens, financial firms don't do any business, credit tightens further, companies go out of business due to lack of financing, etc. I suppose an optimist could view it as 'cleansing'.
Is your 'elasticity' like Soros' 'reflexivity'?
I was responding to earlier commenters' use of the terms "elasticity", "tensile strength", etc. in a general way. I don't use that term myself.
"Break" is a sudden change in market dynamics, usually meaning a crash or bull run. Could also mean a period of extreme volatility as the market sorts things out. In short, we are talking about a market "regime shift" with little foreknowledge of what lies on the other side. I rather suspect the impending change will manifest as a crash.
So do we have any impending energy events, particularly information releases, that could catalyze this regime change?
Shunyata, what do you make of gold's current run? I'm not aware of any single event, or even change in the zeitgeist that would trigger a lot of safe-haven buying all of a sudden.
Errol in Miami
Possibly an implosion of the USA banking sector qualifies as a change in the zeitgeist.
Jim Willie has this thought today.
Unproductive Assets, Wasted Productivity
http://www.financialsense.com/fsu/editorials/willie/2008/0110.html
As part of today's UK Government charm offensive to launch a huge nuclear power programme to mitigate what it coyly calls the looming "energy gap", the Government's chief scientific advisor, Sir David King, said on the BBC today that he expects all UK transport to be "essentially driven by electricity" by 2020 to 2030.
Listen at http://www.bbc.co.uk/radio4/today/listenagain/ram/today4_20080110_nuclea...
OK, take out farm machinery and essential heavy trucking, which can't go electric in that time-scale. That still leaves the UK Government letting slip (accidentally or not, it doesn't matter) that it expects that all of Britain's 30 million internal combustion engine cars will go into mothballs in the next 12 to 22 years.
Even in 10 years' time, electric cars will still be relatively expensive and offer limited range compared with petrol or diesel. Clearly, the Government is planning for a massive and radical change (i.e. reduction) in car ownership and use, not simply the substitution electricity for oil fuels in an otherwise similar car market. Auto makers take a long, deep breath.
All of sudden here in the UK we are hearing Government officials talking openly of energy gaps and energy security - together translated as "not enough oil and gas, and we can't rely on Russia and the Middle East. PS. We'll let the private auto sector hang out to dry if we have to"
All this isn't quite the same thing as a news headline saying "UK Leader Gordon Brown Tells Financial Markets 'Your existing models are all now toast'".
But perhaps it's close.
One part of the British Government never knows what the other bit is doing - I doubt they have a cunning plan to make most of British transport electric on that impossible timescale.
Maybe if we all had to catch the bbus.....
Quite. No cunning plan to make it electric. But a clear belief that it won't be oil-burning either. That must be what they mean by the energy gap.
They probably have filed their master-plan in the same place as they secure our data.
So that's safe then! ;-)
As a proponent of nuclear energy the only thing which gives me pause is the incompetence of the British establishment - you wouldn't willingly entrust them with a tea trolly, let alone nuclear fuel.
They are doing something about the third world - joining it.
Clive Sinclair was ahead of his time! :-)
Sinclair C5 on Wikipedia
Now that really was a silly idea for the masses!
From memory, he spotted a gap in the market (and law) that allowed 14 year olds to ride electrically powered/assisted bikes - it was a toy!
This is the same Sir David King who recently wrote this to the House of Commons 'All Party Parliamentary Group on Peak Oil and Gas':
Actually, by the looks of it, this is turning into a more coherent (if totally inadequate and maybe dangerous) proactive policy - here on TOD we agree that we will have less Fossil Fuels in the future both because of peaking and, maybe more importantly, because of possible 'Dangerous Anthropogenic Climate Change' and that in the future energy will be mostly electricity.
The good news is that the UK Government is slowly leading us all in the direction of keeping the lights on. Do not expect them to even mention 'peak' and 'oil' in the same sentence for fear of panicing the population - however, IMO despite this they will eventually get to realise but by then it may be too late to mitigate the adverse effects.
As you say, the implied bad news that the sheeple don't yet realise ... they won't have cars for everyday use in ten years or so - to say the least of it!
Slowly, slowly, catchee monkey!
Nate
I think the "System Breaks" meme started with Jim Willie's recent article.
ENTER 2008: THE SYSTEM BREAKS
http://www.financialsense.com/fsu/editorials/willie/2008/0103.html
More of the light hearted reading by Willie. I read Kunstler to cheer me up after reading Jim Willie.
BTW, after reading him for a couple of years, he has a good track record.
Yes, Jim Willie has been on a roll. But he needs an editor! Kunstler is a lot easier and more fun to read.
Errol in Miami
Willie is riffing the incredibly prophetic vision of E.M. Forster.
From 1909!
I take it this break is sort of like my Item 15 discontinuity.
I'd like to hear more about your findings.
Beware the Ides of March.
cfm in Gray, ME
The rise in interest rates you indicate is particularly troubling for those who hope to reduce energy use or to increase supply via nuclear or renewables, since what all these have in common is that they are capital intensive, with the costs up front.
One reason why no nuclear plants were built in the States for many years was that high interest rates made them uneconomic.
This is not hopeful for rapid adjustment to higher energy costs, since the easiest way would be to build more natural gas plants, which is likely to be in short supply, but the initial build costs are low, hence the price signals are likely to lead to an inappropriate response.
A report in 'The Times' quoting the World Economic Forum is worth quoting in extensio in the context of this article:
'The wave of turmoil that has engulfed world credit markets since the US sub-prime home loans crisis began last summer has raised “fundamental questions over the vulnerabilities of the current model of financial markets”, the report’s authors conclude.
Although rapid market innovation, deregulation and increasingly complex financial instruments have may have made the system more resilient under normal conditions, the forum argues that not enough attention has been paid to the impact of serious stresses.
“Many would argue that the overall resilience of the global financial system will only become evident under conditions of severe stress over the next year,” it said. “The complexity and near-infinite feedback loops of the modern financial system have exposed it to a small risk of very large systemic shocks … '
http://business.timesonline.co.uk/tol/business/economics/article3158410.ece
It is particularly concerned with the situation in the UK.
"resilience", "tensile strength", "elasticity" -- those are pretty concrete terms for an endeavor so nebulous as an "economy." But I think in concrete terms, even if it is to make mental models of human behavior-- and I believe most people probably do.
I asked about those things in Gail the Actuary's models because she brought up the issue of "The Failure of Networked Systems" in her post. I think that for the concept to be useful, one has to look more closely at the "network." Some connections will fail, and some will survive or strengthen when conditions change.
Just-in-time sourcing of product requires huge inputs of increased organization (translate a local decrease in entropy which doesn't seem to figure in anyone's model) and lots of cheap hydrocarbons-- both to run both the computers to do the organizing and to carry stuff around. That probably won't work in an era of high energy cost. On the other hand, there are lots of abandoned shopping malls (and more to come) which will provide warehouse space for a more traditional form of trade. Refrigeration will be less important as it becomes impractical to carry perishable product 3000 miles at a price a secretary can afford, and that will also decrease needed energy.
I think there is a lot of elasticity in the network.
Huge amounts of money will be lost, of course. But the question in my mind is who is going to wind up with all the stuff that the money built? Will it be like the '30's when people couldn't get food or shelter, even though there was plenty of both? Or will we develop a different sort of "network" that will share abundance rather than hoarding scarcety?
The part of the network that I worry about losing is electricity. Once electricity is gone, pretty much everything else becomes much more difficult.
It is difficult to know of all how much of the network is necessary to maintain electricity. If the local bank fails, and it doesn't have enough cash to pay its employees (because its account was over $100,000, and there is no FDIC insurance), will this be a problem? Will it be possible to keep maintenance of the grid at the necessary level for more than a few months, if gasoline/diesel is much less available? What kinds of problems will people stealing copper wire cause?
Gail, I kind of turned and looked the other way about electricity. One of the conferences we go to
had a presentation from the Solar Electric Light Fund. http://www.self.org/index.asp
What really struck me, working in 3'd world countries with no power at all, what a tremendous difference it made to add something as simple as a single 50watt panel.
Extends the Workday
Improves Health
Stems Urban Migration
Improves Fire-Reduction
Improves Literacy
Conserves Foreign Exchange
Conserves Energy
Reduces Maintenance
http://www.self.org/shs_benefits.asp
I have serious fears that the grid will not hold together under stress, but SELF cleary demostrates
even a small supply drastically effects your living conditions and your way of life. I'm certainly so equiped now. I don't plan on powering everything and maybe not even using it everyday but I will have my own small supply to use as needed.
Gail - many thanks for your cogent overview of our prospects as regards the financial system consequences of declining energy security.
While I share your concern over the scope of the impacts of power cuts, I suspect that many of the latter will (globally) arise not from energy scarcity but through food-price impoverishment (resulting in part from Cheyney's aggressive use of Ethanol subsidies) and consequent power-cable theft, and, far more commonly,
through the rising GHG volumes and resulting frequency of extreme climate events.
As an example of the present vulnerability, you may recall the massive cascade-blackout in Eastern US states, caused initially by some trees reportedly "growing much faster than expected"; but it is hardly mentioned that they did so in elevated CO2 levels . . .
Similarly, back in '87 a great storm came ashore in England one Thursday night and was gone off the east coast by dawn, leaving over 4 million trees thrown down.
This was problematic for London's stock exchange brokers that it trapped in their rural homes, as they had failed to respond to very bad falls in the NY exchange the previous day, which were then replicated during Tokyo's session.
On the Friday morning, London opened, realized 98% of brokers weren't coming, and closed for the first time since WW2. Both NY & Tokyo had still worse falls that day, to which London could not respond.
So on the Monday morning London brokers got to the Exchange knowing they had just 4 hours in which to offload stock before NY opened. They had little option but to dump it onto the market, which then triggered both panic selling and automated selling in NY & Tokyo.
And that was the crash of '87, when no more than a moderate correction was justified by share prices.
I was living 17 miles from the major city of Southampton, and it was 6 weeks before we got the power back on (and twenty days for the phone).
Since then life has become far more dependent on power, e.g. for shops tills, freezers, etc, and I gather that any major corporation that loses its internet links for 24 hours now has an even chance of collapse within six months.
The aspect of climatic destabilization that seems least well recognized is that of its impact on insurance services. The Assoc of British Insurers shares Munich Re's assessment that losses are rising by more than 6% pa globally, of which much is uninsured in much of the world - i.e absolute losses are becoming commonplace, to the point where some nations' infrastructure is now in decline.
The position in developed countries is no less serious in that the decline of climate security poses a grave financial threat even prior to damage occurring.
This is due to the unavoidable ongoing contraction of insurance cover for weather damage. In the event of that withdrawal of cover (thus far in the UK mostly when property changes hands) a mortgage can no longer be obtained using the property as collateral. Both domestically and commercially this is potentially ruinous and economically destabilizing, and thus far we are seeing only the first hints of the problem's development.
Not being an actuary, I'm unclear as to what solutions might be applied, given that the present anthro weather-impacts reflect the pollution output of the '70s, and thus that we face over 30 years-worth of worsening conditions even if the requisite "Treaty of the Atmospheric Commons" is agreed forthwith.
So would you care to try to outline the options with regard to the global insurance industry ?
Regards,
Backstop
Your comments are interesting.
Climate change is a real issue, playing into the story that is now unfolding. I hadn't heard about the 1987 storm. Climate change leads to a systematic bias in rates for weather coverage. Insurers figure this out, and are reluctant to provide coverage for the high risk properties.
Food price impoverishment will no doubt also be a problem.
All of this feeds into the systemic risk of the system.
I wouldn't want to be a cop if the electricity comes unpredictable.
A city without power, "If known in advance" will experience a crime wave unlike any before. Everything from an uptick in muggings and stickups to large jewelry and bank heists.
Cameras, Cameras we need more cameras downtown with 'starlight' or IR ability.
Hi Samsara,
re: Cameras.
Would those be digital, requiring electricity for downloading photos, etc.?
The whole system depends on large amounts of low entropy - provided by energy and other natural resources. Our technology, culture, society are all of a piece with the level of available low entropy input. Lacking it, I think we get a paradigm shift. Lacking it, what will anyone do with the new 767s that FedEx is buying? I don't know.
I'm not sure we have the right network for the different entropy level. [Alf Hornborg, "The Machine" is a great discussion of this angle.]
As for Portland Maine, it's not just seafood that won't be on the plane. Neither will all the animal vaccines from Idexx. Nor the garbage from LLBean. Where we have a globalized winner-take-all economy, critical supplies [in this case vaccines] will be a problem. Nor is it simply a matter of product pick-up; the widespread delivery is equally critical. It's all part of one piece - energy, technology, culture, law. Imagine 6, 7, 8 billion people, bird flu and no vaccines.
cfm in Gray, ME
Off subject for Leanan.
Is anybody still working the "Last 24hr" command problem over on Peak Oil? Most of the time I get gibberish.
Regarding the bank failures, I see either mergers or takeovers by sovereign wealth funds (for pennies on the dollar). We've already seen some injections from Asia and the Middle East into US and European banks. Even third world countries have functioning banks - e.g. the State Bank of India (a nationalized bank) has a long history.
As long as the buyers don't understand peak oil, I think takeovers by sovereign wealth funds are real possibilities. Once they understand peak oil, they will understand the problems with debt, particularly long-term debt, and be much less interested in banks.
They might be willing to take a loss on banks, otherwise their dollar holdings become worthless and they take a larger loss. Nationalization is also a possibility, along with tax increases.
These investments in US banks have been on what one commentator called 'guido' terms; 11% for Citi and 16.6% for another bank (I forget which). Whether or not these sovereign wealth funds are PO aware or not, they understand risk/reward a lot better than the banks they are bailing out.
Errol in Miami
Gale,
Can you quantify (at least some ranges) around what you are predicting. It would be good to see at the end of 2008 who is closer to what happened. your prediction or mainstream economists.
We have Goldman predicting a light recession for the USA in 2008.
http://www.businessweek.com/ap/financialnews/D8U2GG0G0.htm
A serious recession on a comparable scale of what ?
http://en.wikipedia.org/wiki/List_of_recessions
A 1973 situation ?
http://en.wikipedia.org/wiki/1973_oil_crisis
An early 80's situation ?
http://en.wikipedia.org/wiki/Early_1980s_recession
Country wide has well known problems
http://www.marketwatch.com/tools/quotes/profile.asp?symb=CFC&dist=sp_inthis
MBIA and Etrade Financial.
Which ones are you saying are at risk ? It should relatively apparent now which ones are at risk. If there are some new ones that do not appear to be in trouble.
Are you talking one of the top ten banks failing ?
Bank size info
A Tier 1 bank ?
Solvency analysis of the big banks
Merril Lynch has least coverage by some measures.
By index ballpark of how much.
If you are going to make the predictions then separate out which ones you are willing to quantify to the point where it is clear whether you are more right or less right than others and whether you were flat out right or not.
More trouble or less trouble would be associated with positive or negative growth in some metric. How would it compare against historical performance of that metric. If half of the time the metric is negative then so what. If it is only negative one time out of then then ok, something might be happening.
2.50% looked like the bottom a couple months ago- now 2.00% is more likely IMO.
Clearly a lot worse than any post WWII recession - although perhaps we won't get there until late 2008, early 2009.
Will it be worse than the depression? I don't know.
So that would mean 17+ months of negative growth and negative GDP of 5%+ (to be worse than the 1973 recession, unemployment 11%+). And actually since you say a lot worse then what 8% negative ? The two recessions from the thirties were 18.2% negative GDP and 33% negative GDP. If you are also saying a lot worse on duration then past 2009 for 23+ months. If you are saying in the ballpark of the dual depressions of the thirties (since by the theory that peak oil would have a constant and increasing hit it would be two depressions from 2008 until 2017+. with a combined 50+% hit to GDP.
Are there some numbers that you are comfortable with ? As opposed to the equivalent of oil will be between "130 and 600 dollars per barrel". ie a lot worse than the $100 per barrel now to worse than the 4 times historical move. (the seventies where it went four times higher than the previous inflation adjusted peak.)
Can we say a lot worse is negative 8% GDP with 23+ month duration ?
Or are you confident enough to say closer to the thirties depressions
15% GDP (an actual depression by definition but not as bad as either the thirties.), 36+ months duration.
There is a pretty big gap between worse than any post WW2 US recession and the depressions. Perhaps you want to include the Japan situation of the nineties or some other country.
You will not be able to get the duration measure in 2008 it would have to be passed late in 2009.
One definition (recession vs depression)
How about banks ? what is large ?
Just Country wide which is already at risk or a tier 1 ?
so come Dec 31, 2008 (or later in 2009 based on GDP restatements.
Here is what I am interpreting your statements to mean:
GDP growth not negative - this prediction completely wrong
GDP growth negative 1% or less - this prediction is way wrong
GDP growth negative 4.8% or higher - then this prediction is wrong
GDP growth negative 5%+ - then this prediction is somewhat right
GDP growth negative 8%+ - This prediction nailed for 2008
GDP growth negative 15%+ - Doomer highside prediction nailed.
then if it carries through 2009, the full severe recession prediction nailed.
If country wide does not fail in 2008 and no other tier 1 or tier 2 banks fails then the "large bank fails" prediction is completely wrong.
If country wide fails and no other tier 1 or tier 2 bank fails (has to get bailed out) then this is a slightly wrong prediction.
If two or more tier 1 or tier 2 banks fails then the prediction about large bank failures is substantially correct.
I am not sure how to interpret a lot of the other qualitive predictions or ones which seem to flow past 2008 in an indefinite way.
the worsening housing prediction.. can that be quantified by foreclosure rates reaching some record ?
the unsold homes prediction and the destruction of certain energy unviable communities. How does that play out ? it is not clear.
Bond Insurer downgrades. Clearly if they do not get downgraded at all then the prediction is wrong or if the number of bond insurer downgrades is not out of line with historical averages then the prediction is wrong. However, I believe the prediction is for something more dramatic. Record levels of downgrades relative to past years ?
http://www.csmonitor.com/2007/1016/p01s04-usec.html
So what a pull back in this fund in 2008 and for asset back commercial paper to drop another 750 billion to near zero ?
http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=FT&d...
Nano, unless one has a crystal ball, these things are hard to quantify.
But here is something firm: having shorted both the financials and the S&P 500, I am already happily making money. So while we can't know the exact numbers in advance, knowing the trend can be VERY useful.
Errol in Miami
It is also hard to pick the winners in the football pool, but if you do not quantify then you cannot determine who was right.
The traditional economist forecasters pick numbers. It let's us compare who was more right either by skill, foresight or luck.
I quantified it on behalf of Gail based upon what she said in qualitative sense. The post war worst recession. That is 5% negative GDP at a minimum or it is not the worst post war recession.
Either Gail is right or she is not. If she is saying some kind of negative growth then she is predicting the bare minimum recession just like Goldman Sachs. Clearly that is not the claim. She has said in the first paragraph those predicting lite recession and business as usual are wrong.
It would be interesting to know where you made your SP500 short.
http://finance.yahoo.com/q/bc?s=%5EGSPC&t=2y
As the SP 500 has been trading in wide sideways band 1400 and 1550 for about 20 months.
Gail has not renounced the statement so I presume that she is comfortable with my matching up historical facts and numbers with her qualitative statements. If anything the qualitative statements are for even deeper numbers. ie. Long term decline. Which would be worse than the relative business as usual of the thirties depressions.
I think one problem with what your trying to do is that we will fairly quickly be facing what I call a social fabric issue. The depression of the 20's destroyed the social fabric of many countries and lead fairly directly to the conditions that allowed WWII to happen. The US for some reason managed to last longer than the other countries probably because we where still a very agrarian society vs Europe.
I think just following the trend 50% smaller economy by 2017 does not seem reasonable give just WT Export Land model more like 75% or greater. But this is not all that sensible since one has to conclude what I'm saying above would happen we are not a agrarian society thus this time the social fabric if you will would tear and probably well before the 50% mark. A more modern example and I think far more relevant is the collapse of the Soviet Union.
Given the current situation a collapse of this type before 2017 is probably certain. When and how bad it would be is difficult but one thing is certain no one has offered any evidence that your going to take a nation of strip mall employees and expect it to weather a fairly serious economic dislocation.
Hi nano,
The S&P's trading range for the last 20 months isn't so important to me; however, the fact that it's down about 10% since I pulled the trigger in Oct is very interesting to me. Not a bad move for 3 months. While no market moves in a straight line, over the coming months I expect more of the same.
As far as I'm concerned, Gail, Jeffrey Brown, Jeff Vail and other are plenty "right" so far.
Errol in Miami
Country Wide is looking like it will get bought out by the Bank of America. This follows the 2 billion purchase of Country Wide two months ago by the B of A. This was not a government bailout ala Chrysler, this will be a financial purchase/merger.
This is one day after the post and I had asked for clarification on "large bank failures and the Country Wide situation", which was ignored by Gail. Therefore, I do not think Gail gets any points for this development under the "large bank failures prediction". Maybe as much as predicting $100 oil when prices are at $99.5 the previous day. It is a business as usual development that is not related to peak oil. Loose lending and overly agressive financial practices seem to bite financial instititutions once a decade. S&L crisis, junk bonds, japan real estate, asian currency, subprime, etc...
http://biz.yahoo.com/ap/080110/wall_street.html
http://en.wikipedia.org/wiki/List_of_recessions
I think we are headed into pretty much permanent decline (or declines, punctuated by short up periods, like our current recessions).
I expect at some point, we will be looking at banks like Citibank, Bank of America, and Wachovia failing, although probably not all this year.
I think that a model of a a fixed percentage decline isn't quite right. We are likely to move more in steps. We don't think of New Orleans pre-Katrina and post-Katrina as an xx% decline, we think of losses of big pieces of the economy, and big changes. I think that may be more of the correct model. There may be big failures of financial institutions that are not fully insured, and they start taking with them associated pieces of the economy. Gradually, these pieces of the economy become bigger and bigger holes in the total economy, and start pulling other parts in.
If you want a scenario of what kinds of things might be a few years down the road, read my Economic Impact of Peak Oil Part 3: What's Ahead?
I have read your scenarios and I think you are wrong.
I want to quantify it so that when you are wrong it can be pointed out.
I expect that if there is a recession and there might not be that it will not be worse than a 1% GDP negative at the end of 2008.
I do not think that we are at the start of a long term decline.
I think that even in the event of peak oil that civilization and the world economy will manage better than you think.
Plenty of steps can be taken.
Aero modding cars. Getting 60psi tires, racing hub caps. bottom plate, etc...
http://advancednano.blogspot.com/2007/12/aero-modding-car-customization-...
$500-1000 plus labor
biodiesel and diesel mods
http://advancednano.blogspot.com/2008/01/car-modder-making-60mpg-biodies...
$5000/vehicle
I'd go along with advanced Nano. Gail's analysis to me gives some grounds for concern, but nothing to justify the apocalyptic tone of many of the comments here.
Sure, things have always got the potential to go badly wrong, and if you hypothesise that everyone will make the most stupid response possible then you end up with a doomsday scenario, but usually things aren't that bad.
The question resolves into two parts, technical and financial.
On the technical side then peak oil is assumed to act as some sort of trigger.
Note that for the present at least there is no question that natural gas is peaking on a world-wide basis, at least for a few years, which automatically gives you some kind of cushion.
There is even less question that coal supplies will be plentiful, again at least for a few years, and this is the main energy source of the two economic powerhouses of the 21st century, China and India.
So you are left with oil, a rise in which would certainly damage many economies, but supposing to take a hypothetical case it went to $200 a barrel.
You would surely hit consumers in the US particularly, although much less in Europe proportionately, as we already pay around the same for petrol as you would end up paying in the States for $200 oil!
You would also greatly improve the economics of plug-in hybrids and so on, widespread adoption of which would reduce the impact of high oil prices.
As an example of the possibilities, by producing biomethane from a hectare of land you can generate enough to drive a small car 4 times around the world!
http://biopact.com/2007/12/biomethane-presented-as-most-efficient.html
The economics of this would be unanswerable with oil at $200, with millions of hectares in the US alone producing this, then pressure on oil supplies would ease, likely reducing it's cost.
After the oil shock in the 70's many economies drastically reduced the amount of energy they need to produce each additional $1 of GNP - why should this not happen again?
It is only the oil component of the energy mix we are talking about anyway,
On the financial side, sure there are grounds for concern, and the high degree of linkage gives additional cause to worry, but essentially economic life is about confidence, and if the stress trigger - ie the problem of high oil prices, causes fewer problems than you hypothecate, then although you might have problems such as the higher inflation in the 70's there seems no reason to hypothesise doom.
In the longer term, without even looking at the potential of renewables, then France currently generates over 75% of it's electricity from nuclear, and if as the gloomy think we have energy problems, that would itself lead to pressure to copy that in other countries.
In short, doom hypothesises predicate no-one doing anything about problems as they arise - the reason especially in the States that they are not adapted to expensive energy is that it has been cheap in the past.
With some dislocation there are no substantial grounds to think that an adaption could not be made - the inefficiency of use in itself means great savings can be made.
The adoption rate is limited and if the decline rate of oil exceeds the adoption rate, the system will fail. People like Stuart have actively researched the adoption rate of the economy without coercive, even tyrannical government controls and it's not very high. If oil decline rates are as high as those expected by the CEO of Schlumberger, the world's largest oil services company, at 8% then we're going to have serious problems. As Alan has noted, the US turned over its entire housing stock and created suburbia while abandoning urban dwellings. But this occurred at the height US power and economic might and growth, while energy supplies were growing and it still took over 30 years to occur. Dr. Bakhtiari's (R.I.P.) predictions have been amongst the most accurate for the longest period of time in the peak oil community. If his predictions continue to be correct, the world will find itself with less than half the total oil produced today in under 20 years. That's a prescription for widespread war, riots, and social disruption, even as we've already seen this occurring in places like Indonesia and Pakistan.
The key question is what is the decline rate? You don't know. I don't know. And until we know, we cannot sit on our asses pretending all will be well. We are burning precious time believing in the false god of "free markets" (and don't get me started on how this market is anything but "free") when we are facing a crisis of monumental proportions. Can we solve it? Yes, technically we already have everything necessary to solve the problems facing us. It's never been a technical problem. The problem is political and until we collectively agree to tackle the problem our collective existence (i.e. our civilization) remains at risk. And that is what this is, a risk management problem. So far we are flunking in spades. A tiny number of entrepreneurs doing something does not constitute a solution if the solution they are going to deliver is going to take 50-60 years to arrive when crisis itself will full blown in less than 20 years. And I use that 50-60 year number deliberately because another TOD paper proved that was the time that the existing system (the so-called "free" market) takes to turn from one energy source to another. It took that long for the rise of coal, the rise of oil, and the rise of natural gas. It's taking even longer for nuclear. Anyone who claims the market will respond faster than that is whistling past the graveyard and has ZERO evidence for that assertion.
I agree that disruption is likely, but you don't need to change, as you put it, from one source to another in 20 years, for the simple reason that the peaks in oil, gas, and coal are disconnected.
The peak that is relevant now is in oil, and difficulties in that will suffice to alert more of the public that change is needed to cope with later gas and coal peaks.
It is surely reasonable to feel that people will take obvious measures before a total crash.
At a very practical level, most oil goes on transport.
In the UK most, although not all, could manage on public transport.
They won't like it, but they can manage and the increased use would lead to better services.
In the US, many could manage with a small motorbike - again they wouldn't like it, but could get by.
Apartments in the US are huge compared to Europe, and very high fuel costs would lead to city centre apartments being split, whilst houses in the suburbs would loose value.
Far bigger adjustments have been carried out many times, for instance in South Africa under sanctions.
From the 8% decline that you quote, for total energy use you might be talking about 2-3% - and that is before more resources are put into developing other resources, when it becomes even clearer that there is a problem.
If oil were our only energy resource, then projections common on this forum might be reasonable, but it is not.
Don't forget that most of the time to build a nuclear plant is in getting the planning and so on - if people are hurting all that will go out of the window, and massive construction would start, scheduled more to actual build times, and that on an accelerated basis, with plenty of corners trimmed.
After all, if the alternatives are as bad as many here seem to think, what's to loose? Most will want to keep their lights on, even if it means accepting extra risk.
You didn't even read what I wrote.
The decline rate of petroleum alone can be sufficient to overwhelm society's ability to adapt! We just don't yet know whether the decline rate will reach that level or not but some pretty accurate (so far) projections indicate that it might.
All the regulation and planning out the window to rush nuclear plants online? Do you realize what a disaster that would be? Even nuclear proponents don't make absurd arguments like that!
You are so far off in fairy tale land that you are not even credible. You fail to realize the underlying importance of petroleum to our civilization and that it cannot be one-for-one swapped with other energy forms without huge issues to overcome. You fail to realize the additional uses of petroleum. You even admit that natural gas is also peaking about now and thus soon headed downhill as well.
And despite all this you think nothing can go wrong with a society that has proven (via historical facts) that it cannot retool in under a half century and yet it will somehow magically do what it has never ever been able to do before?
Poppycock! And this discussion doesn't even touch on collapsing financial markets (whether due to peak oil or not) which means LESS capital, not more, free to invest in alternatives.
Hey look, I'm one of those who says we don't have to be doomed if we choose not to be. But it's not going to happen via the so-called "free" market and it's not going to happen at all unless we really do choose.
Steady on the abuse chum!
I did indeed read what you wrote, and answered the points as presented by yourself.
You state 'the decline rate of petroleum alone will be sufficient to overwhelm societies ability to adapt'
I gave specific examples of how it would be possible to greatly reduce petroleum use in the West, with large but not insuperable difficulties, far short of any projections of total collapse.
Regarding nuclear power, I just said that if the consequences of not having power were anything like as bad as you were saying, then it would seem preferable to take a chance - you don't seem to be prepared to accept that choices can often be between two less than perfect alternatives.
Personally, I think that the consequences will be sufficiently less than you think to make a more ponderate program possible and desirable.
Just the same I should note that the present nuclear fleet was built within about 20-30years, and the gap in build since then means that technologies have moved on - and attitudes would certainly change to facilitate faster build.
Engineering is always about choice, and what may not be acceptable if you are comfortable will do just fine if anything like the distress which some here imagine should happen.
In France they built the present nuclear fleet within around 30years - and that supplies 75% of French electricity.
Technology has moved on, but you are still convinced that America can't do the same?
That's around 1% per year of total energy use - a fair chunk of the projected rate of decline of total energy resources, according to your figures.
It would build up gradually, but could hit much higher rates by the end of that time-period.
Of course, that does not power the cars and so on, but a very large part of that use is very discretionary.
That is without considering contributions from biogas and so on, which would certainly contribute substantially.
I omit some abusive comment here - if you want to participate on a discussion forum, it is a good idea to learn to discuss, rather than ranting.
I did not 'admit that gas is also peaking about now' - you seem to have been guilty of the same thing as you were criticising me for, not reading what has actually been said.
I actually said that the peaks were NOT coincident.
There is a slight difference there.
The peak of natural gas may not be too far off, but in an emergency such as you postulate even ten years can make a heck of a difference.
As for there being 'nothing wrong with society', I fail to see what either your or my philosophical stance has to do with it.
The 'sin' which you seem to feel that society has been guilty of is to utilise cheap and common resources to make most people in the West vastly richer and healthier.
I don't think we need to be in a panic because we have a certain level of challenge ourselves, to maintain good living conditions whilst economising on some of those resources.
Can you just remind me, which ethics class did you say you attended? Ah, yes, that’s right, none.
Not being of the Christian orthodoxy myself, I couldn’t comment on the issue of sin in any particularly meaningful way. On the issue of ethics, however, I find your position ambiguous at best.
When you say common, which commons are you referring to in particular? Until we get that particular boundary settled I fear we’ll be going in circles.
As for the issue of cheap, I myself wonder what you might mean by this. For example, it was pretty cheap for Union Carbide to trash Bhopal for the wealth it returned to the west and the company’s shareholders. But, I struggle with the cheap part when considering the poor, in means as well as luck, citizens of Bhopal in the wake of the aftermath of the disaster. Funny that Dow was able to buy the assets of Union Carbide but wasn’t required to own the liabilities, including reparations for the disaster itself and its legacy. Man, that was one cheap acquisition.
Then, I guess I just don’t understand these things, really. Like all those poor folk in Brazil using solutions of mercury to get at the gold ore as they dig away in rather less than hospitable conditions. That must be one cheap way to get cheap earrings and cheap rings in the local jewellers, eh? I’m not sure if it implies their lives are cheap or not. I’ll leave that one for you to work out.
Back to the issue of common resources. If they are indeed common, how come you get to use so much more than a Somali family? I mean, if they’re indeed common, ought they not be shared out even-stevens, as it were? Seems like a good way to look at it. If they’re common, ooops!
Got it all wrong. Sorry. You meant common as in found just about everywhere, didn’t you. Now it makes sense. But, it would seem, diamonds aren’t all that common, and they still don’t make the wealth of the workers seem much greater now than it was during Apartheid. I could be wrong, I don’t work the diamond mines. But it doesn’t seem for uncommon resources, say diamonds, or oil, or precious metals, the folks whose land these things are found get much for having these uncommon things other than hungry children and an early grave. I’m probably just some damn liberal bleeding heart. That’s gotta be my problem. I need to seek help. Do you think Romney can show me the way?
That’s okay, you get on with the benefits that your cheap and common resources bring. Enjoy your comfortable life in the west knowing that’s just about the only place with deserving, maybe even “sin” free, people left on Earth.
If you want to go on a guilt-trip, have fun.
It's odd that many who are so inclined are fairly comfortably circumstanced themselves, and the measures that are advocated are often those which would have the effect of drawing up the ladder for those who are not so circumstanced.
Some of us fear that is exactly what will happen - one of our worst nightmares.
I'm not anti-nuke, but I am anti-poorly-sited/built/maintained-nuke.
I agree, and don't think it is necessary.
I was just pointing out that is everything is as awful as some here seem to think, then the alternative is not so bad.
If you fall off a bridge, you don't worry if you might cut your hand by grabbing something to save yourself.
Those who want to persuade themselves that the end is nigh should not have both sides of the argument.
They remind me of the fat child in 'The Pickwick Papers', who 'Wants ter make yer flesh creep! :-)
Resistance to change is a big problem. There are lots of things that can and should be done to mitigate the impact of peak oil and gas. I'm in the UK too, and just this week the Government has started saying and doing things that possibly signal that it's preparing the ground for a crash programme to respond to PO.
The Government's problem is that 99.9% of voters have not yet seen that there is anything to worry about. Sure, there's climate change - but for most people that all seems a bit vague and unproven, and a long way off. Meanwhile, even respectable bits of the media such as the Times newspaper and Economist still regularly run stories along the lines of "plenty of oil left in the ground", apparently as and when asked to so do by proponents of BAU.
Engineering a period of rolling power cuts and temporary shut-downs at petrol stations before oil goes into decline would quickly wake the UK population up to the impending energy crisis. But if those things happened while there seemed still to be plenty of oil and gas left - i.e. no sign of other countries suffering similar difficulties as well - the public reaction would be anger and disbelief, undermining serious attempts to restructure for the post-peak situation.
It's a classic bubble situation. Calling time or trying to get out too early doesn't stop the bubble inflating; it only hurts you at the time. But the longer you stay in, the more risk there is of being crushed in the collapse when the bubble bursts.
I'm certainly no doomer or survivalist - and I can't say how relieved I am to see even a tiny stirring of preparedness among TBTB in the UK right now. But if the late stages of the Cheap Oil Economy carry on behaving like a bubble, I for one still have a healthy respect for the likely dose of pain and strife that will accompany its collapse.
Don't forget that there are a lot of people around who believe the answer is to simply let the markets have free rein or, as a fallback position, to bash those pesky foreigners with superior force until they hand over their oil to we who deserve it more.
Hi Dave,
re: "the peaks in oil, gas, and coal are disconnected."
As I understand it, the geological conditions which underlie the extraction of natural gas and oil are often quite inter-connected.
Also, the physical means of extraction of oil, natural gas and coal, (i.e, the machines, personnel, energy required)- along with the capital arrangements - are also interconnected, in the sense that the extraction processes for each of these relies, in turn, on fossil fuels in order to function.
So, actually, the peaks seem to be very connected.
Also, natural gas is not as easily transported, so the regional peaks are quite significant. Hence, "world peak" is not as relevant. And, hasn't natural gas in North America has already "peaked"?
The picture is, if anything, one of many interconnections on many levels.
re: "people will take obvious measures before a total crash".
Some questions:
1) To whom, exactly, will it be obvious that a "total crash" is imminent?
2) What are the signs they should look out for of this looming "total crash"?
3) If they see a "total crash" coming, will they have the means to respond as you suggest?
4) How would they finance some of these changes? For example, "most" in UK use "public transport"? Is there sufficient public transport in place now to absorb the additional users, for example? And so forth.
5) And really would like your ideas on this one:
What are the "obvious measures" you think people should take? In time to avoid a "crash".
As you say, peaks in oil and gas are interconnected and many oil fields have associated gas.
Total gas supply will not last forever.
However, a relationship does not mean identity, and I was just arguing that the peaks are unlikely to be identical.
In the US, as you say they are already way above peak.
In Europe though the concern for the moment is not that supplies are in imminent danger of running out, but that we would become more dependent on Russia and the middle East.
Another gas source which would undoubtably be pushed in the event of more pressure coming on gas supplies is methane hydrates.
Japan already plans to exploit some. It is a pretty difficult technology, and I am unclear about how much of this will actually be exploited, but it would help quite a lot.
The real point is though, that extreme pressure is hypothecated by many here, and that means that measures that would not otherwise be taken happen.
For instance, you would have a much larger impetus to producing biogas, which is a large resource.
http://biopact.com/2007/12/biomethane-presented-as-most-efficient.html
I am not saying that everything in the garden would be rosy, but neither is there likely to be a total surrender to paralysis.
I say likely because it is always possible that everyone will continually take dumb decisions, and the worst possible result may obtain.
It just isn't smart to base what you do on the premise that the worst possible outcome will obtain.
Those who have been in combat tell me that you don't win battles by wasting your time imagining the worst - you win them by dynamically forming a game plan and putting it into action, just as you don't win sporting contests by deciding that the other team is far better than yours and you might as well give up.
1) The signs a total crash is imminent - when it is well underway, with persistently high oil and gas prices even in the face of recession, inefficient biofuels like ethanol forcing food prices higher, etc.
So what could then be done about it? Lots. There are huge inefficiencies in the system which have not been worth doing anything about whilst fossil fuels are cheap.
For a start, you could increase the fuel efficiency of biogas by eliminating the corn base ethanol scam and going for the biogas system I have given here.
The real big move though is to make use of a technology which has not been developed due to concerns of safety and so on, but on a more rational assessment is entirely capable of powering the world for many millions of years - nuclear power.
here is a run-down:
http://www.nuclearcoal.com/energy_facts.htm
Would it instantly solve problems? Nope, the build would take some time.
Most of the delays are regulatory though, and if you are out of a job and fuel is costing a fortune then worries, largely unfounded with a properly designed system, of safety are going to take a back seat.
So, for instance, instead of using natural gas to get the oil out in the tar sands of Canada, you could use a nuclear reactor.
Far less energetic methods of getting the oil such as Shell's new technology would also be much more rapidly adopted in a high energy cost world.
On nuclear, it might be objected that build-up would take too long.
As Bill said on the link I gave, that is mainly because they have not been mass-produced.
It has to be remembered also that prices are forward looking, so that if you were still heavily dependent on fossil fuels, but it was clear that this would be greatly reduced in ten years time, prices of the fossil fuels would still fall as people attempted to unload a wasting asset.
Don't think I dismiss renewables though - far from it - it is just that there a lot of scams about, and a lot of pie in the sky.
There are also a lot of good ideas about, which are simply not being implemented whilst energy is cheap.
So, what could you personally do if electricity, oil and gas prices went through the roof?
For a start, electricity prices would lag - a lot of it is coal burning, and worldwide there is no suggestion that that is peaking quite yet.
So you could buy a solar thermal panel for your house, which are the most cost-effective form of solar energy.
If you are too broke to buy one, you can always build one yourself out of bottles and plastic piping!
Then you get a heat pump, air in maritime climates like the UK, and in most of the US you would need the extra expense of ground source.
But in rural locations in the US you might also be able to swap to wood burning.
Then you put in partitions tp reconvert your open-plan house to smaller rooms, and only heat what you use.
There is also the possibility that Aero-gels and so on might reduce in cost sufficiently to make them practical for insulation, although in an emergency there are lots of materials you can use to pad out walls - you just loose floor space.
For work, since your cart is expensive to run, you would first consider buying a smaller one, then sharing lifts with someone else, then trying for a job closer to home.
If you had to you would swap to a motor bike.
None of these alternatives are very palatable, but I am just pointing out that before you get to the point that some here are talking about, with the total destruction of the economy and mass starvation and so on, there are a lot of practical measures which would be taken - it is a hassle taking a motor-bike to work, but better than not having a job.
In Britain a lot of people swapping to public transport would put strains on the system - but again, what would you rather do? Put up with a grossly overcrowded bus, or not have a job?
Employers might even see sense, and stagger working hours more.
Not to mention the possibilities of telecommuting.
If you are a businessman, imagine the opportunities open by buying city centre properties, and converting them into flats, tiny by comparison with present US accomodation.
You could then buy up the very cheap suburban property, convert them, and buy a couple of buses to ensure fast and efficient transport to the centre.
Building buses would only take up a tiny fraction as much capacity as the auto industry.
As for food, and the likelihood of mass starvation, again present inefficiencies help.
Most food in places like the US goes to livestock.
If prices rise, then meat prices rise more.
Some people swap to vegetarianism, or reduce their meat intake, and you have freed up a lot of capacity.
Similar considerations apply to places like China, where most of the rise in food consumption has been due to rising meat consumption.
If times get tough you swap back to more vegetables.
There are many other possibilities, some of which would have a major impact if they worked out.
For instance, prospects for wind power would be transformed if we got down to figuring out high-altitude wind.
There is plenty of it, nearly everywhere in the world, and it blows almost all of the time so that you don't have the massive problem of intermittency associated with windmills:
http://www.kitegen.com/
If they can get it working it would cost a fraction of present energy costs.
If biofuel from algae works it is also a game-changing technology
http://www.iht.com/articles/ap/2007/12/11/europe/EU-GEN-Netherlands-Shel...
My point though is that you don't have to expect breakthoughs to have a perfectly acceptable energy system.
All in the world you need is nuclear power and modest improvements in battery technology.
People would also have to move a bit from some of their superstitious attitudes to the perils of nuclear power
Greyzone,
I agree with you. It will take a very long time.
Gail,here in Oregon in the 79-80s it was HARD.The "official" unemployment was 15-16%...briefly touched 17% before the Regan 2 trillion dollar spending spree kicked the economy in the ass.
There was a lot of POOR people.On the NW coast of Oregon ,where I lived at the time,It was common practice to lock your Freezer up tight w/chains for good measure,because yes,people would steal the food in your house.
You would never leave anything of value anywhere: it could "grow legs".
An lot of sharing with friends{you catch a fish,we all eat well,I find some mushrooms,the same soup feeds your kid as well as me..
Its changed from 30 years ago...that part of Oregon suffered the most growth,with the worst planning...
I am living in a similar circumstance now,not near the sea though.What I am getting at is that while "officially" it was not "that bad" in some places It was plenty bad enough.I think there is going to be a lot of sad,sad young men who have never had trouble finding work...and now there is none..or old farts like me who will do there best to hang on to current position tooth and nail as they know the chance of a new position are slim and none
I have been around long enough that I was through the 1974-75 recession and the 1979 - 81 recession.
In the 1974-75 recession, I left one employer (a smaller insurance company) because I could see that it was getting into deep financial problems, related to price inflation and the decline in the stock market. Also, the rise in interest rates meant that the large portfolio of bonds it was holding was "underwater" if it ever tried to sell any. (Insurance regulations allowed the company to carry the bonds at amortized cost, even though this was far above market value). That employer went bankrupt shortly thereafter. I went to a large insurance company, and it struggled financially, but made it through the period.
The thing I remember most about 1981 was the very high interest rates - like 18% mortgages. We were not able to sell our townhouse in Chicago when we moved to Atlanta, so we rented it out. We were able to buy a house in Atlanta by putting down a large down payment, and assuming someone else's loan, at a fairly good interest rate of something like 10.5%, IIRC. We were fortunate that we had always lived well within our means, so could swing this, but a lot of people couldn't. We also had two reasonably good incomes - I was working 60% time in consulting, while my husband was a college professor.
Ahh ,yes,I had mis-placed that memory...sweet jesus the interest rate.People getting a 10%mortgage,and being happy it was not 12.I think your knowledge and memories,like mine,give a better idea what we are walking into.My brother,the ex-republican robotics engineer thinks it will be a lot like the 70'"squared" Lots of hard times,poor people,and little work...We both think its going to get a lot meaner,a lot quicker...Instead of "peacelovedope"rock concert of the 60s',we get the "Me generation" thats been raised by TV "shootumups" .
I like my 6'fence.And the new charger.And being at the end of a dead end road
Your darker analisis/view is much more to my worldveiw
As in EROEI analysis, it is the factor(s) left out that often determine the analysis's validity. Leaving out the critical factor of price invalidates EROEI analysis. Gail's analysis is leaving out the effects of peak oil on the oil patch and the Midwest where ethanol and grain prices are stimulating the economy like it hasn't seen since the 1970's. Midwest land prices are sky rocketing even while house prices on the coasts fall into the ocean. The story of the pluses of Peak Oil gets left out in the doom and gloom of city dwellers facing evaporating equity, soaring gas prices, and levitating food prices. The rural economy, at least in Iowa, loves it. IMO taking the severe minuses into account with the big pluses in the Midwest make the coming recession bearable for the country as a whole, although those not prepared for it may feel like it is the end of the world.
I agree! (but sadly, this is only place)
False. EROEI at least attempts to put limits on an analysis. Prices are in dollars, which are in theory, infinite.
Boldly stated, for a corn farmer. Whats the corn ethanol economy compared to the rest? 1/5th of one percent. You see the world through Practical colored glasses, which is natural. Secondly, any very low EROEI fuel, unless it uses limitless non-energy inputs and plentiful energy inputs, is eating down the capital stocks of high quality fossil fuels to make money for corn farmers. Again, good for you - bad for country.
Source please? I met with banker today in Central Wisconsin because I am buying farmland and there are lots of foreclosures and the market is weak and getting weaker - not AS weak for farmland, but still lower. Perhaps Iowa is the holy grail.
Said differently, 'Im a corn farmer and corn is finally at $5 basis, suckas!'
Farmland price index
http://www2.creighton.edu/business/economicoutlook/mainstreet/surveydeta...
http://www.iht.com/articles/2007/02/19/bloomberg/bxland.php
http://www.msnbc.msn.com/id/18059389/
http://economictrends.blogspot.com/2007/12/no-recession-in-sight-for-rur...
====
advancednano
http://advancednano.blogspot.com
Thanks - its interesting to see the difference between the states. Wisconsin not on there. Based on Stuarts opus on Monday, I continue to believe farmers who own the land are going to make out the best - leasing/contracting out is $$$$.
Speaking of differences between states...
Wisconsin has 66.80 acres of farmland per person, highest in the U.S. I would expect farmland to be relatively cheap in WI since it is so abundant (34,400,000 acres, 515,000 people).
The U.S. in total has 3.11 acres per capita.
Rhode Island is at the bottom with 0.06 acres per capita.
I live in a state, CA, with 0.72 acres per capita (yikes!).
Source, Touch the Soil, Nov./Dec. 2007, page 15.
It's pretty interesting that in one state - let alone the central part, agricultural leases have such a wide dispersion of price. Ag land in my county goes for between $40-$100 acre - in the west of the state, near Minnesota where the topsoil is richer and holds water better, its upwards of $150 per acre. I know people doing that racket and the costs are just too much - even with $4.20 local basis corn - they are going to try it one more year. The landowners own the 'duration'. The renters just get a t-bill yield (analogy)
I don't know where you got those numbers, but WIsconsin population is about 5,557,000. If there are 34.4 million acres of farmland, that would come to 6.19 acres per person.
I grew up in Wisconsin. A lot of the land is fairly rolling. That is why it Wisconsin is known for its dairy cows. Quite a bit of the cropland is too hilly to cultivate with tractors. It is better as pasture for cattle. It might work with manual cultivation, however.
Some of the land near where I lived was scrub pine growing on fairly sandy soil. That land would have been poor for crops, even if the trees were cut down.
34.4 is total land area (55,310 * 640). actual farmland (2005)15.4 million acres.
Per capita farm land is 2.77 acres
ref 2007 World Almanac
I goofed and mixed up Wisconsin and Wyoming. Though I have never been to either I am sure they are different.
Wisconsin has about 15.3 million acres that can be cultivated, or 2.75 acres per person, which is near the U.S. average.
(P.S. Please don't tell my wife I made a mistake, we have been together 16 years and she hasn't discovered my flaws yet!) ;)
Land prices here spiked up 2x, but the outlying data points appear to be contiguous land purchases - guy owns a 320 and the other half of the section comes available so he jumps on it. Overall the read I get is that farmland is up 1.5X but housing runs from crappy in the good places to suicidal developers in the bad. Spirit Lake, which is sort of almost a city, has 5,500 people 500 vacant homes(!), and no rentals at all thanks to ethanol plant and wind farm construction in the area.
practical,
have you heard of anyone in your area having problems locking up fertilizer contracts for the spring? Corn fertilizer here going for over $500 a ton, and there seems to be some 'buy it while you can' mentality. Is that just a local thing?
Around my area there is a very large concern about where N,K,P prices are headed. They are locking up MAP and DAP if they can. They are more concerned though with N.
I have no real figures on prices though since I am currently undergoing some personal trials that keep me busy.
The farmers will go into spring planting as always. If the prices skyrocket then food will do so as well. If there are severe shortages of N,P,K? Then food prices will go ballistic due to reduced yields.
What else could be the outcome? By ballistic I mean way off the charts.
We couldn't grow anything without those huge crop 'inputs'.
We are completely and totally locked into the genetics and chemicals. IE Roundup Ready corn,,etc.
If herbicides were scarce the weeds would simply rule. You can't imagine what happens to an abandoned field where the herbicides have barely kept the huge understory of weeds from breaking out.
One season missed of spraying roundup on my acreage when I went out of row crops resulted in Johnson Grass that I couldn't walk thru or standing on top of my tractor, see over!! I could barely run the spray rig over it. I could barely manage to bushhog it. Once it heads out and the seeds disperse? You are in deep deep trouble.
Right now the fellas I sold my back fields too (years later) let one season of not clipping those fields go by and now they have lost all the future hay crops to johhsongrass.
And I might add that I have never in my life seen higher prices for hay. Square bales that weight approx 35-60 lbs are going for $6 to $8 per bale. I used to get $1.30.....Right now even finding square bales or round bales is almost impossible. There is surely a huge shakeout in the horse and cattle areas coming like a runaway locomotive right square at our eyes. I know some guys who are giving their riding horses away to anyone who will take them. No hay.
airdale
IMO as always.
airdale
Unfortunately, all of this is interconnected with all of the other problems we have. Systemic risk.
Its not local its global...
Here in OZ the price is exploding. Last year the price doubled and on the west coast of South Australia there was a severe shortage which delayed plantings. The way the season finished, resulted in a severe decline in yields...
Peak oil = PEAK FOOD...
Peak oil = peak food is not good news!
Gail & Nate,
Very good post. I particularly like your broad coverage. Do you think that the US recession will be the microcosm of a world wide recession which may occur with certain lag?
Initially I thought that gold would be a big beneficiary from the problems in the financial sector. I still do, but do not think it can be anything more than a minor reserve currency simply (good for individuals to store part of their wealth) because there is so little of it around –that word “scale” in play again. Also gold is being leverage through ETF’s and other derivatives so it may not be as pure a currency insurance as some believe.
Globalization has peaked. I think that it is being or will be re-structured to take advantage of the relative availability of various types of energies as opposed to labour or maybe the optimum of both. When the US does enter a recession other major trading partners will be impacted. Just another example of “network” failure. You are right many of the rules which govern the functioning of markets will most probably be set aside during the “crisis” which may in fact be the beginning of the paradigm shift encompassing how the world sees energy and a re-write of certain economic theories.
I wish to thank the TOD community for sharing their knowledge and thoughts. You provide more than hope. Even the doomers who remind us of the consequences of failure. Where ALL in one hell of a mess but somehow we will extricate ourselves, mind you not without pain and suffereing.
Regards to all,
David
I think the recession will affect most of the world. The timing may be a little different, but with so many multinational corporations, I would expect there not to be too much of a difference.
There may be a group of countries that are lesser affected - say Russia, China, and many of the Middle Eastern countries, and perhaps a few energy-producing countries like Norway. These are likely to experience a smaller decline in standard of living than the other countries.
I doubt such severe effects, simply because the buffer is bigger than it was in the past - ie we have another couple of billion people in China and India who are living in fast growing economies and the world is not so dependent on the US as it was.
To my way of thinking, oil supplies peaking do not necessarily herald the apocalypse.
At the moment there is still plenty of gas, although supplies may tighten in 10years time or whatever, and coal is still the main fuel, certainly of China and India.
Anything like the recession some are talking of here would greatly reduce oil use, and prices for a time at least would fall, peak or no peak.
This is not, in my view, likely to be catastrophic, unless something else kicks in - for instance, shortages leading to bellicose action, then war.
RE:
"15. There is a chance that some type of discontinuity will make financial conditions suddenly take a turn for the worse."
Gail, have you read Naomi Klien's "The Shock Doctrine," or Naomi Wolf's "The End of America"?
The reason I ask is this: both authors have done well-researched, well-documented books showing that a hyper-concentration of wealth and power has been underway for many years, with encouragement from Milton Friedman and the Chicago School of Economics.
The core belief that ties together the military, political, and economic aspects of contemporary fascism seems to be that it is necessary to introduce "shock and awe" everywhere in order to create a kind of "blank slate" upon which to restructure societies.
Friedman hated retirement, health care benefits, and any kind of government networks that represented the common good or a form of commonly held wealth. He insisted that every nation needed to be shocked in such a way as to allow the restructuring of all wealth into private hands.
Friedman supported Pinochet in chile, for example, and just as the USa actively supported and collaborated with the overthrow of Iran's democratically elected government and supported the brutal Shah, it also helped to put Saddam Hussein in power in Iraq and to support his brutal dictatorship, along with many others around the world.
Military, financial, and economic tools are used by todays Neocons -- fascists -- in order to bring about a state of shock in societies and cultures so that they may be re-shaped to fit into this plan of redistributing and concentrating wealth and power.
Even storms and other natural disasters are seen as opportunities to permanently restructure whatever survives -- the much-desired "blank slate" -- to fit the model of huge concentrations of wealth and destruction of the availabiloity of public goods and services such as education, health care, and the like.
My summary does not do justice to the detailed and meticulously documented work of these two women, but at least gfives an idea of what they are about.
In sum, many of the powers that be see a need to shock the world into a state of absolute malleability. Whether that shock is military, political or economic matters not at all. Any combination that will work is on the table.
The USA has been subjected to a series of shocks, and needs more in order to persuade people to trade away more political rights and expectations of a share in wealth -- for promises of some measure of security and survival for those who are compliant with authority.
The coming economic shock may be a "natural consequence" within the closed system of capitalism, but it is welcomed by those who intend to use it to do away with democracy, especially as it affects legislation with regard to "The Free Market."
Any thoughts?
Yes, I have a thought. This sounds just like the MO of an organized crime gang. Except in this case, since this gang has taken over the government, they have redefined it away as a crime, and instead it is claimed to be "in the national interest".
I guess we'll know for sure if we see an increase in things like martial law when people start marching or rioting. Seems like the police are becoming more militarized by the day.
The thing to remember is, the police are US. The military is US. It it weren't for my wonky eye I'd be a cop for sure, and so would you if you could.
Military and cops and yes even Blackwater goons have mothers about to lose a house, fathers who lost their jobs to Mexican truckers, brothers who are languishing after a tour Over There, in Walter Reed watching the flies circle their dirty bandages.
They grew up on farms and in small towns as well as large. They grew up hoping to go to college and getting the same kick-in-the-teeth in that respect most of us did. They grew up with the electric being shut off, the occasional meal featuring flour and water, and all that stuff we went through.
They are US. Never forget that.
Remember that when they cut open your belly and kick you out of the airplane. The military, the police, the authorities of most types are filled with authoritarians. That's the third part of Klein's "deregulate, privatize and taser". They are us. As Freud points out, we find nothing more satisfying than bashing our neighbor over the head with a bat, not even sex - though sex gets mixed in too, as at Abu Ghraib.
They are us, as the Milgram experiments and other similar experiments have shown.
The Shock Doctrine always ends up being imposed at the end of a gun or under the tracks of a tank. It can and will happen here. And even if they are US, I don't really want the Guard to come back from Iraq so they can do in my hometown what they did in Haditha and Fallujah and all across Iraq. Something like 20 states have contracted with Blackwater to do emergency work. In a good chunk of others, the military is in charge of emergency work. [Here in Maine the NSA, CIA, FBI, military, local and state police are all tied together into a "Fusion" law enforcement center under military control.] We've created a whole system of authoritarian paramilitaries and given the amount of toys they have, they will use them.
cfm in Gray, ME
Things get to that point,I expect us to be acting the same as any oppressed people,However I don't see it.Think numbers.Think political blowback.Think about how many citizens wouldn't say a word,but what little tech you had left would stop working.I see the .mil transformation of the police.{my brother,and several friends are LEOs}They KNOW they rule by the CONSENT of the governed.
I have no doubt there will be mis-use of authority.But there is way too many guns,and folks with bad attitudes about authority...Perhaps its simply that I lean to the mindset the .gov types will be doing good to answer their phones/keep their lights on...
I agree. Post-peak oil is eventually a national emergency and IMO will include restrictions on travel and curfews. The National Guard will be activated to keep order.
Another good book about this, short and easy to read as well, is Confessions of an Economic Hitman, by John Perkins.
He was actually hired by U.S. intelligence to work within a corporation to use US/World Bank loans and aid packages to over-build development projects in foreign countries, especially those with resource wealth coveted by the U.S. The plan was to place a nation into debt, overbuild infrastructure so debts could not be repaid, then ask for liquidation of national assets to pay for debt so corporations could own the resources.
I have heard thats an 'interesting' book. My friends father ran central bank in Ecuador and says it all fable however. The author completely makes stuff up. One mans opinion but I never bought it
Hi Nate,
It would be interesting to know if there are some facts (or any) in his story which are verifiable. (You know? Like separating fact from the fiction.) It might be fable built on incident; incident accurate. Or, it might be some combination.
(BTW, the sound of his voice on audio also disinclined me to "buy", as well.)
That reminds me, Philip Agee just passed away.
I haven't read Perkins' book, but there is definitely a long list of World Bank boondoggle projects (built using Western banks and contractors) out there in developing countries. E.g. irrigation or dam projects that caused flooding (seemingly intentionally). A simple google search reveals the failed projects.
A small example tidbit. Via the IMF, World Bank.. Enron came to own all the water systems in Argentina I believe.
Read this interview, that I read back in 2001, with Joe Stiglitz
(Joe has written some other recent good articles on the economy. Do a google with his name.)
Learn about the IMF & World Banks 4 step process.
Ignore National Borders when you are thinking about finance. Or watch the movie 'Network' again. The "Am I Getting Thru To You Mr. Beale" speech.
Nationalities are just a troubling "Cost of Doing Business" or so it would seem. The 4 Step process. Hmm. Let me run them thru our recent history here in the US... I'll get back to you...
I agree that the filter (assumption of infinite economic growth) is fatally flawed. Overwhelmingly downward environmental trends, ecological realities, the preponderance of evidence, and plain logic stand firmly against ubiquitous rhetoric like, "We can grow our way out of just about any social problem. The rising tide of the economy lifts all boats. Grow or die. Etc."
With all the consequences of peak oil and climate change, coupled with the predictions for tough times ahead (e.g., financial collapse, ecological destruction, food shortage, transportation system failure), it's time to get serious about an alternative to the economic growth paradigm. I've been working on promoting a steady state economy -- one that is capped at a sustainable scale with just distribution and efficient allocation of resources. Now is the time to set a new course for the economy.
The problem with the steady state economy is that it needs to start at a fair amount lower level than where we are now, because the status quo will not be sustainable. I have guessed that maybe a 1900 level economy might work for quite a long time - some industrialization, but not much. I don't see how we could get anyone to buy into this, however.
I wouldn't worry about a 1900's level economy. That predicates such a severe degree of dislocation that warfare and so on would be pretty well inevitable, so you might as well go the whole hog and say 500's level economy - after some recovery as the agricultural systems and so on would have already collapsed and a few billion would have starved!
You can't maintain 6.5 billion people on a 1900's style economy.
Myself and Advanced Nano will follow your predictions with some interest!
Why not? They had electricity and trolly cars. Subway was already in a number of cities. Skyscrapers existed, etc..
Wouldn't think it would be too hard.
Of course suburbia would be more than dead...
There were about 1 billion people in 1900, not 6.5 billion.
That means that things like agriculture can be far less energy intensive - current populations are maintained by high levels of fertiliser user, which is energy intensive, for a start.
A drastic cut in living standards is likely to lead to massive conflict anyway - unless human nature has changed since last time I looked.
The fall to something like ten times lower living standards in the west is drastic by any reckoning.
In the UK, life expectancy was around 40 in 1900.
Right
But they were only beginning to BUILD the 1900s world in 1900 based on electricity, for instance. The skyscraper was only 12 years old, as another example..
Another thought: Because life was so good in 1900, we had about 2billion 30 years later, even before most of the countryside (even in America!) was connected to electicity...
And much of the world lives in pre-1900 conditions today....
Cheers, Dom
If not one would buy into this then it will not happen.
You have to look at the choices and find ones that the vast majority of people will accept and want. If you pick a bad plan that no one wants that should tell you it will not happen.
If there is a crash need to reduce oil usage by 1-2 million barrels per day in each succeeding year.
Demand destruction would happen first in poorer countries. So even if global demand goes down there is a 5 year lead time to see other countries having problems with a decline before the USA gets any reductions. So the price has to go up to $200-250/barrel.
12 million barrels per day imported at $100 is 438 billion.
12 million barrels per day imported at $200 is 876 billion.
12 million barrels per day imported at $250 is 1.1 trillion.
The lead time allows in motion legislation and actions to have more deployment. The increase in biofuels under way. The increased number and quality and efficiency of hybrids, electric and diesel cars.
More time for the new Chevron gulf of Mexico oil to come up. More time to get the Colorado oil shale going. More oilsand oil in Canada which is exported primarily to the USA.
The US economy can tolerate those price levels, but they would trigger more actions.
First year:
Increased fuel use for transporation (around double the 1970s usage) Fuel saving of 750,000 gallons per day from 55 mph speed limit in the USA
Legislate to allow for more fuel saving measures which are difficult now by loosening other regulations (safety, emissions etc...). Enable more work from home and satellite offices.
Multi-year phase ins:
Put in tax advantages for aero modding cars or diesel conversions.
Support battery powered folding electric bikes/scotters (60+ million
in China already)
200 million cars but getting the most used cars and trucks first.
$2 trillion to apply $10,000 per car and truck conversions to all the cars and trucks. $200 billion for the first 10%. But those 10% use about 30% of the fuel used for cars and trucks which is about 50% of the fuel use (long haul trucks, taxis and cars for salesman etc...). So getting those vehicles more 50% efficient would save 7%
$50 billion for 100 million electric bikes and scooters at an avg price of $500. Allow people to leverage public transit for more easily and to have a reasonable commute travel radius of about 20-25 miles (each way) without using a car.
Fire up the process to allow for drilling in ANWR.
Get enhanced oil recovery rolled out. (THAI process, the computer modeling of old oil fields to tap the 218 billion barrels of bypassed oil.)
http://www.netl.doe.gov/publications/press/2007/07035-PC_Tools_Boost_Oil...
$200 million flex fuel program to get all new cars flex fuel to allow for more alternative fuels.
Stop using 9.8% of the oil to heat homes, offices and for electricity. (mostly North east)
Try to switch from oil for factory process heating.
Ban/phase out oil for recreational vehicles 1%. Require a switch to electric.
Middle years:
Tap the strategic fuel reserve if needed.
Continue modifications to the installed base of cars and trucks. Aeromodding and diesel conversions can increase fuel efficiency by 25-100%. Determine how to make the process more automated and efficient and low cost.
Get more agressive on the efficiency of new vehicles. do more to force the phase out of heavier vehicles. Cars like the 150 mpg Loremo (expected next year) have 0.22 aerodynamic (versus 0.4-0.6 for regular cars) and have a weight of 450kg versus 1000-3000 kg for regular cars and SUVs. It uses lightweight steel and modular cell construction.
Restructure for more busing and mass transit use.
7+ years:
Have gotten significant oil from oil shale 2+ million barrels per day
ANWR tapped for 1 million barrels per day
Gotten high efficiency thermoelectrics onto a lot of cars and all big generators.
Nuclear power that was already started to be licensed in 2007 starts to be deployed.
More efficient conversions to power grid (superconductors, DC power lines for long haul.)
Good post. There is one point it is worth making though, actually demand for oil is elastic in OECD countries, inelastic in poorer countries - most use is a necessity in poor lands, and people will give up a lot to maintain it, but a lot of use is optional in the West, running the kids to their judo clubs and whatever.
So most of the hit in initial consumption is likely to be absorbed in the OECD.
Least affected would be countries like China and India, with the money to pay if they have to, although the desire of Indian middle class people to own a $2500 car would take a hit.
The very poorest of course would be the hardest hit, but their use if they haven't got oil is low anyway, and wouldn't affect overall global figures much.
A recession would drive down demand for oil and lower prices. The near term equilibriums are not for that deep a recession or for oil prices to go that high.
US recession fears appear to be driving prices below $90/barrel.
An actual recession (especially a strong one would send prices down more in 2008.
The historical increase in energy efficiency has been about 3-4% per year against the same GDP. So 8% decline would go against say 3% GDP efficiency gain and 5% austerity and other measures and efforts to boost supply. The 3-4% are business as usual. More agressive steps can be taken.
Recessions would reduce oil demand. What is the ten year projection for the US's own supply of oil ? With ANWR, gulf of Mexico oil and some canadian supply, oil shale, alternative liquids, enhanced oil recovery ? It is not zero. I think it is 10+ million barrel per day equivalent. Plus 10 years of efficiency gains. Mean a possibly flat economy and a couple of recessions assuming no technology breakthroughs. However, I think enhanced oil recovery will do better and there will still be oil for the USA to import and other technological improvements.
I liked your story too, Gail. I paid close attention to "The Failure of Networked Systems" also. Frankly, both of these articles grabbed my attention on TOD. I suspect, 2008 will be the year, the major market players realize the assumption of perpetual, "infinite" growth falls flat. This will have dire consequences for those expecting interest from their investments. Without investment how can growth occur? At this point, the whole financial system will freeze. People cannot eat IOU's forever, but that's exactly what we've been doing for a very long time.
I also like your thoughts about the interconnectiveness of the systems and just how susceptible, dependent and fraigle those systems are. People will only come to realize this when the power is out, they're alone, cold and hungry in their "homes"!
Gail, it's worth noting that Ayre's etal model doesn't predict declining economic growth as a result of falling energy supplies.
In fact, they say the exact opposite: economic growth is disconnected from energy supplies by increasing efficiency in energy use.
Previous economic models, which used simple energy supply as an input, are badly inaccurate, and require a Solow correction. Ayres included efficiency, and found a much better explanatory model.
So, actually, Ayre's research argues the exact opposite of what you're assuming, namely that reduced energy supplies will limit growth.
I disagree. The model looks at the combination of energy supplies and increasing efficiency of energy supplies. Unless we had a huge amount of increase in efficiency simultaneously, there would be a decrease in economic growth.
I have been corresponding with Robert Ayre. He would like me to do a write-up of some of his recent work for TOD, which he would review before it is posted.
"The model looks at the combination of energy supplies and increasing efficiency of energy supplies. "
The novel contribution of this analysis of economic modeling was in adding the effect of efficiency - the finding was that it was substantially more important in predicting economic growth than the basic energy supply.
"Unless we had a huge amount of increase in efficiency simultaneously, there would be a decrease in economic growth."
The recent post (version 2) by Gliderguider/Paul Chefurka conservatively estimated per capita energy supply as 30% lower in 2050 (by "conservative" I mean in a pessimistic direction - there are good reasons to believe that it will be higher than that). A 2% increase in efficiency would give an increase of roughly 120% in 43 years, giving a net increase in per capita GDP of roughly 50%.
BTW, Gliderguider's analysis of total energy (oil is only 40% of world energy supply) doesn't show a peak for roughly 20+ years, IIRC. We shouldn't get blinded by a focus on oil.
There's no question that oil is necessary in the short term, and that supply represents a very large problem, but we should be clear on the limits of this problem: it's transitional, and even in the short term there are solutions. They may be inconvenient, but they're there. For instance, aggressive use of carpooling alone could reduce US oil consumption by 20% in 6 months, with little effect on the economy.
Even with efficiency gains, there is an absolute limit to how much can be gained following that route. No matter how effecient processes become, there will always be a base amount of energy needed. Eventually, we'll run into that limit regardless of how effecient do things.
"Even with efficiency gains, there is an absolute limit to how much can be gained following that route."
Sure, but that limit is very far away. We could easily reduce energy consumption (measured in BTU's) per vehicle by 90%.
More importantly, we can electrify transportation and HVAC, and eliminate oil entirely. The electricity can come from wind, solar and nuclear, and eliminate oil, and fossil fuels in general.
That's true. But what we can't do is replace the existing stock of oil-fired vehicles quickly enough.
Take the UK. We have around 30 million cars registered with around 2 million new vehicles sold each year. Scrappage is slightly slower than the rate of new sales, so the overall parc continues to grow gradually.
More than half of the new cars sold each year are bought by businesses as company cars, rental vehicles etc. They go to a fairly small pool of drivers who turn over new cars every 2 to 4 years. Another bunch of new cars are run for a few weeks by rental companies, or employees of auto companies, or as dealer demonstrators before being sold on as low-mileage used cars to buyers too smart to take the depreciation on a new car themselves. Call it a hidden price reduction.
I digress. The point is, the UK has a huge car parc with not a lot of new car churn at the top apart from the frothy business car sector. The further "down" the market you go, the older and less fuel efficient the cars are and the poorer the owners are (i.e. less able to buy newer, more efficient replacement oil burners, let alone whizzy expensive ultra low emission new cars).
Even if you converted all new car sales in the UK in 2008 to ultra efficient vehicles and assume that total sales stay steady at 2 million and replacements percolate down through the parc in subsequent years at a steady rate, it would take until 2022 to replace all the oil-burners in the UK.
Of course that's impossible and it highlights the huge implications of the end of the 150-year cheap oil bubble.
In a best-case, non-doomer scenario, static or negative growth in the UK economy fostered by the global effects of expensive oil will be felt throughout the car market. The top end will contract; firms will buy fewer new company cars, which will hit the automakers' capacity to invest in new low-emission technologies. At the bottom, poorer owners will be squeezed by high fuel prices and be forced to stop using their cars.
Ultimately, with no return to affordable oil based road fuels, car ownership as it currently exists in the UK will come to an end. For instance, someone like me who doesn't need a car to commute, would probably only drive very occasionally in a hired electric car - or cars if the trip was longer than a single charge would carry me. Even then, the cost would be too prohibitive to make it worth doing regularly.
Of course, that's a rosy picture of one small part of the post-cheap-oil economy ff there's time to manage the transition; if there is popular understanding and consent to the process; if there are not too many sudden and destabilising shocks to the rest of the system; if the retreat from universal car ownership doesn't in itself crash the UK economy, which is still 5-10% dependent on activity around cars, car parks, workshops; leasing firms and so on and so on.
By the way, I'm a self-employed PR working for auto leasing
clients and dependent on the Internet to transact business. The fickle finger of Peak Oil is writing LOSER across my forehead as I write.
I have some plans to ride the wave down as far as I can, so long as some auto business norms hold up during the coming transition. In the end, I think that "marketing" as a full-time occupation is just another creature of the cheap oil age (like "Investment Analyst" or "Hedge Fund Manager")and it will disappear in the next 20 or so years even if the rest of human life doesn't go completely tits up by then.
Lastly, there's the question of what the UK does with 30 million unwanted oil burning vehicles. Scrapping them costs money and uses energy people won't want to spend. Already the usual treatment for a car that's so worn out that not even the local joy riders are interested in it is to chisel off the engine and chassis ID markings and dump it in a residential neighbourhood for the local council to tow away.
Older vehicles can be modified for higher efficiency.
Aerodynamic modifications can get 25-40% higher fuel economy at highway speeds. $400-1500 + labor for a reasonable modification.
There are people/companies who are converting less efficient vehicles to hybrids and diesels. $5000-10000 for most modifications. There are more expensive modifications which make less economic sense.
http://advancednano.blogspot.com/2008/01/car-modder-making-60mpg-biodies...
http://www.calcars.org/howtoget.html
A large freight truck can justify $10,000-20,000 modifications.
Policy would be to accelerate and facilitate conversions of the installed base of cars that will be kept on the road and to facilitate the early retirement of fuel inefficient cars and trucks.
There is also the option that people in Italy, China and Taiwan go with. Scooters and bikes. Electric scooters and bikes can provide cheap peak oil resistant transportation.
"Aerodynamic modifications can get 25-40% higher fuel economy at highway speeds. $400-1500 + labor for a reasonable modification."
I'm familiar with these for trucks, but not for light vehicles. Are you just talking about trucks?
I had a link to a guy who aeromodded his 1992 civic to get as high as 95mpg at 65 mph. The average mpg is actually more about 70-75mpg. Up from about 40-50mpg that he gets from hypermile driving his civic.
Just a few thoughts on coping with what will be a tough situation.
There is going to be a premium on vehicles which get good mileage, and for their longer trips some might want to lease smaller vehicles than their relatively fuel-inefficient Mondeo.
Secondly it is remarkable how many very low mileage OAP's drive very fuel efficient vehicles - for the mileage they do they could do a straight swap for a newer, luxury, less fuel efficient vehicle even if it uses more juice.
The new electric delivery vehicles should also be worth big money.
The potential of biogas also seems to be higher than I had imagined:
http://thefraserdomain.typepad.com/energy/2008/01/all-eu-natural.html#co...
City centre properties, public transport companies and so on would also appear to be good bets, not to speak of video conferencing facilities, homeworking organisers and so on.
I think the turnover in cars will be slower, rather than faster, in the future. Fewer people will be able to afford new cars. Some of the car will get into financial trouble. People will be driving less, so the cars will last longer.
Consider my household's situation. We have two cars: a 1990 Honda Civic with ~170K miles, and a 1995 Subaru Impreza with ~200K miles. We've finally managed to get our lifestyle adjusted to the point where we really don't have to drive all that much. We live in a small town and each of us has a very short commute; I could walk to work if I really had to or wanted to, it is only 2 miles for me. Besides commuting, most of our mileage is local; I try to consolidate most of my other driving to a Saturday morning Market Day. Thus, between the two of us, we only put about 5K miles per year or less on these cars. If we have to travel more than 100 miles or so, we rent.
The Honda gets about 30 mpg, the Subaru about 27mpg. Not too bad, but we could do better. Undoubtedly, in the next few years there will be some cars that will enable us to do MUCH better.
Consider this, though: Presently, the two cars that we own are requiring less than 200 gallons of fuel per year. If I walked to work I could immediately cut that down to about 150 gallons. Let's say we replaced these cars with something that gets double the gas mileage. That would thus save no more than 100 gallons - only 50 gallons more than I'd save just by walking to work. If I change cars AND walk, our consumption would be down to 75 gallons, a total savings of 125 gallons. That's pretty good, but only 75 gallons of that can be credited to the change in cars.
Now consider how much it costs to buy a new car. Scratch that, assume I'm going to wait a few more years and buy something super fuel efficient but 2-3 years used (which probably IS what I would do). My present two cars are paid for. How far do you think that 75 gallons per year in fuel savings will take me in payments on the new cars? Even if we assume a quadrupling of gasoline prices to $12/gal in just 4 years (possible, but very much on the high side), that only generates $900/year, or $75/month. Do you really think I'm going to be able to replace my two cars for more recent, more fuel efficient models for a total of $75/month? I don't think so. Even a further doubling of gas prices to $24/gal might not be enough for me to swing it.
Then there is the question: just how much longer am I really going to be able to drive these cars, anyway? Gasoline prices are going to continue to go up, at some point rationing will inevitably be introduced, and eventually gasoline will become unavailable - at least for ordinary people like myself. Furthermore, it is going to be very dangerous to be in one of the last few cars seen driving down the deserted streets; lots of envious, resentful, and angry people will likely take out their frustrations on the fortunate few still driving.
Therefore, the point of this post is this: once people like myself have already picked the low-hanging fruit by making the lifestyle adjustments required to minimize motor fuel use, the savings to be had by trading vehicles, and the time period available to realize those savings, are unlikely to be sufficient to justify the trade. Under such circumstances, one would be better off to just hold on to what one has, try to keep it running as long as possible, and continue to try to make further lifestyle adjustments to further reduce motor fuel use.
People who are burning many multiples of our 100 gal. per person per year will undoubtedly find it more beneficial to trade to a more fuel efficient car. They will also undoubtedly find ways to implement lifestyle changes as higher fuel prices create greater incentives for doing so. As these are done, and as the time approaches when the supply of motor fuels starts to become increasingly constrained and eventually unavailable, people will see fewer incentives to realize further improvements in fuel consumption by changing cars. This phenomenon will thus set something of a floor on what might be expected to be realized through improved fuel consumption efficiency in automobiles. The floor might end up being quite a bit higher, and the gains to be realized quite a bit less, than some analysts might suppose.
Also,if there is a major recession, many will be out of jobs and not able to buy cars.
I think that there is a significant chance of some of the major car manufacturers getting into financial difficulty, and going out of business.
I think we may have to make better use of what we now have - carpool, and not count on as much help from new cars.
This thread is about dead, but one final thought: Converting small compact cars to electric is an interesting option that should be looked at further. Take my Honda Civic, for example. Yes, I could plop down 12 grand on a GEM (and I still might). Or, I could plop down maybe $6-9 grand to convert the Civic to an electric. Being heavier than the GEM and not purpose-built, it won't be quite a energy-efficient and may have a shorter range. On the other hand, if I only need it for trips around town, that may not matter.
Especially when gasoline becomes espensive and in short supply, GEMs are likely to have multi-year waiting lists, so a conversion like this might be the only viable strategy for a lot of people that still need some minimal motorized wheels.
Good idea - convert what we have, if there is an alternative.
"if there is a major recession, many will be out of jobs and not able to buy cars."
OTOH, right now there's really very little difference between new cars and 4 year old (for example) cars, and new car buying is driven primarily by fashion and marketing. If new cars are much less expensive to drive, sales may go up.
" there is a significant chance of some of the major car manufacturers getting into financial difficulty, and going out of business."
There's an excellent chance of bankruptcy, but little chance they'll go out of business. Bankruptcy would allow the shedding of pension (to the PBGC, in part), pay and health obligations, and car companies would emerge much more competitive, with cheaper products. Which would, of course, increase sales.
"what we can't do is replace the existing stock of oil-fired vehicles quickly enough."
Sure, we can't do it overnight. That's the transitional problem. OTOH, it's not quite as bad as you think.
First, new cars are used much more than old ones. Sure, old ones hang around a long time, but they become increasingly irrelevant. In the US, 50% of vehicle miles traveled come from vehicles less than 6 years old - this effect could be expected to become even stronger when new vehicles are much less expensive to operate.
Second, true electric vehicles (or serial hybrids) will be no more expensive to purchase than ICE vehicles when produced in large volume, and much less expensive to operate (even when compared to current ICE operating costs - both fuel and maintenance costs will be lower). For better or worse, the end of oil is not the end of personal passenger vehicles.
3rd, most hybrids can be upgraded with a very easy installation procedure: add a plug and a bigger battery. When fuel prices rise enough, those existing hybrids can be done very quickly. Hybrids are about 2.5% of new sales in the US, and growing about 50% per year. That, BTW, is an advantage the US has over Europe. Europe is in love with diesels, which are efficient but a dead-end technology.
I'd like to see some of the detail behind assertions like this. I've heard lot's and lot's of people make the 'increasing efficiency of technology' argument but seldom seen it quantified in any but the most cherry-picking, cursory manner. Maybe Ayres could be talked into doing a 'Stanifordesque' write up for TOD detailing his research.
See my reply to Gail for some info.
As far as overall efficiency info goes, the Ayres paper linked in Gail's post is helpful.
I believe the US GDP has grow about doubled in the last 25 years, while energy consumption has gone up by perhaps 1/3. Similar figures apply to the whole world, which takes care of the outsourcing objection. Better stats, anyone?
There is a parallel between what you are referring to as the business as usual attitude towards Peak Oil and I believe also regarding Global Warming. In both cases, the powers to be seem oblivious to the possibility that there really may be more to rising prices and tempetures than just a short term blip at a 100 bucks a barrel, or to the recent news of a tipping point being passed in global warming with the unprcedented ice melt in the arctic this past summer.
I see this as a form of denial based on the current success of humankind's civilization. But all those glittering lights and decadent lifestyle opportunities will never have greater power than the natural order of things. Ultimately our current state is merely a reflection of cheap oil usage, and in its reduced availability due to astronomical prices, will cause a run of bankruptcies that will crescendo with us entering another stone age, or at best another bronze age.
If the powers to be can ever be shocked into coherence, then maybe we can start to move towards algae ethanol or E coli synthesized fuel as a replacement for oil. But my fear is the denial period has gone on so long, that the window of opportunity to make this tranistion is evaporating all too quickly.
Once the wheels of commerce grind down, it will be too late to jolt it back to life. People will battle one another for the last available food, and once the stores are shattered and empty, no more deliveries will be made, and on to the stone age we will lumber with some useless item in tow helping us to remember a more energy rich era.
And the same type of people that stood on the decks of the Titanic refusing to get into life rafts because the brochure for their trip claimed the ship unsinkable, will be the same people that were in power but did nothing to avoid this catastrophe.
I hope in the face of dwindling supply and ever rising prices for crude oil, that a new leader will emerge who takes on the challenge of implementing a plan B. Afterall, we don't want to drive the Chevy to the levy, but the levy is dry, and good ol boys start singing...you get the point.
I like your analogy. Nearly everyone believes that no problem is possible Only now it isn't from a brochure, it is from all of our government agencies, and a whole lot of economists, and even Scientific American.
I wonder what the tipping point will be when they do get it. I thought a hundred bucks a barrel would clinch it, but I suppose something more adverse will need to occur for the economists and govt. agencies to fully comprehend the reality of Peak Oil. Do I hear 5 bucks a gallon? 6,7?
The TPTB probably won't "get it" until they try to fill up in a Washington D.C. gas station and the attendent says, "Sorry. We're just ran out of gas. We'll probably get another shipment next week."
First, thanks for your article.
I was laid off 5/03, took control of my ira's 5/04, bought a variety of mutual funds. By 12/04 I realized that energy was carrying my portfolio... was this a transitory thing, or would it last a while? I spent that month studying energy issues, found the aspo site, bought into po. For months i waited impatiently for the next aspo newsletter, eventually discovered tod, then began to wait impatiently for stuart's updates. I went to 100% US small E&P's from 3/05 until 6/07 when, for personal reasons, I thought it advisable to reduce my energy exposure, reduced to 15% by year end.
Some months ago I began to read stoneleigh postings from tod;canada, including links to roubini, etc. I bought into the idea of a coming recession. Timidly at first, then with growing gusto, I began shorting builders (SRPIX), financials (skf), selected bits (BEARX) and, more recently, MBI and F. Last month I realized that my shorts were carrying my portfolio, better to spend more time studying... Since then I have been avidly reading and, hopefully, learning. I have been waiting impatiently for the next stoneleigh links at the beginning of drumbeats...
Sadly I have learned that stoneleigh/ilargi are no longer posting on tod:canada. This strikes me as very strange...
First, and remembering one of nate's posts that asked the question 'what will affect oil price more, scarcity or recession?' or something like that. IMO this is clear - a serious recession could easily cut worldwide oil consumption 5%, and this does not include DD that is already cooked with last year's price boost. Meanwhile, nobody is predicting 2008 supply to decline 5%, so price simply must fall, but maybe not until 2Q. Further, in the near term a recession/lost jobs/lost homes/lost credit/lost spending would hit the average consumer far harder than did the 2007 boost in oil price. And, in any case, many credible po'ers see flat or higher production between now and 2010/11 whether exports decline a bit or not... remember, we're just talking of the period 2008-2010.
Accordingly, I conclude that the study of recessions, and what does well/badly, is more useful at the moment than what sa will or will not do. And, anyway drumbeats are more and more focused with advising that we should try to farm somewhere as civilization breaks down and anarchy reigns (in the olden days before police, it was necessary to build castles to protect grains/cattle from bandits... not many will survive the loss of police/army, not worth much effort to worry about that.)
thinking about past recessions, all have been deflationary, not least the depression, and this one is caused by massive deflationary defaults. We are going into a worldwide cash/credit short recession, even the chinese will at least suffer much lower growth... IMO the commodity bull market is dead until we climb out, not likely before 2010, which may indeed be just in time for declining oil.
Clearly a recession will have a profound influence on oil price and demand, certainly for the next couple of years - why is this not seen to be of critical interest to tod readers? IMO tod is doing a disservice to its readers in banning those that, as in this post, are doing their best to peer into the coming recession. Hopefully, however, the posts will continue, even if elsewhere, and I will be able to figure out where.
We will continue to have financial analysis articles on TOD, written from a peak-oil aware viewpoint.
I agree that deflation is a real possibility, especially if we hit what I call a discontinuity. I worry about the hedge funds failing.
Also, we have a lot of insurance companies, and it would be very difficult to figure bail-outs for them, if defaulting loans become too much of a problem. States have "post insolvency assessment funds" that provide limited benefits to policyholders of insolvent companies. The funds work by assessing solvent insurers to pay these benefits. They will not work well, if too many insurance companies fail.
jkissing, I agree that we appear to be headed for deflation, which will be bearish for commodities.
That said, I haven't lightened up on oil & nat'l gas because:
1) bought long enough ago I'm well in the green, so a correction doesn't worry me
2) Problems in Pakistan or Iran or a hurricane in the GoM can spike prices in a hurry and I hate to be on the sidelines then. Depending on the cirumstances, I might lighten up on the spike expecting to re-enter during the ensuing correction.
I don't do well trading; I like to anticipate major trends and hold for a while. Many thanks to Gail, Stoneleigh, and ilargi for helping me to identify those trends.
Errol in Miami
"And, anyway drumbeats are more and more focused with advising that we should try to farm somewhere as civilization breaks down and anarchy reigns "
Been hearing alot of smash and grabs lately, particularly against parked cars.
This has been spreading out from from the Ci-tay to the 'burbs that it even made local TV news.
This type of crime is purely opportunistic, has a high rate of success and is rarely punishable.
Combine this with increasing copper, sewer cover thieving, carjacking and storefront smash and grabs and what do you get?
Sounds alot like "civilization breaking down and anarchy reigning" to me.
JKissing, IMV the prospects depend on the monetary policy adopted by OECD central banks.
Tight monetary policy: OECD enters big recession, China grows at 4%, asset prices (house, stocks) plunge, commodity prices (particularly oil) stabilize.
Expansive monetary policy: OECD stagnates, China grows at 8%, asset prices remain stable, commodity prices shoot up.
My view is based on both EIA data as of Jan. 08, 2008 at http://www.eia.doe.gov/emeu/steo/pub/contents.html (table 3a), and IEA data as of Dec. 14, 2007 at http://omrpublic.iea.org/currentissues/full.pdf.
World oil production
year 2005 2006 2007 2008
EIA 84.6 84.6 84.8 87.6 (wishful thinking?)
IEA 84.6 85.4 85.5
World oil consumption
year 2005 2006 2007 2008
EIA 83.7 84.8 85.9 87.5
IEA 83.9 84.7 85.7 87.8
Clearly 2008 will be "interesting times" in the Chinese sense for the oil market, since, for the {EIA / IEA}, projected 2008 global demand will be {2.7 / 2.3} Mpbd higher than 2007 global supply (*). So,
- either world oil production experiences a "surge" in 2008 (do you feel lucky?),
- or a deep recession is allowed to take place in the OECD,
- or the oil price will surge deep into the triple digits in 2008 (and not only in dollars).
(*) The trend in EIA projections is in fact for worse, since as of Dec. 11, 2007 they were also predicting 2008 demand "only" 2.3 Mbpd higher than 2007 supply.
From those same reports it is easy to see where the growth in oil demand is coming from (China, etc.) And IMV, if an OECD recession materializes, the other players are extremely unlikely to reduce their oil demand (i.e. I favor the "decoupling" scenario) . The reason for that being:
- For non-oil exporters like China and East Asian countries, the huge foreign exchange reserves that these players have accumulated over the last years, which make their situation entirely different from that in 2000-2003: having already saved for a rainy day (or rather decade), they can now afford to keep growing their internal consumption even if half of their customers curtail the demand for their products.
- For oil exporters like the FSU, ME and several LatAm countries, the fact that it is just not reasonable to expect they would refrain from growing the consumption of their own product.
To sum up, a prompt and deep OECD recession is the only way to avoid triple digit oil prices in 2008 and will most probably result in oil prices staying in the 70-90 range.
This of course does NOT mean that such a recession is the long-term solution to the energy problem. It just provides a window of opportunity for addressing the problem in a decisive yet orderly way, while alleviating the price pressure that drives the process of diversion of agricultural production into biofuels that Stuart masterfully covered.
The last point is critical since, quoting Stuart, "when oil prices spike up, a year or so later we have a new burst of ethanol capacity under construction (which then comes on stream 1-2 years after that)", so that, at the present rate, "you see global biofuel production hitting half the global food supply within about six or seven years".
This timing prospect should be contrasted with the realistic response time for the global population growth rate. Because, in the extremely unlikely case that all governments, NGOs, etc. worldwide started right now to spread the word that "the most likely scenario is that global food production in 10 years will be half or less than that of today, so people making procreation decisions BEWARE", and in the even more improbable case that, out of this advice, global fertility rate dropped right now to 1 child per woman, it would clearly take several decades for the world population to drop to 4 billion. Therefore an OECD recession now amounts to a reprieve for millions facing starvation.
I was following along, nodding my head until I got to this:
'The last point is critical since, quoting Stuart, "when oil prices spike up, a year or so later we have a new burst of ethanol capacity under construction (which then comes on stream 1-2 years after that)", so that, at the present rate, "you see global biofuel production hitting half the global food supply within about six or seven years".
This timing prospect should be contrasted with the realistic response time for the global population growth rate. Because, in the extremely unlikely case that all governments, NGOs, etc. worldwide started right now to spread the word that "the most likely scenario is that global food production in 10 years will be half or less than that of today, so people making procreation decisions BEWARE", and in the even more improbable case that, out of this advice, global fertility rate dropped right now to 1 child per woman, it would clearly take several decades for the world population to drop to 4 billion. Therefore an OECD recession now amounts to a reprieve for millions facing starvation.'
Huh? There are so many assumptions fed in before you can reach this conclusion that it is a non-sequiter.
For a start, it is mainly the US which is mad-keen on ethanol - in Europe Biogas which is much more popular, which has a better return to energy in, and is far more efficient per hectare.
http://biopact.com/2007/12/biomethane-presented-as-most-efficient.html
Secondly, there is no question for the present at least of peak natural gas being here - minimum estimates would be at least ten more years, beyond your 'halving of food production'
Rising oil prices would also mean that the world was alerted to problems ,and would start doing something about it.
The two most populous countries on earth, China and India, are in any case substantially dependent on coal, not oil.
The only reason oil is not made from coal is it costs more - this would not be true in the scenario you suggest, and long before half the population starved to death they could produce oil in quantity, even supposing that producing oil from algae has more problems than at present seems likely:
http://thefraserdomain.typepad.com/energy/2008/01/all-eu-natural.html#co...
(See comments)
France. presumably, you would except from the likelihood of loosing half it's population, as 75% of all it's electricity is produced from nuclear power, and even supposing that all oil supply stopped, as long as they have the sense God gave little apples they would manage to apply some of that to agricultural production - lithium or NimiCad batteries would work quite well in a tractor.
Then you have to assume that only France can successfully make nuclear power work, however great the incentive.
I could continue with the long list of negative assumptions needed before you arrive at this conclusion, that reproduction is folly.
There is no 'therefore' about it! :-)
I assume that observation goes for the 1st paragraph, which is literally quoted from Stuart. Because the 2nd observed paragraph (from me) is completely logical and consistent in itself. Anyway, I'll be glad to offer data supporting Stuart's.
Let's have a look elsewhere, then.
On Jan 2, Brazil started enforcing B2, implying an annual BD consumption of 840 Ml/year, with B5 scheduled for Jan 2013. The current installed BD production capacity is 2.5 Bl/y, from 49 plants. Other 47 plants are in the pipeline, so that, when operating, total production capacity will be 3.8 Bl/y.
Unfortunately the references at hand are in Portuguese or Spanish:
http://brasilbio.blogspot.com/2007/12/biodiesel-no-posto-equao-difcil-pa...
http://www.biodiesel.com.ar/?p=661
The speed of growth of Brazil's biodiesel production (not capacity) can be seen at
http://www.anp.gov.br/doc/dados_estatisticos/Producao_de_biodiesel_m3.xls
2005: 0.7 Ml
2006: 69 Ml
2007: 408 Ml (conservatively assuming 55.7 Ml in December)
Soybean oil is the feedstock for 75% of Brazilian production.
Argentina in turn exported 319 Kt of BD in 2007, which at a density of 0.88 kg/l means 362 Ml. Since they will not be blending till 2010, that's their whole production. (Surprisingly, 76% of those exports were for the US and the rest for Europe.)
Current production capacity is 600 Kt/y (680 Ml/y) from 8 plants. For year end 2008 production capacity is planned to be 1.5 MT/y (1.7 Bl/y). Not bad for ZERO in 2006.
Ref: http://www.biodiesel.com.ar/?p=668
Huh? It's the OIL peak which drives biofuel implementation, not the NG peak. Actually expensive oil and cheap NG is the most favorable scenario for the biofuel boom. (It should be noted, BTW, that Brazil does not even use NG for methanol production, since they use ETHANOL from sugarcane for transesterification.)
Sure. They have already started scaling up biofuels production.
First, the lion's share of global growth in crude oil consumption comes from precisely those countries.
Secondly, if they are intent on adopting the Western happy motoring way of life, they will need increasing amounts of LIQUID fuels for their cars.
Third, according to the Energy Watch Group's Coal Report at http://www.energywatchgroup.org/files/Coalreport.pdf
"The fastest reserves depletion worldwide is taking place in China with 1.9 percent of reserves
produced annually." That doesn't seem to leave much room for scaling up CTL.
I'm just assuming that the analysis in the Energy Watch Group Uranium Report is correct
http://www.energywatchgroup.org/fileadmin/global/pdf/EWG_Uraniumreport_1...
"This assessment results in the conclusion that in the short term, until about 2015, the long lead
times of new and the decommissioning of aging reactors perform the barrier for fast
extension, and after about 2020 severe uranium supply shortages become likely which, again
will limit the extension of nuclear energy."
I'm not saying that. I'm saying that those deciding about it should do that taking into account the good of their present and potential children (I assume no argument so far) and for that purpose they should BE AWARE ("BEWARE") of the conditions of the times in which their potential children would be living.
Anyway, thank you for giving me the opportunity to provide additional data to the TOD community showing that the phenomenon described by Stuart is definitely not restricted to the US.
Beach Boy said:
'I assume that observation goes for the 1st paragraph, which is literally quoted from Stuart. Because the 2nd observed paragraph (from me) is completely logical and consistent in itself. Anyway, I'll be glad to offer data supporting Stuart's.'
Nope, I was referring to the second paragraph, when you were saying that things would get so tough that serious thought should be given to whether to reproduce.
You don't reference the report of Stuart to which you are referring, so it is difficult to be sure if I am looking at the right article, but this is the one I found:
http://www.sfam.org.uk/pdf/issues/micro_june07.pd
In his conclusion he sums up for first generation biofuels, and doesn't really commit on more advanced prospects.
You then reference Brazil in relation to Biofuel production. It should be noted however that the process they use there is from sugar-cane, which is hugely more efficient than the corn process used in the States, although to me it is also dubious.
You did not really reply or deal with my reference to much more efficient ways of producing biofuels. I will reproduce it here for convenience:
http://biopact.com/2007/12/biomethane-presented-as-most-efficient.html
With adaption you could certainly use this to drive vehicles , should you so desire, at vastly better efficiencies per hectare of crops than for the corn-based ethanol.
You then say:
'Secondly, if they are intent on adopting the Western happy motoring way of life, they will need increasing amounts of LIQUID fuels for their cars.'
I don't see why it should have to be liquid. Pressure tanks are a well-understood technology.
But the main point is that the assumption behind your thinking that it all leads to billions starving is that everyone is too dumb to adapt their behaviour when things go wrong.
It ain't gonna happen.
At the moment the US which has surplus land has got a nice scam for farmers in wasting oil producing ethanol, and Brazil rather less uneconomically substituted oil - but both have large areas of surplus land.
Others like the EU then got into the act.
I agree they are acting dumbly, or rather sectional interests are manipulating the market, but that is because things have not got really grim.
If algae biofuels or whatever do not pan out then land will be switched back to food long before billions die.
You say:
'"The fastest reserves depletion worldwide is taking place in China with 1.9 percent of reserves
produced annually." That doesn't seem to leave much room for scaling up CTL.'
In an ideal world, no, but for a relatively short period of time then this option may happen to some extent.
That comes on to long term energy supplies.
you say:
'I'm just assuming that the analysis in the Energy Watch Group Uranium Report is correct
http://www.energywatchgroup.org/fileadmin/global/pdf/EWG_Uraniumreport_1...
"This assessment results in the conclusion that in the short term, until about 2015, the long lead
times of new and the decommissioning of aging reactors perform the barrier for fast
extension, and after about 2020 severe uranium supply shortages become likely which, again
will limit the extension of nuclear energy."'
The Energy Watch group is just nuts in this respect, IMHO.
There are plenty of other studies around which come to no such conclusion, so many I will not list them, as anyone interested can easily find the references.
On the first point of how quickly things can be done, this is largely predicated on present leisurely timescales of authorisation and so on being carried on.
If things get rough, this simply will not happen - needs must when the devil drives.
That is not to say that there are not real issues with ramping up production rapidly, from production of the steel vessels to trained personnel, but as I said measures such as CTL although not having a long term future perhaps could help to fill in the gaps, and in the emergency situation postulated in your thesis then fast ramp would indeed occur, as has been done many times in many situations by many nations, for example in the production of Liberty ships by the States in the second world war.
The second part refers to availability of uranium.
It is a bit like someone arguing in the 18th century that the Industrial Revolution is impossible as the Newcomen Engine was not efficient enough to sustain it.
In fact, the analogy is apposite as the Newcomen is around 2% efficient, and present once through fuel cycles in reactors do worse than that, at around 1% fuel burn.
Uranium forms a minor part of the cost of running a reactor, so small that you could easily pay 100 times the current price without affecting costs greatly.
In fact, that was the reason that fast-breeder reactors were not pursued - uranium was so cheap it wasn't worth the bother, but we are hypothcating rising costs of other fuels, and Energy Watch shortage of Uranium, so it is reassuring to note that this option is available.
Anti-nuclear folk tell us that the technology is not developed , and that is true in the sense that there is some relatively standard development work to be carried out to do it, but nothing remotely approaching the breakthroughs which some of the renewables would require.
One alternative which gets around a 50% fuel burn and could use Thorium, 4 times as abundant as uranium, is this small Fuji reactor designed for mass-production:
http://advancednano.blogspot.com/search/label/thorium
Critics would say it is not ready yet, but licensing is as ever with things nuclear the main obstacle, and if God gave people the sense that he gave little apples then that would be speeded up in an emergency.
For those interested, this link deals with nuclear issues an potentials in more detail:
http://www.nuclearcoal.com/energy_facts.htm
Anyways, I hope I have given some reasons to think that all is not necessarily lost, and that with a minimum of sensible action a lot of action can be taken, and that if times get tough there is even more incentive to do so, certainly before billions die,
I'll leave you to the last word - I am not too good at navigating around this site, and had to found it a bit cumbersome to keep the original argument you made on screen, or locate where the discussion we were having was located.
Probably me not using it right!
I enjoyed the debate.
I see I got the wrong Stuart as your reference in my last post! :-)
I still can't trace what you are referring to, but you said:
'The last point is critical since, quoting Stuart, "when oil prices spike up, a year or so later we have a new burst of ethanol capacity under construction (which then comes on stream 1-2 years after that)", so that, at the present rate, "you see global biofuel production hitting half the global food supply within about six or seven years".'
So to me the obvious conclusion is that things won't continue at the current rate - it is a bit like peak oil, if you extrapolate increases of production of oil indefinitely you run into absurdities, so peak oil production rates occur.
This comment form Stuart is really useful in showing that things will not continue at the present rate.
Either: personal mobility will be much more restricted than it would if this happened
Or: more efficient ways will be found to produce biofuels, such as algae.
In any case, well before it hits half the global fuel supply present means of production will be curtailed.
There is already a lot of adverse comment about biofuels, such as in Stuart's article.
This is the landmark report from Stuart Staniford:
http://www.theoildrum.com/node/2431
Brazil is producing BOTH ethanol from sugarcane AND biodiesel mostly from soybeans. Ethanol from sugarcane is not a threat for food production: no displacement of grain crops, and refined sugar as a nutrient sucks.
Actually it's "too selfish", although with a varying degree of dumbness. And definitely NOT everyone. But it's enough with the majority.
I will reproduce here a comment from "Ani" to a post in TOD contributor "Jewishfarmer"'s blog about Stuart's piece at
http://casaubonsbook.blogspot.com/2008/01/three-billion-dead-future-of-b....
It conveys the point brilliantly.
"Guess I'm just being cynical again, but where is this whole outcry going to come from and why? Are you expecting that whole hordes of Americans are going to suddenly really care about starving poor people living primarily in other countries; they haven't yet for the most part. People die of starvation and malnutrition every day and I only see attention paid to it rarely- the footage of dying children gets a bit of front page attention for a few days until replaced by the latest important sports news or whatever.
Why should the hordes protest against this really? What is left to take the place of diminishing supplies of fossil fuels? So if the masses protest against the use of biofuels what exactly will they do to fuel their trips to the mall? It's not as if we had a realistic alternative fuel for them to use-what we are proposing is lifestyle changes and restraint......
So what do they obtain by protesting against biofuels? Higher prices for fuel, rationing, etc?? Not going to be too popular I'd guess-don't believe the general American public is into the self-sacrifice bit anymore....
Between the politicans who don't want to face the truth, the automakers who want to continue to bull a gullible public, ADM and the rest of the corporate ag types raking in the bucks, and the general public who really want to believe biofuels are the answer- I don't see a public outcry happening to change the path we are on."
I'm breaking my promise not to reply! :-)
The appeal of the 'helpless' wrings the heartstrings much more when they are heavily armed with nuclear weapons!
If 2 billion look like staving, they are going to fight for access to whatever it takes to keep them alive.
If it gets as bad as you think, add nuclear war to the hassles.
Nice work Gail,
"The Fed may attempt to lower interest rates, but as defaults grow and lenders become more aware of peak oil, the risk margin for defaults included in interest rates will tend to rise. Thus, the actual interest rates charged to consumers and businesses may not decline, even when the Fed lowers target interest rates."
We are seeing this now in the mortgage market, the 10 year note is about where it was in 2005, 3.8%, but mortgages are what?, 3/4 to full point higher than in 2005, if you can get a mortgage. As the housing market stumbles along, the risk premium can do nothing but go up.
How important is the power of money today in this economy. It's seems that the United States have there back up against the wall.
To put it all in a nut shell the USA is putting all of its eggs in one basket trying to keep the dollar a dollar.
How important is the power of money?
If the dollar declines too much, we will be paying off our debt in dollars that are essentially worthless to the creditors. They are likely to figure this out and cut us off from future credit.
Did you see my post with Shunyata called Monetary Policy and Weaseling Out of Debt? Shunyata was also the one who commented above that some analysis he was doing showed a "break" between early March and mid April.
Peak oil has been here since 2005. The US has begun a period of adjustment away from oil. Since the beginning of the last century the US has built its political and economic power on single mindedly controlling the aquisition and supply of the worlds oil using war and intimidation where necessary.
Inevitably as the oil runs out alternative sources of energy are found and contribute to the classic supply/demand equation which will lead to a gradual weakening of Americas grip in direct proportion to the diminishing importance of oil. Is it any wonder Big Oil and the American government want to delay the onset of alternative fuels and fuel economy. When the dollar has weakened so much that countries using it have to switch out for their own economic survival and stability. Then the belief system that supports it will lose credibility then all those world dollars, printed instead of earned, will slowly but systematicaly depreciate.
This will not be allowed to happen fully for a few years while the old oil economy is still breathing but the rearguard action has started. The US only has these few more years, a window of opportunity if you like, to change its ways. I think the people can adjust OK however the tyrants and despots in the power elite will find it much harder.
There are already moves by seven countries to move away from payments for oil in dollars. Saudi Arabia, South Korea, China, Venezuela, Sudan, Iran, Russia. With many more watching events unfold with interest. Very wise as even hinting at such a course in the past led to war and regime change.
Change it must and change it will. Will the US Government drag the rest of the world down to beneath its own level? If so what method will it use to maintain the status quo. Fair means or foul? Human or Inhuman we are all going to find out soon enough.
First week of March 2008, thru April. Not Good Looking.
There is no profit in utter desolation.
Depression: A second becomes eternity.
Always remember, we allowed this to happen by trusting THE SYSTEM.
Subvert the dominant paradigm.
gail
have u listened to puplava's 08 predictions
http://www.financialsense.com/fsn/main.html.
he thinks central banks will inflate together to contain financial crisis & added dollars will go into stock market by mid year so increase then. he also expects commodities to jump too. he thinks politically a stimulus package too.
then by end of year inflation comes back & bad inflation & rising interest rates. by early 09 depression.
he thinks first quarter 08 bad, volatile then inflating.
curious to hear u'r response to his predictions. his thinking fits with election schedule i would see the fed attempting to manage the problems.i think the big assumption he makes is some traction for the feds actions[worldwide] to keep the deflationary forces at bay.
btw re u'r last sentence 'negative' the technical meaning would be a positive feedback if i understand u correctly. u might avoid the feedback term as the scientist/math meaning is kind of like the inflation term & is confusing to me & many.
thanks for laying out u'r thoughts/ideas.
I want to listen to Puplava's forecast.
Based on what you say, I wouldn't necessarily disagree with it. I think TPTB will try to keep our problems contained, and the way of doing this is adding more and more money supply /debt. This will lead to lots of inflation.
Once this strategy fails, we are likely to fall into depression. I don't know precisely the timing of all of this. It may be that the depression comes in early 2009. It depends on whether we hit a "discontinuity" earlier or later.
With respect to positive or negative feedback, I probably deserve the blame for the way it is stated. Nate added the feedback sentence in the last round of edits, but he used the phrase "positive feedback loops". This had the wrong connotation to me, so I changed it to negative feedback loops. The correct terminology would probably have been "positive feedback loops working in a negative direction", or something like that. This late in the life of the post, it probably isn't too critical - people are likely to get the gist of what the article is saying, even if it isn't stated quite correctly. If the article gets formally published somewhere, I will take a look at it again. Thanks for pointing this out.
An interesting article would be to take a hard look at oil production and consumption from 1920 to 1940 and from 1970 to 1990.
Ivanhoe has a world production graph going back to 1930. Note the very small dip in production in the depths of the Great Depression:
http://hubbert.mines.edu/news/Ivanhoe_00-1.pdf
As for the money assertion, you think we're going to see a rampant rise in USD notes in circulation, the (in)famous helicopter philosophy? So we can expect a tomorrow much like a Zimbabwe today? They better ramp up the printing presses immediately because it’ll take rivers of ink and forests of paper to achieve such an outcome.
As for an increase in debt, just how will they manage this? You can't force tapped out consumers and wary business to take on more debt. What, are TPTB going to go out and force signatures at gun point? The notion TPTB can force more debt to be taken up is simply ludicrous. TPTB may be able to literally print more money but they simply won't be able to expand debt unless consumers and businesses want to take on more debt. This isn’t happening now, nor will it happen in the future.
The debt that is now outstanding will either be paid off or written off. Considering how quickly written off is becoming today’s fashion choice, there is a commensurate and rapid revaluation of both asset prices (downward) and risk (upward). Considering the recent finance house write downs, rising foreclosure rates, and increasing personal and commercial bankruptcies, to name but a few obvious signposts, only the most optimistic of observers would be able to conclude debt is likely to grow in the future.
You understand why I talk about a discontinuity. All this debt can't work forever.
You fail to consider the capacity of the US Government to issue more debt, and of the Federal Reserve System to monetize that debt. If you think that Helicopter Ben cannot engineer a hyperinflation of the money supply, you are very much misinformed.
It won't just be the money that's a large problem. The underlying declining base of physical resources and energy stocks that are represented by money will be another large problem.
Please enlighten me. Not even the Rosetta Stone could decipher this. Is there some coherent and understandable idea you’re sharing here that you’ve decided needs a bit of obfuscation to make it seem way cool?
Let me pre-empt the “hey man, are you ignorant? It’s so obvious…” riposte. Do you have a problem with plain English? English, as you may or may not be aware, has not only been around for centuries, it is also the language you’re apparently attempting to use to put forth your great wisdom and insight.
On the other hand, perhaps prose ain’t your kinda thang. Have you considered poetry? A decade or two of really dedicated effort and you might just produce a stanza or three worth penning in your mum’s Christmas Card. Keep up the good work.
I wasn't even going to go the ignorant route. You're so sensitive and preemptively defensive.
My comment was attempting to be brief and succinct, and now you've ruined that. How dreadful and upsetting, whew, I'm over it now.
But as to the point of your post, as to what the hell I meant:
Money is an energy carrier, not an energy source. Money only represents an underlying supply of people, and their collective ability to perform societal support and survival services for other people using a collective supply of technology, power sources and energy, and physical stocks and resources.
The energy stocks are declining, as are the physical stocks, and large portions of the natural environment that haven't even been monetized are also going to crap.
Whether our money supply inflates or deflates, the underlying exchange of energy and resource stocks which that money represents is where a second, large problem lies, in addition to the problem faced by inefficiencies in the money supply.
That spell it out for you? Perhaps when I make a post about how money works, you can give me more of your even-handed insight and criticism?
See you next Wednesday, goritsas. Or is it next Tuesday? I can't remember.
Gail,
Thanks for the well-thought-out article.
Bank stocks are getting pummeled. One I know of firsthand is Zions Utah, a Salt Lake City bank founded by Matt Simmons' father (his brother runs it now).
Over the 20 years or so that I have owned the stock, it's split 6:1 and share price peaked within the last year or so over $80 (my cost-basis is about $4). It has good management and seemed to avoid making bad decisions or jumping onto flavor-of-the-month financial bandwagons.
But now it's getting whacked and Zions shares are noodling around $41 - losing more than half their value. I don't know what their exposure is to the subprime mess but many are now saying, as you point out, this is far bigger than subprime and it seems that few in the banking industry will be exempt from the devastation.
Obviously this is personally painful, and I wish I had sold more shares in the last year or two. I wonder how other "solid" bank stocks are doing - anyone else have a story?
- Dick Lawrence
ASPO-USA
Well, a lot of people, including yours truly, tried to warn you:
ELP Plan (April, 2007)
http://graphoilogy.blogspot.com/2007/04/elp-plan-economize-localize-prod...
Jeffrey J. Brown
Gail, could you please reconsider this statement?
How can an infinite growth model be "less sustainable"? It was never sustainable in the first place. It's a fairy tale.
I'd word it much more harshly but that's just me so I won't suggest any replacements as they'll probably violate the sensibilities of the "measured" and "calm" image that TOD seems to want to promote. (I'd say more about that nonsense but it's futile.) However, as worded the statement looks farcical.
Instead of
"making the infinite growth model underlying the current economic system less sustainable"
I would have said
"showing that the infinite growth model underlying the current economic system is not sustainable in the long run"
The problem is also Keynes' "in the long run we are all dead". If you are aware of the role and limits of physical inputs to the economy, the statement needs to be completed by "and we don't give a @#%& for those who will be living then."
cmon man - give us some credit. We're trying to keep it in the fairway, not promote anything other than waking sensible people up to whats happening. Since I've known you on Jays list I have respected your wisdom and insight and the comments you bring to TOD. All I can say is that this is not easy, and I can see why Jay shut his list down.
You compare TOD to Jay's list? OMG, don't make me laugh.
Why are you being obtuse? His point was that this is hard to do...not that TOD=Jay's List.
Thanks again TOD for all the great info. I hope that in the future the trolls and those who do not believe in "living room manners" do not aggrevate TOD and its loyal users out of existence.
I'm not the one being obtuse, PG. Nate is indirectly asserting that Jay shut his list(s) down because of how difficult they were to manage. Well, I am going to directly assert that I really strongly suspect that is not why Jay's list(s) got shut down, hence my laughter.
Now Nate can go on believing what he wishes. I'll go on believing what I wish. One of us may be right or both of us may be wrong. But I have this tiny sneaking suspicion that Nate's wrong, ok?
One of the main problems with a site such as this is the different generations. And I don't mean age. To educate new people and keep the people who have been delving into this topic for years active and respectful is difficult. That is the primary reason Jay shut down/changed/reopened/shut down his lists - because new people who didn't understand either thermodynamics or evolution/history would make him start all over again and he tired of it. And then the discussions (here)get dragged down because the standard deviation (and emotion ) becomes too high and eventually the bad drives out the good (Greshams law). It becomes 'toxic' to the editors to be able to navigate. This would be the second reason Jay shut down, the third being he doesn't think anything (practical) can be done and that these discussions are therefore a waste of time. In general I disagree with him on that last point, but this week I could see the vision in it, which was the reason I made my initial comment.
And (for different reasons) I talked to him today about these issues. So I'm quite sure I'm correct, not that it matters.
In any case, this is not about Jay, its about theoildrum. This is a special place, and I think through a wide range of information and ideas here, people have learned a hell of a lot. Whether that is going to change anything for the better globally or locally is another question entirely.
p.s. to prove my initial point, Im sure after posting this to you, who obviously respects Jay, I will have 5 emails in my inbox saying 'aha I caught you admitting you are in contact with that anarchist Jay Hanson, or some crap like that' Can't win GZ.
Nate,
You're right, I have learned alot from this special place and it has given me the hope that at least there are other people out there thinking along the same lines, even though I still don't have much hope for the situation the earth finds itself in. As time goes on, I find myself becoming more grateful for many odd little things in life and this in the end is what makes life worth living.
Regards to you all, (including the trolls)
Nic
You are interpreting Jay's comments as supporting your position, which I would fully expect you to do. I think you need to look at what he's said, many many times. But hey, go on believing what you wish. I'm sure not going to change your mind, quite obviously.
And I'm not going to change your mind either. This whole experiment is Peak Oil in a microcosm. Tribal hierarchies, tribal splits, politics, etc. If we can't make TOD work, with smart people sharing info and ideas, hows it gonna work in broader society?
Good luck to you.
One comment I am getting from my non-peak oil believing friends is that peak oil is not here yet, so this cannot be a problem. When I think about it, the problems we are seeing are from the growing gap between production and quantity demanded. This is really a situation related to "peak lite". The graph I have been responding with is this one:
The demand line is really demand at something like $50 barrel. Even if production follows Scenario 1, we have a growing gap, which leads to higher and higher prices. I probably will need to write a new version of this post, primarily for the non-peak oil aware. This post will need to include evidence that an increasing gap is likely to be a problem, whether or not peak peak oil is around the corner.
I don't know about you, but sensible doesn't seem to be the bigger of the groups you'll need to be reaching to me. On the other hand, always best to reach for the low hanging fruit first.
By the way, if you find a big group of sensible out there in a localised area, would you let me know? I'd like to live in a community of sensible people. Not like the real world I'm forced to inhabit now.
well that something I struggle with of late -6.7 billion is too big of a group to reach. yet people that already understand all this stuff is too small a group to reach. I guess reaching the people around you in the UK that might make decisions that will improve their lives and yours, and therefore form a foundation of stability in one, or several regions of the UK, is something to shoot for. And repeat that in a thousand different places..But its difficult.
By the way - have you looked into Transition Towns?
We do want people to get past the introductory paragraph, so there is perhaps a point in being a little soft in the intro.
Japan had a baby boom that preceded ours by about ten years. When that generation sold their homes to pay for retirement, the Japanese real estate bubble burst. The oldest boomers in the United States are turning 62. Will they start the avalanche of retiring boomers who want to sell their homes to relocate or for needed retirement money? That would flood the market with even more properties and make matters worse.
Yes. If you really want to worry, worry about the 53 trillion in unfunded liabilities promised by your fearless leaders to these future and present old geezers. Good luck finding a politician who will stand up to the senior lobby-senior boomers will go a long way towards bankrupting the USA before they are through (it is on their Bucket List). This would happen even if XOM stumbled upon a field of a trillion barrels tomorrow.
I have no doubt that I'll get the Social Security checks I was promised. One of those, and $53 trillion dollars, should be just about enough for a cup of coffee.
Most boomers will be "aging in place" - they just don't realize it yet.
To adapt a quote from a rather infamous former SecDef: "In a collapse, you won't live in the house you would like to have, you'll live in the house that you've got."
Hi Gail,
I have read this commentary “Peak Oil and the Financial Markets: A Forecast for 2008”. I have also sought out commentary from many other sources, and created “An Assessment of the Most Difficult Challenges of Our Times” which includes a 10 point list as a summary (see www.ipcri.net).
I would like to ask you, and others who might read this and also wish to respond, three questions. I realize that to answer the first question, you may need to consider some of the elements of The IPCR Initiative in depth; however, it may be that in the context of this thread, the following two paragraphs, as a preface to the questions, will be enough to initiate discussion.
The IPCR Initiative (at www.ipcri.net) is an accumulation of documents, resources, and observations brought together to support the propositions that we—collectively—have both the need, and the potential, to be
a) much more organized and deliberate about “… bringing to the fore what is often hidden: how many good people there are, how many ways there are to do good, and how much happiness comes to those who extend help, as well as to those who receive it.”
b) much more multifaceted and participation-friendly in our approaches to peacebuilding, community revitalization, and ecological sustainability
c) much more resourceful in the use of the storehouses of accumulated wisdom and “embodied energy” which are now accessible to us.
There are many important initiatives which are critical to overcoming the challenges of our times, but which are not quite “coming through the mist as much as they should be.” The IPCR Initiative can be very helpful in exactly these kinds of circumstances, as The Eight IPCR Concepts encourage and facilitate a “constellation” of initiatives by which the best (in the view of the participants using these processes) associated with individual spiritual formation, interfaith peacebuilding, community revitalization, ecological sustainability, etc. can bubble up to the surface, be recognized as priorities, and therefore be brought forward as appropriate recipients of peoples time, energy, and money. Many people can realize the wisdom of deliberately focusing the way they spend their time, energy, and money so that their actions have positive repercussions on the fields of activity described by the IPCR Mission Statement goals, and on other related fields of activity (see“105 related fields of activity”). As the ancient Chinese proverb says: “Many hands make much work light.”
With those two paragraphs as a preface, here are my three questions:
1) In your opinion, could initiatives like The IPCR Initiative provide something along the lines of a systematic approach for re-aligning contributions of time, energy, and money so that the greatest challenges in the financial sector, and in the economic and social structure, of the United States, are sufficiently enough resolved for a majority of people to have confidence in the re-establishment of economic and social order?
2) If you think maybe so, do you have any suggestions for how The IPCR Initiatives, or initiatives like it, can get its message to the people who could help implement it as such a systematic approach?
3) If you think probably not, has The Oil Drum, or any other organization focusing on discussion, analysis, and solutions relating to peak oil, considered a systematic approach to “identifying the challenges and brainstorming solutions” (such as described by the IPCR’s “Towards Higher Common Ground” proposal) for the purpose of 1) re-framing public discourse so that it can become more relevant and constructive and 2) “bringing to the fore” systematic approaches which may be sufficient to demonstrate that the re-establishment of economic and social order is possible?
Kind Regards,
Stefan Pasti
The IPCR Initiative
I am afraid I don't have time to look at your iniative in any detail now. I am travelling, and mostly off-line.
I do agree that community building of some type is a step in the right direction. Existing churches may be one form of existing organization that is helpful.
One of the problems is getting these peacebuilding and community building iniatives working in a short enough time frame. Another is the real issue of shortness of resources and the lack of knowledge base of the population regarding growing food locally and learning to manufacture necessities locally.
I think the world as a whole is too densely populated for relocalization to work. The population of the United States is much closer to being in line with its carrying capacity, so there is more chance of it working here, if we could teach people what to do, and if people could build community and work together.