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Oil Demand Destruction & Brittle Systems
Posted by jeffvail on August 20, 2008 - 11:08am
I've seen a number of comments, both at TheOilDrum and elsewhere, suggesting that the US is now less susceptible to supply disruptions because we have reduced our demand for oil by several hundred thousand barrels per day over the past year. In general, I get the sense that people think we can insulate ourselves from supply disruptions, from our dependence on potentially unreliable foreign sources of oil, by improving our efficiency and eliminating "unnecessary" oil consumption. In my opinion, this is backward. In this post, I will argue that, because the demand that is destroyed first in a free market is the demand that is easiest to eliminate, the resulting consumptive system is more inelastic, more brittle, and more susceptible to systemic shock from supply disruption. I will approach this argument by outlining what makes a system either resilient or brittle and why market-driven demand destruction creates a more brittle system. I will conclude with a few thoughts on how we can increase the resiliency of our energy-driven economy in a future environment of declining energy supplies.
Figure 1: A hypothetical model of market-driven demand destruction illustrates the theory that the highest elasticity demand is destroyed first. This results in the remaining demand being, in aggregate, more inelastic. "E" figures are meant only as relative measures of demand elasticity and are not meant as actual values for price elasticity of demand.
What Makes Systems Resilient or Brittle?
A system is brittle if it is unable to effectively absorb shock. Consider a plate glass window in comparison to a trampoline net. The plate glass window can take a significant shock without budging, but at some point it can no longer absorb an impact and fractures. It is brittle. The trampoline net, on the other hand, will be moved by even a minor impact, but because of its ability to deform and stretch, it will not fracture (or tear) until far greater stress is applied then is needed to break the glass window. The trampoline is resilient. These same qualities of "brittle" and "resilient" apply to economies and financial markets.
The Problem with Brittle Systems
When an economic or financial system is brittle, it is less able to absorb the impact of a shock or ongoing stress--say, a geopolitical disruption to oil supplies, or the ongoing, grinding problem of geological peak oil. When a system is resilient it tends to be able to absorb such impacts, giving the underlying system time to reorganize to eliminate or mitigate the stress event. When a system is brittle, however, it is more likely to shatter, after which point it can no longer bounce back to its original shape. When an economic system shatters, we call it "collapse"--the system enters a downward spiral into depression and dissolution. This is one of the "worst case scenarios" for the impact of peak oil--that it will overstress a brittle global economic system and act as the catalyst for economic, even societal collapse.
For this reason, it is important to understand what makes our economic system brittle or resilient, and how our personal economic choices and political/policy choices can influence the character of the system. In this post, I will look specifically at the how crude oil demand destruction changes the systemic elasticity of demand for oil, and how this makes our economic system more brittle.
Why Demand Destruction Makes a System More Brittle
The basic mechanism underlying this theory is that, when forced to eliminate consumption of oil, individuals, and the market in aggregate, will eliminate the most discretionary consumption first. As a result, the remaining consumption will be more valuable to the individual, firm, or economy in terms of GDP or quality of life produced per barrel of oil consumed. This remaining demand is more inelastic. When the oil demand--whether it is for a family, industry, or nation--becomes more inelastic there is greater exposure to supply disruptions.
For example, the US economy that consumed roughly 20 million barrels of oil per day in 2007 was less vulnerable to a theoretical geopolitical disruption removing 5 million barrels of oil per day from the world market (say, war with Iran) than a future US economy that only consumes 10 million barrels per day due to market-driven demand destruction. The reason is that, presumably, that future US economy cut the least valuable, most discretionary 10 million barrels per day of consumption, and the remaining 10 million barrels per day of demand is far more inelastic.
Is Market-Driven Demand Destruction an Example of a Market Failure?
The tendency of a free market to cut the most elastic demand first seems to be an example of market failure--that is, where the market action produces a long-term result that runs counter to the goals of the market mechanism. One of the classic causes of market failure is where the market acts to optimize short-term benefit, but in the process creates significant long-term problems that aren't adequately accounted for due to inability to incorporate these long term costs in the analysis of present decisions.
We saw exactly this in the rush to extend credit to increasingly low income home buyers resulting in today's "credit crunch," and I predict that we are currently seeing a similar market failure in the market's destruction of the most elastic demand first. The result will be an increasing vulnerability to future supply disruptions--unfortunately, this will come exactly as the likelihood of more severe supply disruptions increases, as I discussed in my recent article on Geopolitical Feedback Loops.
Measuring Inelasticity: Is it Purely a Price Issue?
The standard measure of demand elasticity is as a function of price. Unfortunately, this is not necessarily a good measure of the impact on systemic resiliency. Even if prices are going down, demand inelasticity can be increasing if the cause for the price drop is that high prices have caused an economic downturn that is eliminating the most elastic oil demand. There are indications that this is exactly what is happening at present--high prices are creating demand destruction, at least in the US, but the demand that is being eliminated appears to be the most elastic consumption. A better measure of the impact of demand inelasticity on systemic resiliency may be price as a percentage of median disposable income.
Comparing the Credit Default Swap system to Demand Destruction
It is useful to compare the process of increasing inelasticity of demand due to market-driven demand destruction with the systemic brittleness created by the mushrooming market for credit default swaps. I've written a brief explanation of this shadowy corner of the financial world in Financial Wizardry & Collapse. In brief, by spreading the risk of default on corporate bonds very thinly and widely, the global financial system becomes superficially more resilient as it is better able to absorb a handful of major failures. However, because the system is so interconnected, at some tipping point of numerous defaults, the entire system would crash at once. The result is a system that is actually far more brittle.
The credit default swap (CDS) system is in some ways useful in understanding how to reduce the brittleness caused by market-driven oil demand destruction. In the CDS system, individual corporations or issuers essentially bet on the viability of corporate bonds--they have the power to choose their level of exposure. Of course, in seeking to maximize profits, there is a trend to maximizing revenues by maximizing exposure to systemic default. Participants can, however, participate in the system while maintaining a safe, low level of overall exposure--a level where they could absorb the impact of simultaneous default of every position they hold. The lesson, roughly applied to energy demand inelasticity, seems to be to minimize the exposure to supply disruptions of the most inelastic sources of consumption.
For example, if winter heating by heating oil is a very "important" (and thereby inelastic), source of consumption, it would make sense to move that use to a more reliable source of energy (say, passive solar design and added insulation) before converting gas-powered commuter cars to plug-in electric. This also applies to electricity and natural gas use--for example, the electricity used to pump water out of aquifers for a farmhouse is likely a very inelastic source of demand; replacing this source of energy consumption with rainwater harvesting would improve the aggregate elasticity of demand.
This seems to run counter to what the market and non-market incentives (subsidies & R&D funding) are pushing for--one reason why I think this process demonstrates a market failure--and may be a good candidate for a centrally-planned policy push. This is just one example of how the US could actually increase systemic resiliency by substituting renewable, domestic, alternative energy sources and conservation measures for the most inelastic sources of oil demand (the red section of the Figure 1, above), while retaining the more elastic and discretionary sources of oil consumption to buffer supply shocks.
What About Efficiency?
Do improvements in efficiency have the same effect as involuntary, market-driven demand destruction? Maybe. If the pace of efficiency measures decreases the scarcity of oil, then the result will be a less brittle system. However, this tends to act as a negative feedback loop, as the exact stimulus that drives investment in efficiency (high prices & scarcity) will also be eliminated by efficiency gains rapid enough to decrease the overall scarcity of oil.
Conclusion
As a result of recent demand destruction, the US economy is becoming increasingly susceptible to shocks caused by supply disruptions. The global economy appears to be following suit to some degree, though the process of demand destruction in the growing economies of China, India, Russia, and elsewhere in the developing world is currently less clear than the picture in the US. It appears that the process of demand destruction in the US is a classic example of market failure--not that it is a failure to reduce apparently "unnecessary" or frivolous consumption, but rather that by relying on market signals alone we are increasing the inelasticity of remaining demand and setting ourselves up for catastrophic system failure. While anathema to the orthodoxy (though certainly not orthopraxy) of American capitalism, it is time to consider how we must use non-market mechanisms to plan for increasing our systemic resiliency.
While this may be unlikely to happen at a national level, the need to increase resiliency is scale-free: individuals, communities, bioregions, and nations can all benefit by the increase of resiliency at any level. I have previously addressed one way to increase resiliency--by addressing the Problem of Growth that tends to "eat up" systemic resiliency. In this post I also recommended policy programs that would first transition our most inelastic demand to reliable, domestic, and renewable sources of energy.
If there is a "so what?" point to this post, that is it: rather than work to create viable, stable, renewable substitutes to the more elastic components of oil demand, we would be better served by focusing subsidies and research grants on replacing our most inelastic demand first. Implement policy and subsidy as necessary to replace or eliminate the most inelastic sources of demand first--the exact opposite of what the market would do, but the best way to increase systemic resiliency.
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Nice work Jeff. The irony of the Washington Consensus trajectory of removing import substitution policies around the world is that US is as or more vulnerable than many countries. We certainly grow alot of food, make good steel, and other high necessity items, but are the required inputs to these themselves mostly imported? At what price of oil are the benefits of comparative advantage completely offset? $200? $300? I wrote here about oil, trade and basic necessity hierarchies.
Recommend evaluating global demand elasticity as a sum of first, second, and third world contributions. These have orders of magnitude different incomes and consequently very different demand elasticities. e.g., nominal incomes of $30,000, $3,000 and $300/year. Oil's 1500% price increase from 1998 to 2008 has the greatest impact on the poorest in the developing world. Use of first world SUV's drop very little compared to fuel use among the 3rd world poor.
Great post Jeff!
I personally think that gasoline demand can be dropped more than heavy fuel oil demand. Simply because diesel and heavy fuel oils are more "necessary". In other words, most of us could walk to the grocery store, but the grocery store needs deliveries from thousands of miles away.
I personally think gasoline will be much more elastic than the other fuels. This is why I believe heavy fuel oils will stay more expensive than gasoline.
Most options on the market (hybrids or soon electric and plug in hybrids) for being green reduce gasoline demand, not heavy fuel oil demand.
Proof of this is the narrowing of the price gap between gasoline and diesel in Europe. Diesel has "always" been substantially cheaper; this summer we have achieved parity, at a time when cars are consuming something like 5% to 10% less fuel than the same month last year. Personal transport is becoming prohibitively expensive; goods transport is still very cheap.
Freight by truck in Europe still seems to be growing apace; ever-greater economic integration and rationalisation, the delocalising of manufacturing to central and eastern Europe...
Growth in freight by truck in Europe might at least partly come from a relocation of manufacturing from Asia to central and eastern Europe. I've read some numbers on that, but can't recall where. It must have been written in German anyway.
Them big rigs are a rolling
diesel fuel is what they need
If you want to keep them rolling
and groceries on the shelves
best you think about tomorrow
and just slow that Hummer down
From "The end of oil is coming, won't you slow that hummer down"
I see it the other way around. The heavy fuel oil demand is more concentrated on industrial uses. Many of the uses have the potential for fuel switching, or for significant fuel savings, by the substitution of human labor. Take the example of your long distance trucking. At highway speeds roughly 65% of drag is allegedly due to aerodynamic drag. This means the fuel demand, per freight mile is a rapidly increasing function of speed. So the trucker can slow down, substituting his time behind the wheel for lower fuel costs. The automobile driver can do likewise, but his fuel cost savings, measured by his expenditure of time is much lower. Exactly the same thing applies to shipping by water, lower speeds mean higher labor costs, but greatly decreased fuel costs. And this is before technological tweaks. In the case of interstate trucking, trucks could be made more aerodynamic, and a switch from single trailers to double trailers would significantly reduce fuel usage per ton mile. I would think that much of the lowest hanging fruit is in the heavy fuel sector, not the gasoline sector. How many hybrid cars would it take to save as much oil, as a single hybrid garbage truck?
EOS,
A bit of supporting data for your post.
One of my best friends operates a long haul trucking company. He told me about 6 weeks ago that at 65 average mph his trucks were burning about $12,000 of diesel per month. He decided to limit some to 55 mph and they were burning $10,000 of diesel per month over the same routes. Time to delivery, and other costs, were obviously impacted, but you can see the effect that could be achieved in terms of fuel savings should it be required.
Wyo
I thought a lot about reducing truck energy usage. The basic problem is for any real reduction (greater than 10%) of trucking fuel demand, it would take a long time to happen.
The problem is they have already tried a lot of energy reduction. When a 300 gallon tank costs $1200, they think of what they can to reduce that price. Speaking with truck drivers, they don't have options when it comes to reducing fuel use. The best one is driving slower, which will move some of them from 6.5 mpg to 7 mpg. However, it would reduce the amount of freight a trucker could deliver and thus the profit. It is not a very good option for them. Even if it did happen, it would only drop highway truck consumption by ~5% (going from 75 to 55) and less freight would be delivered.
When it comes to replacing trucks with hybrid versions, there are a few problems. Hybrid trucks are really expensive ( 100k or more than a same model diesel ), don't save much fuel (0% highway, 10-20% city) so they are not cost effective. Also, there really aren't many on the market. Full battery electrics are not feasible with todays technology, not an option.
On the flip side, nearly 50% more of us could take a bus/subway or ride a bike to work 3 out of 5 days a week. 10% more of us could telecommute 3 out of 5 days a week. 75% of the SUV's and trucks on the road could be replaced by economy cars (yes I know, this would take a long time, and is unlikely). We could be moved to the 4 day work week. On top of that, there are many (15+ models from major manufactures) PHEV and EV's coming onto the market within the next 5 years (and yes I drove one, they are good commuters).
Bottom line, within 5 Years, I believe that gasoline demand could drop by 25%, easily. However, diesel demand would be struggling to drop by 10%. There are just way more alternative to gasoline than there are to diesel.
Five percent seems way too low for the speed change. Got any actual data?
This article says going from 65 to 75mpg raised fuel consumption
by 27%!
http://www.greencarcongress.com/2008/05/us-trucking-ind.html
That's probably true in general. Air resistance increases roughly as the square of speed, and so is 33% higher at 75mph than 65mph.
Wyoming, above, suggested a 20% reduction in consumption from the 30% lower wind resistance at 55mph vs. 65mph, which also seems reasonable, as one would expect non-wind factors to be larger at lower speeds.
Either way, though, there are quite substantial fuel savings to be had from reducing speed a modest amount.
Market-driven efficiency can be either more or less brittle than existing systems.
For example:
1) Riding a bicycle or insulating a house makes an individual more resilient in the face of energy price increases or shortages.
2) But turning the thermostat down to 40 F in a poorly insulated house is less resilient because any energy supply interruption will result in pipes freezing and other systemic damage.
Not sure how one could determine what percentage of adaptation is increasing or decreasing resiliency.
Been thinking along those same lines - what adds to resilience and what subtracts from it?
Hi redcoltken
IMO the biggest contributor that adds to it is complexity. Our 'global' civilization is hideously complex and vulnerable to disruption, either of oil supplies or the grid. I've just read Alex Scarrows book 'Last Light' which, although a fictional novel, does bring home just how many days we would be from anarchy if the power went down. Even individual self-sufficiency would be no good if the hungry mob turned up at your allotment. Scary!
tw
I'd add one other point Jeff, on the matter of brittle vs resilient and in particular the difference between 'break' and 'shatter'. How a system breaks is critical to how it can recover and its level of resilience.
Now the electricity system can break quite spectacularly - cascade failures, etc. However its a break rather than a true shatter because bringing it back up again is a well practiced operation that can be achieved relatively quickly, with local resets etc. We can be up and running again fully within a week or two.
However something like the gas supply is a different matter. If gas stops then pilot lights go out, etc. and you can't just restart the system since its a recipe for gas explosions. As Euan has pointed out previously, restarting the gas system from a break is something people don't really know how to do. When it goes its not coming back in the same form, ever. That cascades to those dependent on it, fast and hard.
That's a system that's shattered.
In practice if a failure as cascading effects that feedback to prevent restart and feed forward to have other bigger impacts, its a shatter event and its orders of magnitude more critical than a simple break.
Most civil contingency work doesn't recognise the difference.
I was thinking of "break" and "shatter" on a civilizational level, but I think you raise an important point that applies across scale--the ability to reconstitute (break) vs. irreparability (shatter). Ultimately, it may be an accumulation (or coincidence) of multiple systems shattering that leads to civilizational failure in the energy arena.
While, generally, the electric grid may be easier to restart than the gas grid (and other examples), there are important exceptions to this as well. Hydropower, especially in some regions, represent a critical "black start" capability because they require no (or very little) electricity supplied to them in order to start generating. This is not the case with most other generation options to one degree or another, nuclear being the worst after a prolonged shutdown. Under certain types of grid failure, black start capability is a real problem...
Thanks.
The concept comes out of thoughts on terrorism and black swans, but it applies to the systems of a post peak world - which is something I've been considering.
Of course we could suffer through the slow collapse of those systems we've built up in the peak peak world. However the reality is the transition into the world we here tend to expect is likely to happen through one or more of these shatter events. Sudden catastrophic failure, rather than slow decline - on a civilisation level.
Oil, I feel, is not likely to be at the centre. Rather something that oil maintains that shatters is likely to be highlighted as the cause. Probably electrical power in some form - so much of what we call civilisation has that at its heart.
Any thoughts on what systems can shatter would be welcomed.
Yes, interesting stuff. What about road/rail/air traffic signaling? Could the mass failure of this be catastrophic to our just-in-time delivery systems, or would it be manageable?
I think the theft of electrical cable for sale as scrap seems like one of the scariest tendencies. This is happening increasingly now.
Another worrying thing is that I've heard reports of people following oil/diesel delivery trucks in order to identify where there are storage tanks that are worth stealing from, and are inadequetly protected. Many of the targets are small farms, who then often then need to pay for the clearup costs (where oil has leaked), as well as the repairs to the tanks, and the oil itself.
I'm only familiar with the UK environment by the way.
Garyp:
You said:
Unless you can provide a citation from a utility to support this assertion I would disagree.
Gas equipment with standing pilots is increasingly rare, most now uses electronic ignition. In those with pilots there is a safety on the gas valve of the equipment, If the pilot goes out it cools, and when that happens the gas is shut off, to relight you need to hold a button in by hand to allow gas to flow while relighting the pilot until the safety rewarms, this is a DIY job for most people.
The gas on our street was shut off last year due to a house fire down the block a ways, the Gas Co. just put a flier in our mailbox explaining how to relight, and to call them if we needed help with that.
There might be very old, or broken, equipment still in service with no working safety on the gas valve, in such cases it would take a very long time, probably forever in most houses given that you are likely to get more than 1 air exchange per hour just from drafts even if the windows are closed, for the tiny amount of gas from a pilot to build up to explosive levels (5% of the air volume is the minimum)
Might a house or 2 explode? Highly unlikely, but possible, but this is not a "system that's shattered".
There is an article by Euan on the UK gas supply under TOD:Europe that mentions this issue. Its not just the pilot light issue (of which my mother has one) that contribute to the collapse of the system.
One street is one thing. An entire country is another. If you just reconnect the gas and somewhere blows up, who do you think will be liable? Whatever most may have, it's what some might have that drives the problem.
As for it not being an issue, we regularly have 'gas explosions' most winters as some malfunctioning item causes just this effect and a couple of houses end up a smoking ruin (so much for air exchanges). That's with the status quo.
And if the gas is off for a few days during the winter, as it would be given the various issues, it IS a shatter event, since the feed forward effects are so severe (bring out your dead).
Garyp:
You are moving the goalposts.
Your assertion was, as I read it, that if the gas network goes down it will stay down because we don't know how to restart it, if that is your contention please provide evidence, or clarify what you meant to say.
Yes, malfunctions of equipment, and stupid contractors or owners, sometimes cause explosions (at the rate of 1 in many millions) but this was / is, I would suggest not caused by a systemic supply network failure but by individual equipment failure or human error, and is a "given" regardless of a network failure, its also I think you will find not due to pilot light issues in the vast majority of cases but from things that cause much larger rates of leakage...
Who would be liable? well, who would be liable if the Gas Company failed to restore service to customers who had contracted with them to provide it and preventable property damage or death were to result? Liability exposure cuts both ways. My expectation would be that in such an emergency gov't would backstop the risk. (I'm not American, those folks might be in a bigger difficulty in such a situation I don't know...)
Could a long winter outage cause great losses? Yes, but would that mean that the gas distribution network had been "shattered"? No, the survivors could restart the network, the network being down for some time would not, in and of itself destroy the network (again, if you can point to evidence to the contrary please do so, it's your burden of proof as the one advancing the proposition yes?).
Nice essay Jeff!
One thing your brittle/elastic analogy is missing, it seems to me, is time. As you consider price shocks, each shock (economic stressor) is a discrete event, essentially with time=0. The system must either react elastically, inelastically or with some combination of both; that makes this thought exercise a comparison of the difference between brittle and elastic behavior.
If you insert time into the equation, we get a third type of response: ductile/plastic. Window glass can undergo deformation similar to a trampoline (as long as the force operating on the window glass is modest, steady and of a very long duration), but there is no significant elasticity, because the window will remain deformed once the stress is removed. Perhaps we should attempt to model the ongoing plastic deformation of the economy?
And perhaps I am taking your analogy too far, hence deforming it!
Yes, I like the plastic deformation analogy.
For example, what we see as elasticity in gasoline demand (reduction of relatively discretionary travel etc) might, in theory, rebound like a trampoline (if prices dropped or incomes improved), but it is in fact reshaping the economy and society : giving people strong incentives to move closer to their place of work, to transport hubs, etc, and in a thousand other ways.
Various countries subsidise fossil fuel prices, and are incurring unsustainable costs in doing so. This is (take your pick) foolish, because the market would allocate resources more efficiently, or wise, because it cushions the economic and social systems from the impact that could break them.
I don't think you're deforming it, just adding in realistic complexity that also makes it less clear--funny how the real world works like that! Especially when we start modeling civilization-level resiliency, the system quickly gets so complex that there is little meaningful that we can say about it...
While I agree that as crude oil price increases, and thus product prices increase as well, that the economy becomes more and more strapped, I disagree with your conclusion. However, I disagree with your theory that demand become more inelastic with higher and higher crude oil/product prices.
As gasoline/diesel prices has risen, the use of gasoline has been very inelastic. This is because people can conveniently drive their car to work and offset the higher gasoline prices by spending less in areas which are more discretionary (i.e., change vacation plans, go to movies or go out to eat less often). However, as gasoline prices increase further, they don't have as many opportunities to save as easily to offset the higher fuel costs (for example, they don't want to loose their house), so they have to begin to save by directly lowering their fuel cost bill. They can do this by going to a 4-day work week, commuting by mass transit instead of my car, carpooling... This would result in a more elastic response to fuel price increases than their initial response.
The elasticity of demand data supports my case. Back in the early 80's when fuel costs comprised a larger portion of people's budgets and we then experienced the fuel price shocks, the price elasticity of demand was on the order of 0.2 (many studies supported this). However, more recently (the year 2000 I believe), the price elasticity of demand was estimated to be 0.07. Since the early 80s, fuel costs have comprised a lower and lower portion of their household budgets. As the crude oil price increases, though (above the $150/bbl range), I would expect to see the elasticity of demand increase and demand destruction accelerate, not diminish.
Retsel
The existing elasticity (as demonstrated by your data) is irrelevant--what matters is how demand destruction changes that elasticity. My basic argument holds here--market driven demand destruction destroys the most elastic demand first (as demand is not uniformly elastic). The resulting demand is, by definition, less elastic in aggregate.
Imagine if you have a $1 bill, a $5 bill, a $10 bill, and a $20 bill in your wallet. The average bill value is $9. If you tell your kid they can have any one bill out of the wallet, they'll most likely choose the $20. Now the average value is only 5.33. Demand elasticity works the same way. When faced with high prices, we're more likely to cut Summer road trips than ambulance miles, and the resulting demand is more inelastic.
I agree with your conclusion, that demand destruction makes the system more brittle. However, I don't think the government can respond appropriately. Given time, the market will adapt and become more elastic. Walmart has no interest in having their warehouse-on-wheels vulnerable.
On thing I wanted to point out is I've kept a budget for years, and my gasoline consumption has rarely been more than 1% of my net salary. Gasoline would have to go up pretty significantly before I felt any pinch.
You must either have a much higher income than average, or drive much less than average, or you stopped that calculation back when gasoline was around $1/gallon. For the average American, it's now something like this: 14000 miles at 20 mpg = 700 gallons, at $4/gal that's $2800 - more than 5% of a typical salary.
But "your mileage may vary". E.g., for me it's more like 200 gallons (fewer miles, more economical car). On the other hand, I need to keep a house warm through the Vermont winter...
I agree vtpeaknik,
And a rise in the price of crude oil ripples through the price structure of the entire economy, not just gasoline prices or fuel oil. :(
Given time, the market will adapt and become more elastic.
You are assigning to "the market" a quality that it definitely does not have : intelligence and foresight.
As long as the worst has not happened, "the market" does not know how to price it, and will take no adaptive measures.
But individual actors can. You are right that "Walmart has no interest in having their warehouse-on-wheels vulnerable" : it is precisely such major actors who can take adaptive action. They might evaluate a risk of a catastrophic failure of their business model at some future unknown date, and insure against it by moving to a lower-energy logistical model. But this would be more costly, therefore they will only do it if they are confident in their evaluation of risk.
They could, for example, build warehouses at rail freight locations and re-tool their truck fleet to deliver from these. This would not, in fact, increase elasticity (that would require that they maintain two alternative freight distribution methods, which they wouldn't do) but it would lower diesel demand.
However, Walmart, and other entities of their order of magnitude, are the exception : they carry as much weight as most state governments, and are capable of foresight and wisdom, if they want. The rest of businesses, and the mass of individuals, can't and won't plan for disaster.
Bottom line, Fred : the market will evolve under gradual pressure, but will absolutely not plan for catastrophic failure (and I suspect that the insurance sector is as decadent as the banking sector has proved to be! i.e. incapable of assuming its basic function of risk analysis and hedging).
Ergo, government action (regulation and taxation) is all you've got.
If we get to the point where we are debating whether or not to drive ambulances, then elasticity won't matter, as the world economy will be kaput. We have a long, long way to go in terms of demand destruction before we get to that point.
If the U.S. reduced our oil demand to be the same as Europe's, our gasoline demand would be half that of today's, and yet Europe is fine at its level of fuel use. We have a lot, a very lot, of elasticity to go before we get to that brittle point. In the extreme case, the country will go into a recession or a depression, and the elasticity numbers will be huge (the fuel demand is not so inelastic when we have a recession, as the portion of people out of work don't use much fuel).
I agree that times are different compared to the 1980s. One very important difference between how people will react to higher oil prices today versus 28 years ago is that peak oil is better understood. Many people understand now that they cannot simply go out and replace their SUV with a newer SUV with slightly better fuel economy (a V6 instead of a V8), because oil prices are likely to continue to increase. They, instead, will go out and purchase a compact or a hybrid.
In our case, my wife and I replaced our thirty eight year old 60% efficient natural gas furnace with a 400% efficient ground-sourced heat pump, at the tune of $23,000. If we thought that natural gas prices were only going to increse to $8/mmbtu, we would have put in a 90% natural gas furnace. The payout is poor at $6 or even $8/mmbtu, but at $20/mmbtu we will look like geniuses!
Retsel
But there is no constituency in the US for such action. The market is defined by existing corporate interests which see no need to "make space" for a competitor. This structural inertia is a significant aspect of the problem.
garyp brings up another important point and that is the degree of coupling between elements of the system. If there is a tight couple then a failure at point A will cause subsequent failure at point B and this will cascade through the system resulting in catastrophic failure.
Most engineered systems (my experience is with offshore drilling units - the Military and NASA employ similar methodology) will be designed to "fail safe." This ensures that any single critical component failure cannot propagate through the system. Or the system will have built in redundancies (think RAID or multiple power plants on fixed wing) or will be designed to avoid a tight couple between components (lots of small independent economic units rather than a single integrated global economy with a high degree of interdependency). And if all else fails there will be some form of lifeboat capacity. Hard to supply that for 9 billion souls.
Exactly because there is no constituency in the US for such action is why I think this is a classic market failure. I'm generally hesitant to advocate centrally-planned solutions. I guess I appease my concern for central planning in general by suggesting that we resort to "scale-free central planning." What I mean by that is that it isn't only the Federal government that should look to substitute the most inelastic demand first--individuals, communities, and businesses should do the same, and will likely have more success doing so.
I think your comment on systems engineered to be fail-safe is important. As you point out, the systems most likely to be engineered to a relatively fail-safe standard are those in the military, NASA, high-consequence engineering projects (e.g. dams), etc. Especially where we see our infrastructure privatized, but also where it is the product of constrained government spending (e.g. outside DoD), the result is far from fail-safe as corporations and government agencies are forced to show short-term improvements in services delivered and profits gained. This leads to cutting corners on long-term fail safety measures, etc...
I think you are highlighting the difference between Keynesian and Friedman style capitalism/governing systems. Both believe in free markets and price signals but are polar opposite about how best to use those signals.
Keynes approach forgoes driving for optimum efficiency of the system in the present to maintain a structural integrity (efficiency) of the system itself. Friedman and "pure Capitalists" are all about maximizing efficiency now without regard for future conditions.
As you and others have posted the most efficient (from simplicity and cost) systems will by definition have no redundancy built in. Great if your only worried about profit or an I-pod, not so good if you are at 30,000 feet in a plane or totally reliant on one energy source for your survival. There is more than one kind of efficiency depending on your frame of reference.
Hi Jeff,
I appreciate your choice of topics.
I'm wondering how you see what we might call the "military function" and/or sector. I have the impression (and stopped trying to find links for lack of time - you probably know much more than I on this topic) - the "military-industrial-(insert additional)-complex" is one driven by a kind of corporate interest in looking for new "needs" for new "products" (this would constitute the classic "arms race" argument in brief) - as opposed to functions.
I mean, if this were not the case, we'd have a lot more effort (and energy and money) devoted to things like "Peace brigades international", human rights accompaniment, humans rights orgs, "mediators without borders" and so forth.
Under the guise (or rationale) of a military function being one that fits into the category of "inelastic demand", we actually end up with what actually appears to be the opposite of demand-driven production. (If this makes sense.)
So, that's one question.
Thank you again, Jeff,
"Exactly because there is no constituency in the US for such action is why I think this is a classic market failure."
1) What do you see as the cause of the lack of constituency?
Do you think it's because people are unaware of the infrastructure and energy relationship, say, WRT food or water? (Plus lack information about "peak" and what it means.) And thus, there is no mandate to create something like distributed-energy-supplied or other means of helping promote resilience?
One place where we might find something we could label a "constituency" is WRT food - farmer's markets and the "purchase local" movement. (Not a large constituency, still...something).
2) Even WRT corporations. It seems to me that if we restrict our set to "nationals" as opposed to multi-nationals, then it seems like it would become easier to make the case to shareholders that higher (initial) costs to introduce lower FF usage is a good idea because it prevents collapse down the road. (If it does.)
Anyway, all to say...it seems to me there's a logical way to go, namely, a sector, say, healthcare delivery...starts to think about what kinds of "structural changes" or "structural adjustments" (shorten supply chains, try to set up regional manufacturing of most used supplies, etc.) (just trying to find an example)- make sense in view of declining FF availability.
If it is only a matter of information...? Then, what stands in the way of people having the information they need?
3) "...will likely have more success doing so."
What are the tools and means available to "communities"? Do you mean local governments? How can individuals and communities find capital in order to either make "structural adjustments" or put in place "alternative energy sources", since these require doing something other than continuing with their present growth BAU assumptions?
In other words, how do you figure they would have more success? I like the sentiment, but wonder how it might actually play out. (Also, since my personal efforts in this direction have met what looks to me to be exactly zero success to date.)
One centre of "fail-safe" planning excellence which should be tapped : Data center management.
They are, in general, these days (hedging here!) pretty damn good, and pretty cost-effective because it's a very competitive business (whereas, for example, the nuclear sector is pretty damn good but very expensive, and NASA has been awful because cash-strapped).
So perhaps the govt should hire some high-powered data center systems gurus to do some contingency planning against crash-and-burn of Civilization As We Know It.
Good point about data centres. I make my living writing large business software, and one of the most critical semi-annual events we deal with is the "Disaster Recovery Plan testing" exercises. This year its complicated by the fact that the actual site of the backup equipments physical installation is no longer on any maps, including Google or Mapquest, so participants need to be given hand-drawn maps of the location they need to go to, not just an address out in the country.
Perhaps local governments should start doing "Disaster Recovery Plan Testing" for serious disruptions such as transportation failures, electric and gas grid outages, etc. Would at minimum be a very good way to publicise the reasons and needs for such planning. Local media interest, schools etc.
My homespun way of thinking of demand destruction is that conservation eventually transforms into deprivation and deprivation eventually leads to death.
As far as flexibility of dealing with energy shortages, freedom (of which free markets are a part) gives the greatest number of people a chance of survival. Freedom is the opposite of rigid, bureaucratic, centrally controlled systems. This is why my personal steam safety valve whistles every time I see proposals here and elsewhere for solutions which government must undertake to save us.
If you want to make the system less rigid, get government out of economic planning and control completely, and eliminate all the special privilege laws granted by government to special interests, which privileges just rig the markets in favor of the few at the expense of the many. This will not eliminate the underlying problem of finite resources, but will mitigate the damage as we face a world with progressively less available energy.
Henry,surely by now you should have seen the disasters inherant in laissez faire systems.
When it comes to building a workable,sustainable nation it should not be a choice between "rigid,bureaucratic,centrally controlled" or a free for all.This is what I call the ideological trap.The old USSR fell into the former version and the USA the latter.Blind faith in communism or capitalism is akin to religious faith - irrational.
Markets and industry have to be regulated because,if allowed to operate without a guiding hand,they will self destruct and take the innocent along with them.Human nature is at the bottom of this.There is a happy medium between that and the command economy.
An analogy-A sail boat with vane self steering can be set up to sail without a hand on the tiller.However,once conditions change then the crew must adjust the vane,sails or course.If conditions worsen then the self steering must be disconnected and the boat steered by hand.
The US is a blend of plenty of economic fascism (government control of private property), plenty of socialism (government operated enterprises) mixed with the remains of a once free economy.
Freedom is a value which serves life, in many minds second only to life itself. Your advocacy of government control instead of freedom in economic matters is the path that I am warning against. We suffer daily from the plunder of the majority by the few as a result of government interference in free trade, giving advantage to some and disadvantage to others.
You analogy of a sailing boat is laughable, simply because in a free market there is control. Individuals making decisions about what they want control what is produced by revealing their desires through their spending.
I find it quite strange that anyone would advocate bureaucrat and politicians making the decision about what is best for himself. It never happens the fairy tale book way. What they do is make decisions about what is best for themselves and those who support them. This is the repeated lesson of history.
I have no doubt that as things fall apart that there will be plenty of begging for government to do something, and they will gladly oblige. The collective solutions will be disaster, just as has been mandated ethanol or the government rescue of New Orleans. The collective solutions will crowd out individual solutions because resources are limited, and the overall result will be to maximize the human suffering from the end of the industrial age.
I smell a false dichotomy!
It sounds to me like you are arguing from and an a priori assumption that government action is always negative and that the actions of the(so called) free market is always positive.
Is that actually your position?
It does appear that way, doesn't it?
Flexibility I think is a form of resiliency, and what Henry seems to be advocating is that there is a set of actions (those performed by so-called independent actors) that are always good and a set performed by government that are, if not always bad, at least misguided.
A flexible stance would be to accept something along the lines of what thirra wrote. A rigid (and thus less resilient) stance would be to advocate all-government action or all free-market action. In the former creativity is stifled and in the latter no businessperson will internalize any cost it isn't forced to, which leads to the gross mistreatment of workers, the environment, etc.
Good? What is that?
The principle upon which freedom is based is nonaggression. What is lawful is free association and actions which do not directly harm others. Any private activity is legal as long as one party is not forced against his will to do or not do something not involving aggression. The purpose of government in a free society is to facilitate defense against aggression of foreign governments and to punish acts of aggression domestically by one individual against another. Hence the need for an air force, a navy and a militia. Hence the need for courts and prisons. Any part that can be privately done is better than the lumbering inefficiency of government, hence private police and insurance are preferable to government police and prosecutors, and private arbitration is preferable to government courts, for example.
Government should punish those who pass on costs such as dumping pollution into the commons because this is an act of aggression, but instead government authorized certain levels of pollution and prevents private citizens from seeking damage from those polluting. As far as the mistreatment of workers you mention, this is bogus. The relationship between workers and business is a private matter and either is free to terminate the relationship if it is unsatisfactory. Of course committing acts of aggression by employees or employers is the business of government, say should workers burn the plant or business hire thugs to beat strikers. Setting the terms between employer and employee by government involves force by government, which is aggression by government, a prohibited act. If we created this government, it cannot legitimately do something that we as individuals cannot legally do.
So acts of aggression by individuals are bad and all other acts are legitimate. Some of the legitimate acts are good and some are misguided. All legitimate acts are none of anyone else's business.
Limited acts of government to defend against foreign and domestic aggression are legitimate, and while often inefficient are necessary. We each have a right to defend ourselves, hence we can authorize other groups including government to act on our behalf. Government involvement in economic matters are not legitimate because they involve aggression (force) in free association and contract which force we as individuals would not be permitted to initiate.
I should know better than to get into an argument with a die hard libertarian, but here goes.
This is just silly. Freedom as a concept includes the freedom to be aggressive. All this indicates is that freedom cannot be the sole basis for a society.
That is one of the reasons to have government, another reason is to facilitate trade. Yet another is to provide security to the populace, not just against aggression, but also against mischance and deterioration.
Absurd. The court system works only because it is an independent arbiter that can be called upon by anyone. Any private system of arbitration must be paid for and the one doing the paying will have an advantage in that system.
Without a strong central government there are no commons. Are you implying that it is ok to dump on your own property? If someone buys up all the water rights in Colorado does that give them the right to pollute that water?
The business is free to find a worker more willing to enslave themselves and the worker is free to starve to death. Do these freedoms seem equivalent to you?
This is the second time I've heard this drivel in a week. The entire reason for the existance of a government is to do things that we as individuals cannot do. These things include the ability to coerce the population to move in the same direction. And yes, I said that the government can coerce the citizens.
Goverments are given a monopoly on force within the society because that is required to make them effective. In order for large groups of people to live together there must be a fair arbiter of disputes that can enforce its decrees.
You want to limit the government to dealing with things that you define as aggression. However, your definition of aggression is both inconsistent and arbitrary. If I steal from you that's aggression, if I defraud you is that aggression? If I take advantage of your ignorance is that aggression? Is it legitimate for companies to conspire to blacklist people from employment? Is price fixing aggression? What about price dumping to force out competitors?
Now you can go through that list of questions and say yes or no to each of them, but the issue is that we can all come up with different answers for the list (or in fact, different lists).
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JimFive
Hi Henry,
re: "economic fascism (government control of private property)"
How about corporate control of private property - and of government, to a large extent?
re: "The collective solutions will be disaster, just as has been mandated ethanol or the government rescue of New Orleans."
Good examples.
Here's my question. How do you find capital for solutions, other than via the government? The current oil infrastructure (including the financial infrastructure, but let's just take something easier for me to talk about, like, say, roads...) was put in place via government's ability to garner capital.
Do you have examples of "solutions" that you see? What are those?
re: "revealing their desires through their spending."
Well, yes and no. It's about impossible, as far as I can tell, to find a pair of running shoes (or most any kind of lower to mid-priced shoe) that is not manufactured in China, for example. So, if one wants to express an opinion ("support regional manufacturing") - it is simply not possible, because the range of items (selection) of purchase is limited.
Or, you can not buy running shoes. So, I don't think it's really possible to argue that spending is the same as exercising exact control or choice. it sounds like a good argument, and it's true in a way, for some things (food example is the best one), where "selection according to desires" exists. However...the opposite cases are also true.
And where, again, is that choice to refrain from high-tech (or even low-tech) export of weaponry? I mean, how, exactly, can one exercise the "choice"? The taxpayer, unwittingly (is my guess) funds this type of corporate "foreign aid". I think this would make the argument that actually supports your "no gov" statement. Which is not exactly the same thing as saying "collective" solutions. (Since we might categorize a collection of individual solutions - eg. garden - as a collective solution.)
Corporations are a good example of government interference in free markets. Government creates these artificial entities. Historically they were created as the recipients of monopoly grant. So had government not interfered in the free market there would be no corporations. Even without corporations, however, individuals would lobby government for special privilege just as many people believe their pet "solution" to the energy problem should receive government largesse; this is however an improper function of government in a free society, i.e., to take wealth from one man and spend it for another. It is immoral; nothing more than theft by a gang instead of theft by an individual. And such a system eliminates competition in the free market and creates competition for government largesse.
The issue you raise about capital only being available from government, I don't understand. Were government and their spawn, corporations, not plundering us to the great extent they do, there would be adequate private capital. To fix this problem you do not plunder more to fund the peak oiler's view of where stolen capital should be directed; you cease the plunder. It would take a lengthy dissertation to address the fraudulent money and banking system that government has imposed upon us in violation of the Constitution, but this is yet another of the interferences of government into the free market that transfers wealth out of the hands of the many into the hands of the few and gives rise to massive economic disequilibrium such as is unfolding in the current financial crisis as it did before in 1929.
As far as solutions, if you mean something that will sustain our current way of living, I think there are none. I am not competent to engineer energy out of thin air, and politicians and bureaucrats are certainly not even close to understanding anything but plunder and control. There may be individuals who might have the genius to timely overturn the laws of physics as they are now understood and keep the shell game going, but I doubt it.
The solutions I see are personal; do what you can to save yourself. Some of us have sufficient capital to relocate and adopt an agrarian lifestyle in a human sized community where the necessities of life are closer at hand. Others might not and may not survive. I think that those who call the loudest for government to save them perhaps do so out of a sense of desperation arising from facing the reality of being unable or unwilling to save themselves. Again I put forth the idea that it is government and friends who have destroyed free markets and the solution is to promptly return to freedom; the solution is not more destruction of freedom by government.
On the issue of production having been shifted away from the US, again a dissertation is required, but essentially after WWII the US imposed the dollar on the rest of the world as the means to buy oil. This created artificial demand for the dollar, artificially raising its value against other currencies. This made foreign goods cheaper and drove manufacturing out of the US. We manufacture dollars and the rest of the world in need of oil manufactures goods to trade for dollars. Honest money, gold and silver were abandoned in violation of the Constitution in order to create this fraudulent money system. The purpose was to allow bankers to create money out of thin air and loan it into existence, both to earn interest on the loans and to give government a ready means to take purchasing power from producers (inflation) when they could not openly tax.
Don't you see the black hand of government every where you look, involving itself in economic matters? Government is force and force is inappropriate except to punish real crime. Instead government has become the criminal and calls for government to solve the energy problem are in reality calls for more crime.
Personally, I see people making choices and electing and supporting politicians who enact those choices. Sometimes we (the people) make poor choices out of ignorance.
The system is far from perfect, on that you'll have my full agreement, but it certainly does look to me like you are attached to your points of view. This strikes me as the opposite of being resilient.
Dogmatism like that is something I hope we can avoid, but am concerned we will not when emotions run high and people react out of fear.
Well people are making choices to elect politicians, but that is entirely different than making choices in a free economy. The system is one of plunder and control by politicians, bureaucrats and privileged interests. By voting for a particular politician what you generally are voting for is who controls the system, essentially a system of fraud, theft, ignorance and economic dislocation and imbalance.
Free people and free economic systems are much more resilient and flexible than one where people vote for rulers who then make choices involving force. No you can't build nuclear power plants; then we must build 100 over the next 20 years. No you can't drill for oil but now you must. Wind power looks like a good idea to T. Boone Pickens so lets take funds out of individual pockets and pony up $1 trillion to subsidize him. Everyone must use ethanol; whoops, forget about eating corn.
My view is that is insanity to look to government to make these decisions. I cannot imagine how anyone can conclude that our economy will be resilient and flexible when it is directed by the inmates in the asylum. Private individuals risking their own capital or the worst of us risking capital they plunder from us seems to be an easy choice.
But again, I think that desperate people who see no future for themselves but likely disaster and a high probability of death, will in fact choose to abandon freedom in return for the illusion of safety. Of course this will just result in being a slave with an illusion. This is not a condemnation of those who seek safety in the collective fold; it is just an observation of how human nature works.
Henry: Your whole thesis depends on the a priori grant of the statement "governments can do no good", which is wrong. Your quaint anarchist ideal of a survival enclave out in the boonies will either be too short of troops to survive when Mad Max comes knocking, or need a government. Going from there to Canadian single-payer universal medicare is simple straightforward logic.
I might also point out that your (and many others) constant argument that currency must all revert to a "gold standard" can be demonstrated completely flawed simply by asking the simple question "Why should the world's currency in circulation be restricted to only that which can be matched by stored accumulations of some yellow metal which is increasingly being more properly used (up and often lost) in industrial processes as a thermal and electrical conductor, and as a catalyst for chemical processes?". Supplies of gold can also be randomly increased by lucky miners. In that case, should its value as a currency standard be proportionately reduced? Ridiculous.
Present monetary systems work fine IF governments can be persuaded to not allow continuous inflation to happen. If voters would simply turf out any government which operated a deficit budget OR allowed net inflation to occur (eg. inflation in any year should be matched by equivalent deflation the following). But voters haven't caught on to that scam yet. Reverting to some silly arbitrary metal currency won't fix that however.
BTW, how many oz. of gold were required to purchase a milk cow 100 years ago? Today?
You disdain for stores of yellow metal as money flies in the face of the history of money and banking.
First of all, most of the gold ever mined is still above ground. Very little of it has been used up for industrial purposes. Additions to the gold supply come from mining which is expensive and requires work. In a free economy with honest money, mining only takes place if there is demand for more money so that mining is profitable. As soon as the demand for money allows the value of gold relative to other things to go below the cost of production, mining ceases. You say that "reverting to some silly arbitrary metal currency" won't fix inflation. If gold were to be used as money, how could it's supply be inflated by any significant amount relative to the existing supply other than by mining? It could not be inflated by other than a very small fraction, and that would be limited by demand for money and the requirement that gold takes work to mine. I am confused that you also argue at the same time that gold is disappearing? So which is it? Is the supply increasing or decreasing? The definition of inflation is increase in the money supply, by the way.
I don't think you understand what money is today. Our money supply is all bank debt except for the small amount of circulating coinage withs is base metal. It is simple to expand bank debt. It requires no work to speak. It comes into existence by bookkeeping entry. The banks create checking accounts out of thin air in exchange for either the government or some private person or business signing a note payable to the bank for an equal amount. This is why in the 1930's the money supply was about 50 billion and today it is more than 25 times that amount. The supply of debt money has grown significantly driving down the value of the debt money so that today it costs dollars to buy what pennies bought before.
So as to your question of cows, in 1909 in Nebraska, a 1000 pound steer brought a farmer $47. Today that same steer would bring a Nebraska farmer $998, or 21+ times more in dollar terms. In 1909 I believe one oz. of gold equaled $20.67 and today it equals $835. In gold terms then, a steer cost 2.27 ounces in 1909 and costs 1.195 ounces today. So today an ounce of gold buys a lot more, but a paper dollar buys a lot, lot less. This is what one would expect because the supply of goods and services has increased faster than the supply of gold. Even thought the supply of goods and services has increased, the supply of debt money has increased even faster.
So you can see that the money we are forced to use by government command "This Note is Legal Tender for All Debts, Public and Private" is in reality a fraud. "Note" means note payable (debt). These notes are "bills of credit". And of course your checking accounts and savings accounts are debts of your bank, payable to you, except the only thing that they are payable in is alternative debt instruments. And you wonder why the banks are near insolvent and the house of cards looks to be about to take a tumble.
So those of you who argue against honest money (gold and silver) I think deserve having your wealth transferred out of your hands through debasement of your preferred fiat. What are you, a masochist?
One final point is that gold is a yellow metal, but its use as money was an invention that made it valuable. It is the characteristics of gold that make it the best money known to mankind (durability, scarcity, high value relative to weight, easy divisibility, difficult to inflate). Every time in history that gold has been abandoned as money, financial disaster has followed. So do you want money you can rely upon (gold) or money that facilitates theft through inflation and promotes wild financial swings and financial instability (debt based fiat)? I think only a fool or the uninformed would reject the former in favor of the latter.
Ask the Spanish, circa 1500.
All currencies are fiat, including gold. The benefit of gold, when it was chosen, is that it:
1. Doesn't corrode.
2. Is dense and therefore doesn't take up a lot of space.
3. Had no value.
Read #3 again. Gold was too soft to be useful for anything. Now we use it as a conductor, but for the most part it is still useless. That is why it makes a good medium of exchange. No one is going to melt it down to make a coffee pot out of it.
The difficulty of procurement of gold tends to encourage a less inflationary economy but it also means that only gold miners can increase wealth. Everyone else is just shuffling money around. In a non-backed economy anyone who can create a product can create wealth by getting the government (or their agents--the banks) to loan them money.
There are several problems inherent in a commodity backed currency, such as the fact that a sufficiently resourceful third party can control the money supply of your country. As well as population increases leading to de facto inflation if demand grows faster than efficiency.
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JimFive
It is not an argument against gold to point out that once in history there was a windfall of new gold as a result of discovery of the New World. Unless you think we will go to Mars and find gold littering the landscape, I think reason indicates that mining will be the only new supply. Like with oil, gold and silver are limited resources and the easiest to acquire deposits have been found and are being depleted. If a once in history inflation of the gold supply is an argument against gold as money, then what about the constant easy and potentially unlimited inflation of fiat money as an argument against fiat. It is unbelievable that one would chose fiat over gold based on your Spanish argument.
You misunderstand money. If as you claim, gold only has marginal value other than as money, then it is not wealth. Paper money is not wealth either. Any money is just a claim on wealth, the true wealth being the assets we use and consume like houses, machines, oil wells, medical services, etc. Increasing the money supply does not increase wealth, it just diminishes the value of money as compared to wealth.
"In a non-backed economy anyone who can create a product can create wealth by getting the government (or their agents--the banks) to loan them money." ---- It is true that productive effort creates wealth, but getting a loan of newly created money did not produce that wealth, the productive effort did. In either a real money gold system or a fiat money system if capital is not possessed and needs to be borrowed for production, then lenders are available. The difference is that in a real money gold system a loan does not create new money, but in our current debt/fiat system a loan does create new money, thus inflating the money supply and debasing the value of existing money; the former is not destructive or fraudulent issue of counterfeit money, while the latter is. And there is the added benefit that a more or less constant money supply results in lower and lower prices for goods and services as production increases, thus encouraging savings.
I think you need to ponder your final paragraph as it it totally illogical. Even if the impossible happened and someone cornered to gold supply, then such a corner would diminish the supply of circulating gold money, not inflate the supply, and prices of goods and services would go down, not up. As far as population increases or increases or decreases in production efficiency, these are independent of the money system and could not logically be used as an argument for or against a particular system.
No, it's an argument against the idea that gold is inflation proof. Finding a large untapped source of gold will cause inflation.
I agree with everything except the first and last sentence. Increasing the money supply only diminishes the value of money if the productive output of the society has not grown. In an ideal economy the amount of money available would equal the amount of goods and services produced. If production goes up then the amount of money needs to increase so that the new production can be distributed (bought).
Ask yourself how those lenders are going to be compensated for the use of their money in a system where no money can be created to pay them back.
Gold is no more "real money" than paper. It has value because a sufficient group of vendors has declared that they will accept it. It has value by fiat (declaration) just like paper currency. As above, the increase in money supply created by the loan should be offset by the wealth created by the production. It should also be mentioned that the increase in money is not due to using unbacked currency but by fractional reserve banking.
Read it again. There are two separate consequences of a commodity based money presented. The first is the danger that a third party can influence your money supply to your detriment. Another consequence is that an increase population leads to both an increased demand for goods and a decrease in the amount of money available per capita which has the effect of making goods more expensive to the consumer (de facto price inflation). This price increase can only be ameliorated in a commodity based money system if there are sufficient efficiency gains in production to offset them. In a non-backed system altering the supply of money can ameliorate the effect of this price increase.
Prove that assumption, please. Or retract it.
Do you want me to prove that government and privileged corporations plunder us, or do you want me to prove that a free market provides adequate private capital?
I think both are axiomatic. Government came into existence to replace the random plunder that fell upon early agriculturalist who gave up hunting and gathering for a sedentary existence. Deals were made with the more powerful plunderers for protection in return for regular tribute (tax). This was the origin of government as we know it, and is and will always be the nature of government. As for corporations, artificial creations of government, it should be obvious that government created laws give them advantage in economic transactions to the detriment of those not granted advantage.
On the issue of adequate private capital, first look at what the fascists economic system has done. The saving rate in the USA is abysmal. This is because we have a fiat money system that encourages debt and discourages saving. Couple that with huge tax rates and the shifting of wealth out of hands of the many into the hands of the few, and the result is inadequate savings, hence inadequate capital. To obtain funds for investment projects new money is created out of thin air plus the interest rate is managed by the government. When new money is created the value of old money is debased, hence money for capital goods is stolen from existing holders of money.
In a free market with honest money (gold and silver) and without interference in interest rates by government, the interest rate fluctuates to provide adequate capital. Whenever there is insufficient capital to fund projects, the interest rate increases to encourage savings and discourage marginal projects. A balance is maintained based on demand and supply.
In other words, you cannot prove that there would be adequate capital. It simply becomes an assumption by which you wave away any counter argument because the counter argument defies your basic assumption.
You have just demonstrated that you are arguing from religious faith, not from a position of rationality or science.
GreyZone,
I don't quite get your argument.
I think I have adequately shown that there is a balance between private capital and the need for investment, interrupted by our (your) masters manipulation. Do you not understand the system of exploitation and slavery of which you are pawn?
I am not religious, so I doubt that I am making some sort of religious leap of faith. Thank you anyway for the illogical conclusion and condemnation as me as a religious "believer". I suggest that alternatively that you somehow are part of the "mama, come wipe me" group wanting to be taken care of, but not understanding the reality of adult responsibility for one's self and the inevitability of depleted resources. You can want and wait all you want, but the people you see as leading you to salvation are in fact taking advantage of you, and the result is you are swimming in ice water while they are rowing the Titanic lifeboats.
I really do get hacked off by those in society, apparently such as yourself, who are manipulated by those in power and who effectively buy into the slave system. I keep thinking that people should be rational and understand what is happening to them, but the response I get is that they depend upon their masters to protect them. So rely on and on, and I will take care of myself, and we shall see who navigates the Darwinian ocean.
Oh, you don't know me at all, Henry. You simply made an unprovable assertion, I caught you in it, and now you are throwing ad hominems around trying to hide the fact that you can NEVER prove your assumption. Ergo, your conclusion is bullcrap.
I don't buy into the slave system at all, Henry. Those around here who know me know this. In fact, I think your entire civilization is trying to commit suicide, precisely because it is built on untenable assumptions such as yours. At the very worst, we will be rid of people like you who are nothing but shills for the failed existing political system.
Finally, Henry, I am not the one waiting on anyone to do anything. I've been one of those telling people to get out of the existing system for a long time. Nate Hagens knows where I am coming from and why. You are arguing in circles about abstract human concepts that are based upon 17th century ideas intended to keep the wealthy as wealthy as possible and fool the rest of everyone into accepting the status quo. I am arguing from positions based on biology, anthropology, geology, physics, and ecology.
P.S. You have PROVEN nothing and demonstrated nothing. You are arguing a tautology. All you have done is made assertions unsubstantiated by facts. All I did was ask you to prove one of your key assertions. You have failed.
I read this at http://theautomaticearth.blogspot.com/ a while ago. Seems topical.
Ilargi: Talking about free markets: I have said many times before that if you leave the provision of basic human needs in the hands of companies set up for profit, you inevitably end up in a situation where human lives are discounted and people become dispensable.
We see this these days in other parts of the world when it comes to the basic need 'food', for which the world’s poor are prized out of the market. In the US, the reality of the food situation can still be disguised through cheap fat burgers and pop, though that’s only a thin veil, about to be lifted.
Off topic, but New Balance makes shoes in the US. You have to look at the shoe itself to determine where it was made. I can't wear their running shoes but I wear them for walking around shoes.
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JimFive
Completely false, Henry.
"Free market" systems excel at precisely one thing - maximizing profit. Maximizing profit is often desirable but not always. But as has been demonstrated with the deregulation of northeastern US electric markets, the "free market" has reduced resiliency and redundancy.
So you have to talk about goals. What are our goals? Well, very much of the time, we want to maximize profit, so the "free market" should be used in such cases. But what about when we have other goals, such as wanting a reliable electric grid (not the most profitable electric grid)? In those cases, we have to adopt different rules and different structures. The regulated utility is an example of such a structure with non-free market rules driven by goals other than maximizing profit.
You have to start by defining goals. If maximizing profit is your primary goal, then capitalism gives the appropriate answer. But if you have other goals, then capitalism is not necessarily the right answer. This, in turn, leads to hybrid real economies as opposed to ivory tower theoretical economies which don't work.
"As a result of recent demand destruction, the US economy is becoming increasingly susceptible to shocks caused by supply disruptions"
This doesn't follow unless the supply chain capacity is being destroyed in line with reduced demand. As long as the US doesn't reduce its capacity to receive oil and producers don't reduce their capacity to supply it there should be more resilience in the system. As one supplier fails, alternative suppliers should have spare capacity they can use to pick up the slack.
If there is capacity to receive oil AND spare oil to be received, then the price wouldn't rise and the predicate demand destruction wouldn't exist. In an environment where scarcity leads to higher prices and demand destruction, the result is that we eliminate the most elastic demand first. The resulting demand is more inelastic, and therefore more susceptible to an additional supply disruption. Your argument falls apart when you say "[a]s one supplier fails, alternative suppliers should have spare capacity they can use to pick up the slack." I think that's a faulty assumption, and without that assumption, the susceptibility to supply shocks will increase. IF there is spare capacity just being held off the market that can quickly be brought to market, then sure, the susceptibility to supply shocks is buffered (though the principle still holds). I don't think we have that buffer, and I think the evidence of increasingly tight oil markets over the past few years supports that opinion.
Jeff:
It all depends upon how the two systems being concieved are allowed to differ: If I replicate the current world, and on one destroy some demand -say the 10mpbd of your eample in world B, then at least temporarily, world B still has potential supply the same, but demand has been reduced. So in this case, an immediate 5mbpd or even 10mbpd disruption can be absorbed in B without any damage whatsoever. Now given time, in world B, presumably some combination of increased demand, and reduced supply (less oil development going on), might hypothetically increase the scarcity in world B, to match that of world A, and we could concievable get to the point you did your analysis at. The difference between my conception and yours, is that the resource scarcity, and the probability of a given size of disruption are affected by the demand destruction, whereas in your model they are not.
I think the difference is crucial, as the takeaway lesson from your model is that trying to prepare for potential future disruption by destroying demand is counterproductive. But I think, this it is still an effective strategy. I am agreed, that from a resiliency standpoint, destroying the most inelastic potions of the demand is more valuable, and it would be good if this were reflected in public policy.
Good post. Some thoughts that came to my mind.
1) People need to stop thinking about price elasticity alone. First, as you correctly note, in developing countries for example, demand for oil is more dependent on income elasticity (ref: Bank of England presentation). Also, most models of price elasticity are way too simplistic (fixed, aggregate, time-independent, demand-structure-independent).
2) Price elasticity means very little if there is a full supply shock, instead of only a price shock. It doesn't help if the price is whatever, if you just can't get oil. In that case demand elasticity figure may tell you also very little about the pain cause by 100% loss of oil access.
Further, people are used to slowed down effects of price rises, that propagate through the value chain slowly in 3-9 months. This gives people at the end of the chain a lot of time to think, plan and implement, while actors at the start of the chain swallow part of the pain and wait till they can pass it on. Supply chains are different, when commercial stocks are thin: they come through like a lightning. No slowing of effects, everybody's in the same scramble at the same time. Example: price rises from diesel are only starting to get repriced to logistics, after that to those using logistics, after that those using those who use logistics... in the end to the end user products. If there's a supply loss, nobody's going to give you their oil so that you can continue driving for another day and postpone the supply shock.
3) For normal operative risk management, people use outdated models. The simple model is the classic risk = event likelihood * event consequence. While this can be helpful, it is not often enough when modeling oil supply shocks. Why? Because such important factors as likelihood as a function of time (Peak comes closer), nature of the failure event (trend-like, normal distributed, pure random, etc), impact propagation speed/depth and secondary/tertiary/etc effects are almost always ignored. I know of examples where only primary effects have been modeled using single fixed probability, completely missing the point that sometimes the hardest effects come via positive feedbacks in secondary effects.
4) Substitution mechanisms may indeed fail on the short run as long as markets are not transparent (never will be) and as long as prices do not contain significant externalities (always will). What I mean by this? There's so much more current money to be made in car replacement than in residential heating replacement (or that is at least the current thinking). Therefor, most attention, reporting, efforts and money are diverted towards thinking of ways to continue driving BAU, instead of thinking of heating fault tolerance. It's just not business sexy enough. Maybe we need more subsidies (aka externalities) there or remove the ones that are in the personal automotive field (gasp! horrors!).
5) I find the oil use / GDP figures very misleading. Let's take US as an example. Much of the GDP growth comes from financial service sector. It's not very oil intensive. Does this mean that the rest of the critical basic supply infrastructure is somehow less oil intensive? Of course not. So the intensity figures to GDP can be misleading. Looking at aggregate national intensity figures can easily mask the problems in critical parts of the national resilience, as anybody looking into oil intense agriculture knows.
Stuff like this should be on all the planner's, scenario modelers and risk managers desks - if it's not there already. Oil supply shock is coming. Not too late to plan and prepare for temporal supply shocks. Price in that situation will mean very little and so will price based mitigation models.
Good point on the GDP/oil use. I think that GDP can also be very misleading--it assumes an accurate reporting on inflation over the data set, which I think we don't have. I think rising GDP may also represent a more highly optimized system, one which is fundamentally more susceptible to cascading failures and shock ripples. Modeling a system as complex as the entire economy to that level of resolution may not be possible, but it certainly seems possible that higher GDP/barrel consumed actually makes us more susceptible.
I agree to some extend. But people shouldn't stop thinking about price elasticity alone, people should stop thinking about price elasticity at all, at least for this kind of analisys.
Price elasticity tells how expensive oil will become once production increases/reduces to a certain amount; everything else is a non-sequitur. It doesn't help predicting a colapse, by what extent there will be substitution or demand destruction, how politicians will react to it or any of the other things that we are used to argue about here.
I think what you're missing in the value of the price elasticity signal is that price is a way to capture the value of something within our choices to allocate finite resources. Price elasticity is a way to capture how that choice compares to our other choices when the relative availability of the objects of our choices changes. This provides insight into which of our choices are truly critical to the functioning of our extraordinarily complex civilization, and which are more discretionary. This tells us when the complex machine that is our civilization will begin to break down. I don't see anything in that chain that is a non-sequitur--can you explain which of those statements doesn't logically follow its predecessor? If I need to explain the link more clearly, please let me know where it's breaking down for you. If you think the implied connection is faulty, please explain why.
Price is a way to alocate resources, but it fails to represent how essential those resources are for a society (unless you consider discretionary spending by the richer more essential than subsistence spending by the poorer - of course, that holds in varying intensity for varying degrees of wealth difference), we need other kinds of metric for that.
Jeff,
Nice article. The caption of the initial graph is incorrect, however. It says "The lowest elasticity demand is destroyed first".
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JimFive
Thanks for catching that, I've fixed it...
Right on ... and very poorly understood, I believe, by policy makers.
As far as energy security goes, it can actually be more secure to pursue a wasteful policy, because when there is a real shortage, there are things that wasteful countries, such as the US, can do immediately to resolve the shortfall without entire parts of the economy coming to a grinding halt.
In countries like Japan, which have established efficiency maximizing policies, there will literally be next to nothing they could do in the event of a real shortage outside of bid up the price of oil in the hope to maintain their import requirement.
Paradoxical, but true. Very nice article.
I don't know about Japan's oil "efficiency maximizing policies". Yet in the event of a real oil shortage, Japan (and every other country) will find that suddenly issues like rainfall and growing season length and water availability will be suddenly very important. In the case of Japan, which has the most rain of any temperate country, plus a rather long growing season, growing one's own food might be easier than in many countries. Japan imports lots of food but will have to obviously stop doing that, But they can grow lots of food if they wanted to and had to.
Already Narita Airport had a shockingly few number of travelers this summer (down 40% for Europe and N. America.) The economy contracted last quarter and the stock market is down. But life is still quite normal here (near Tokyo), not very changed except for a few more empty storefronts. Much much more oil could vanish from the system (yes cars and cellphones could all go) before bigger problems would start to be seen. I'm not sure, but I get the feeling that the climate and the infrastucture (villages still exist but are pretty much dormant) would be a big help in the case of oil shortages. In other words, the past still exists here and the way of life of the past would be like "sleeping beauty", awakening and viable (although creaky and not particularly happy) if oil disappeared.
Theory about "brittleness" is interesting but it is important to examine how countries differ in myriad ways, not just oil use and GDP.
Jeff, thanks for the post. Note that your comment that increased fuel efficiency may act as a negative feedback loop was first noted by William Jevons in 1866, and is named eponymously Jevon's paradox.
In figure 1, I think you are misusing the term elasticity, or at least not being precise. Given any good with inelastic demand, the demand curve will slow downward and the price will increase towards infinity as the supply drops towards zero. Thus, the price will change the most as the supply becomes scarce, which I believe is your point. I do not believe you need to introduce a changing elasticity of demand function to make this point.
I think the key is that demand is not monolithic, and is merely the aggregate of multiple streams of demand for a given commodity of varying elasticities. I agree with you on the shapes of the demand and price curves, but my point is not that price will change more as supply becomes scarce. My point is that market-driven demand destruction increases the remaining aggregate demand inelasticity, which leads to the recommendation that we must move against the market and focus our subsidies and policy initiatives to substitute for the most inelastic demand first, otherwise we get a more brittle system. It is precisely the understanding of how elasticity changes as demand is destroyed that must be understood to recognize the importance of this policy position.
Very nice work Jeff.
Have you considered the "brittleness" of different segments of the markets?
For example:
Kersosene - reduced supply results in less vacation travel, fewer military practice flights, etc.
Gasolene - reduced supply results in large numbers of people being unable to get to work or retail outlets.
Heating oil - reduced supply leads to a crisis as people are unable to heat their homes
Diesel - reduced supply leads to a breakdown in truck and rail transport - power stations unable to get coal; farmers unable to get food to market
A 50% reduction in kerosene supplies would lead to a lot of unhappy vacationers whereas a 50% reduction in diesel supplies could start a social collapse.
I think that reduced supplies will be inevitable at some point. Now, we have to figure out the best way to handle it when it comes.
Kerosene is jet fuel. Essentially it is the oil that does not have the high octane or high cetane values. There are people here who know more than I do about this subject. For instance, I think you want lots of bushy/branchy molecules for high octane, but god knows what for high cetane for diesels.
Jet fuel is important for shipping spare parts around and especially across oceans.
"Given any good with inelastic demand, the demand curve will slow downward and the price will increase towards infinity as the supply drops towards zero. "
No it won't.
That's what happens in a simplified business school model.
In reality what happens is that price increases until there is no single market player left who can afford to pay.
This is cornering the market (no demand is met yet there is some supply)
Then the market will either continue to be cornered and not supplied or else price will have to drop to meet ability to pay.
So in practise you will get punctuated price booms and busts.
The interesting question is what is the time period between the booms because this will determine whether we can recover or whether we will collapse.
Dan, would you expand on your important point about the time period between booms?
What in your view would be the interval which would allow successful adaption, and what would preclude it?
On another point, it seems to me that what level of oil price is sustainable without the economy collapsing is also important - a higher price gives better options both for producing as much oil as possible and for introducing renewables and nuclear energy.
In this light, it is somewhat discouraging that the rise in price to $147/barrel seems to have pretty well killed world demand, and perhaps anything above around $110 has this affect.
If this is the case then an awful lot of oil is going to stay in the ground, and many renewables are doubtful.
If up to $200/barrel was sustainable options would be much better.
"Dan, would you expand on your important point about the time period between booms?
What in your view would be the interval which would allow successful adaption, and what would preclude it?"
The easier point to address is the simplest and I think several posters are alluding to it already when talking about resilience though from a different angle.
What it comes down to is how consistent and predictable price spikes are. If there are wild swings in short time periods it may be difficult to deal with leading to unpredictable and sporadic deliveries of goods due to inability to pass on random price changes to customers and inability to absorb random losses from distribution.
I have no idea what the adaptation period between price spikes would be but I speculate that it is related to how fast it takes to build factories that are immune to these price spikes and also produce goods that dampen the effect.
An interesting sideline to this is that if we wanted to go down a government intervention route it might make sense to pick a single region and cluster renewable and sustainable tech manufacturing there and support the infrastructure there.
An "oasis of calm" in the storm so to say. This is instead of trying to make the entire country resilient and spreading resources thin.
I would be less worried about very sort-term prices spikes and collapses, as they can be fairly well bridged as long as you have a good grasp of what the overall trend is likely to be.
For instance in mining a lot of your costs are sunk, and so if the price collapses you don't necessarily take very drastic action within, say, a 6 month horizon.
OTOH, if you had a periodicy of around 2-5 years, then the financial carrying costs are much more difficult, and you impact future production plans.
Unfortunately, this seems to be exactly what is happening.
If you accept the estimates of financial analysts such as Roubini that present American write offs of around $400bn will increase to around $1.5trn, then recovery in the absence of energy constraints might start in perhaps 2012.
According to West Texas, Khebab et al, this is exactly when oil exports will really fall off a cliff.
If in the interim prices have been pretty well bumping along at the $110/barrel level, then investment plans both in oil and renewables/nuclear will have been severely constrained compared to where they would have been with oil at $150-200.
I very much hope that OPEC succeeds in setting a base price for oil, hopefully towards the $150 level.
Perhaps we are not seeing so much of an "energy demand destruction" as we are an "oil demand destruction". Perhaps alternatives are becoming more economical (due to the high cost of oil), and are gaining market share.
Excellent post Jeff,
I have been making comments about this issue for quite some time, and was thrilled to see a full post on it. Would this in fact mean that waste as oppose to conservation measures are more of a buffer for society, as the more waste you have the more there is to cut back on if you have too. There may also be an advantage to having more demand for energy and products than you actually need to survive as such supply lines are oriented towards you and the glut of goods and services that would result in a consumption cut back would help stabilize the economy for longer. Jeff, would you agree that the best way to avoid reliance on an unreliable flow of energy would be to reduce the complexity of society, as oppose to continuing BAU with ultra advanced/complex led lights just taking advantage of natural lighting than a window, thats a huge reduction in the infrastructure required to give you light, led's being more complex, require more infrastructure and more energy to produce. besides, natural lighting is 100% efficient solar power if you think of it. At the same time, society at the moment, is quite specialized so a reduction in complexity might result in a lot of unemployment in the corresponding infrastructure. It would seem making society more complex is a positive feedback loop to increasing hierarchy because it benefits itself by creating more jobs where there were none before, this however is very unsustainable. Thats seems the biggest issue going back to simpler living and a less industrial world, is what to do with all the people. Just thinking out loud, I'd love to hear your thoughts.
Best Wishes,
Crews
I think this does mean that "waste" consumption acts as a buffer (and we have plenty of it), and I think it's one of America's advantages going forward (though most likely significantly outweighed by our huge overall reliance on imported oil)--I think we can cut 10 mbpd of domestic consumption (WAG) without truly significant changes in quality of life.
I think that reducing complexity alone isn't necessarily a good thing--it may reduce exposure to system-wide meltdowns, but at the cost of dramatically increasing exposure to localized problems (without the systemic safety net that, at least to some degree, currently exists to surge to address regional/local problems). Rather than reducing complexity (such as non-mandatory communication linkage between nodes, which don't increase dependencies and therefore don't increase brittleness), I think that reducing dependency and increasing scale-free self-sufficiency measures is the best way to increase resiliency--I concluded the post with the recommendation to find substitutes for the most highly inelastic demand first, but I think the real key is to do this in a scale free manner: do it individually, do it at the community/regional level, and do it with national policies. Since I think the latter is most likely to fail, at least individuals (and often communities) have a great chance of succeeding...
That is very interesting. I like the idea of going for the most inelastic demand first, it would, I think, help prevent that silly little problem of diminishing marginal returns, which is a product of always going for the easiest solution first. But it is also rather contradictory of typical governmental policies at a city, state and federal level, which tend to avoid those inelastic inconvenient issues, after all they are the hardest to change and the most politically risky to do so. There is also little reward for going after difficult problems in politics pro bono style, as i think we are seeing with our current lack of any sensible energy policy. These types of solutions would seem to need a bottom-up approach where the level of action works its way up from an individual or group level, open-source if you will.
I also love the idea of opening up more communication between nodes because it plays to our current information driven society's advantage, where as 10 years ago it may have been much harder to transfer that much information as conveniently. Also, from an evolutionary biology point of view, if you take each node as an organism or group of organisms, the communication will allow, nodes to "mimic" each other to take advantage of the more successful polices and infrastructure implementations, it would also seem to be mutually beneficial to each node, as the stability of the other nodes helps keep any individual node out of nasty negative destabilizing feed-back loops such as the stresses of an immigrating population because other nodes cant take care of themselves or have set up counter-productive practices. I just hope that the policies that lead a node, or city/community to succeed end up being sustainable solutions as oppose to sucking at the teet of dwindling non-renewable resources for survival.
Thanks for your feedback,
Crews
That would be the local bus service that loops around rural areas - like the mobilos in the DR - so that someone can get from home to various unusual locations. NOT the intercity long haul routes - that's a train. NOT the trip to market - a bike works just fine for that. In my experiment of going carless, just how was I to move my air compressor to the repair shop today? Not in my back pack. A trailer maybe, but that would be asking too much for most people. It's shuffling loads like that - or picking up the chicken feed - that seem the biggest obstacles to dumping my car.
cfm in Gray, ME
Depends on what you mean by "dump your car". If you didn't regularly use a car, but could access one for the rare occasions when there is no other good solution, that would suffice. Such occasional access to a car could be done via car sharing, renting a car, or hiring a taxi.
Re: the problem of unemployment following a simplification of society. I think we'll need laws similar to the one that is now being weakened in France: if legislation limited employment to, say, 30 hours per week, then the available work would be spread out over more people. As a side effect we'd have saner lives with more time for "non-work" (unpaid) activities, which could range from family fun to growing some of your own food. Alas, in our current culture which worships hyper-capitalism, this won't happen. Thus, some people will have more work than they really want (forced to work "overtime"), and they'll grumble over that, but will be able to pay the bills, while many others will have no work at all, and out of boredom or desperation will be getting into crime or revolution. I see this as one of the more serious consequences of Peak Oil in an "advanced" society.
I've been mulling that over, the whole notion of limited work hours.
It seems self-evident to me that we will need to collectively look for ways to employ millions of newly unemployed.
I think this is how we've progressed from a 10,000 foot view:
cheap resources, cheap labor
.
. (time passes)
.
cheap resources, expensive labor
.
. (time passes)
.
expensive resources, expensive labor
.
. (time passes)
.
expensive resources, cheap labor
We will have cheap labor because we will have a surplus of it as societal specialization unwinds.
Given the above, it's better for us to put 100 workers on an infrastructure project (like the Chinese do in many of theirs) rather than put off the project until an expensive, powerful machine that requires only one operator can be brought in.
At some point, the people working may accept working for their room and board rather than going without both.
In any case, spreading the wealth around will seriously need to be considered very soon, in my view. The consequences of not doing so (i.e. riots, home invasions (c.f. South America)) are something I'd rather not experience.
Your civilisation view reminds me of Spengler's, except yours is simpler and makes more sense to me.
Presumably after expensive resources, cheap labour; we have a population collapse and go back to the beginning? ;)
Jeffvail:
Absolutely great post. I love posts that bring new concepts into my head/articulate ones I toyed with in my own.
While your premise is very much valid, an issue I find with it is that you show the demand in your graph to be linear, while in fact it is far from it. Demand destruction is shaped mostly from (1) behaviorial patterns (fuel substitution, retail behaviorial changes like biking, mass transit, etc) and (2) from infrastucture changes (attritional vehicle fleet MPG improvements, improving home/power plant efficency, changing transportation modes, etc). Behaviorial demand destruction would likely be characterized by a downward sloping parabola while the infrastructure would be characterized by an upward sloping parabola which would eventually flatten out.
Good point on demand destruction--while I think it has linear influences, parabolic influences, etc., I think it is ultimately far too chaotic a system to model with both high resolution and high accuracy. I chose to use the linear representation because it most effectively illustrates the concept of increasing inelasticity, but it does create an oversimplification... I'll have another post coming out in a week or two that uses another method (Lotka-Volterra system of non-linear equations) to model (again, an extreme simplification to illustrate a point) the interrelationship between price and demand destruction/marginal production, but I don't want to get ahead of myself!
While I agree that market driven demand destruction is not an adequate response to rising energy costs, I sense something wrong with this analysis. Surely eliminating wasteful, discretionary use of energy has to be part of any intelligent response to higher energy costs. The problem with this response is not that it is incorrect or unintelligent, but rather that it is inadequate. We need to reduce our energy use far beyond the amount required to keep sales volumes as high as possible in the short term, which is all that the market in its current form will ever consent to. If we forsee substantially reduced productivity in the future due to rising energy costs, then we need to deliberately reduce wasteful production in the present and dedicate the saved resources to creating infrastructure for for a relatively energy poor future (e.g. energy efficient housing, energy effcient food production systems, and so forth). We need to follow the path of voluntary simplicity and mutual support rather than fighting ecnomic contraction every step of the way. I am not particularly hopeful that we are capable of following such a path, but anyone who has even a faint hope for a semi-soft landing for our high consumption society should be doing everything in his or her power to push us in this direction.
I agree--my general approach is "all of the above," and we can't all keep driving Hummers and justify it by saying that we're maintaining the elasticity of the system :)
My hope is that we can look at this effect of increasing inelasticity through market-driven demand destruction and realize that, when we use subsidies for R&D, tax breaks, and policy programs, we should aim them first (or primarily) at the most inelastic demand. So, if we have $10 billion for tax breaks, let's not use it all encouraging people to trade in their Hummers for Prii (Priuses?), but instead allocate a portion (preferably a large portion) to substituting the most inelastic demand. I think this is especially relevant as a use for centralized spending--people should be able to figure out on their own that it's a bad time to buy a Hummer (and if they don't, they can deal with the consequences).
I agree that the elastic demand can be largely left to take care of itself. Unfortunately adressing the inelastic demand by creating energy efficient housing and so forth is probably going to hurt the economy in the short term (energy efficiency improvements take a while to pay for themselves) so that developing the politcal will to vigorously pursue such policies while we are on the brink of a major recession is going to be difficult. The growth orientation of the economy gets in your way wherever you turn.
We seem to have two choices: continue to try to grow ourselves out of trouble, and end up growing ourselves into catastrophe, or figure out how to move away from our growth-orientation. I've written about this Problem of Growth before, not that there's a chance in hell of widespread implementation of my proposed solution...
Hello Jeff,
Well done. Don't forget that an unforeseen Liebig Minimum can quickly turn a trampoline-type system into a brittle pane of glass. Extreme example?--> even if the US has bicycles and wheelbarrows in use everywhere postPeak, if no replacement ball-bearings or tires are available, then this system quickly crashes to the next magnitude lower efficiency of the Nuahtl Tlameme backpacking scheme.
Question: Where are these tubes & tires currently made? My guess is out-of-country-->hope, the Chinese don't make a strategic decision to put us out-of-luck. :(
Recall that the ancient Chinese leadership considered rickshaws & wheelbarrows as strategic weapons for societal and military logistics. I sure hope our leadership can make a decision to have strategic reserves of bicycles and wheelbarrows, plus the factories and resources in-country to make spare parts.
http://www.uni-kiel.de/sino/ar/sk/12a_1970s.jpg
Sadly, Error 404 now, but it used to show my favorite photo of 50,000 to 100,000 Chinese working with wheelbarrows in the 1970s.
Bob Shaw in Phx,Az Are Humans Smarter than Yeast?
There you are:
http://web.archive.org/web/19960101-re_/http://www.uni-kiel.de/sino/ar/s...
:-)
Hello Drillo,
Very Cool--Big Thxs for finding this again--I added it to my favorites.
This is a good point, Bob. When I was first drafting this article, I had used "on-farm solar PV to power plug-in electric tractors" as an example of how to substitute the most inelastic demand. Gail the Actuary pointed out that this was just substituting one set of dependencies for another, very much along the lines of your point, so I changed the examples to insulation/passive solar and rainwater harvesting. It's difficult (impossible?) to eliminate dependencies entirely, but I think that at least keeping this issue in the front of the mind whenever we talk about "solutions" is a good first step.
Jefvail,
Thanks for an interesting post. One major criticism of your thesis is the time factor. This fits in with the person pointing out that plastic deformation can avoid shattering, but only if the rate of change is below a critical level. If we consider oil consumption in the US a fast response to much higher fuel prices is lower vehicle miles traveled(VMT).
This has limits, even at say $50 a gallon, when VMT has to be reduced so much that people are unable to afford to commute to work, material deliveries are reduced and the economy shatters. If though that price increase is much slower, consumers can buy much more efficient vehicles, move closer to work or change job locations, supply chains can be changed, resulting in the economy adapting.
The real concerns about peak oil is not that eventually no oil will be available, its that the decrease in availability is going to be faster than the economy can adapt. Because of the massive oil waste in US and Australia, I think these economies will be able to adapt at least to your example of a 50% reduction in fuel use. A further 50% reduction would also be possible if there is time(10-15 years) to replace most of the vehicle fleet with cars that get 50mpg instead of the 25mpg of today, and a further 50% reduction would be possible if there was time to replace most of these vehicles with EV, keeping oil for rail and truck transport( presently about 12% of oil use). We could see a similar adaption of economy to high gas and heating oil prices by a major shift to wind and solar generated power, again very achievable over a 10-20 year period of dramatic reductions in oil availability and price increases but not 1-5 years.
I fail to see how demand destruction caused by for example adding 100cm of insulation to houses prevents additional insulation being added and further demand destruction after further heating price increases or how doubling vehicle fuel efficiency over 10years prevents a further doubling after another 10years.
Each doubling brings less benefit per unit. WRT insulation if the first layer cut use in half the the next layer only cuts use by 25% and a third layer cuts use by 12.5%. As for doubling vehicle efficiency there comes a point when efficiency reaches over 50% that a doubling is impossible.
That depends on how efficiency is figured I suppose. In terms of engine efficiency I imagine we could only double it once compared to it's current average, but in terms of the energy to autonomously move an individual and minimal cargo we could probably double efficiency another four times give or take w/ the rough lower limit being ~20-30 times less energy than we use now.
Hello Jeff,
Thxs for the reply. I was thinking about your fig.1 chart when it occurred to me that the very bottom inelastic segment [the dark, blood red] is the food & water segment--> so this actually needs to be growing over time as population increases. The uppermost, more elastic chart segments will actually shrink quicker than your chart shows to keep the bottom segment growing over time [till it can't anymore]. This is because people will give up nearly everything to keep the food & water coming.
There are No Substitutes for sulfur & I/O-NPK--> you simply must have these Elements to leverage the topsoil, thus the resulting plant growth above a Liebig Minimum. This need, plus the need for irrigation and potable water, are very rigid glass panes. But once they finally break....
[1]The Peak oil downslope will be bad enough, [2] WT's ELM will additionally make it cascade downward even faster for importers, and [3] I would expect those exporter countries of I-NPK to eventually throttle back their production to maximize profits like many suspect Russia & OPEC will do with their FFs. Thus, we might be looking at a triple whammy effect: 1+2+3 to really ratchet down the Overshoot pop. quickly from demand destruction attacking the most inelastic segment with the most impact.
Demand destruction is really economic destruction. The use of "brittle" is accurate.
Efficiency gains and other forms of transition are required to maintain the economy with less oil.
Here is a article, Oil: Demand Destruction Overdone? noting how decreases in oil demand is mostly correlated with recessions.
EIA data on demand:
We use this graphic to illustrate how disposable income (dark blue) was overwhelmed by rising oil prices (red line). The gap between income and expenses from the mid-1980's to 2004 allowed the housing market to heat up. Then risking oil prices drove foreclosures that exposed bad banking practices. The only way to solve housing and banking problems is to deal honestly with Peak Oil.
The basic graphic is from EIA. They have not updated it since 2004.
Foreclosures fractured the economic system. Cracks are propaging through the banking system. Food distribution could follow.
We have been doing research into supply shock contengency plans. There are very few. Current rationing based on price will work in very mild circumstances. When things become more severe, current policies are a "let them eat cake" approach.
BillJames: I read tha article Jeff wrote and then every comment.I was waiting to see if what you touched
on was going to get mentioned.I also beleive (like you
Iam guessing)That the monetary pressure placed on the
great unwashed masses will be a burden they cannot
carry.
The whole system is based on the drones of society,no
matter what the MSM bombards you with.Trickle down
economics is just a ruse.If making the wealthy more
wealthy would help the poor...lets make mere billionaires trillionaraires and then the poor will be
millionaires.Or the oft reapeated media CNBC refrain
of how a "Weak dollar is good for America".
Great!!!. Lets make the dollar worthless and we can all be trillionaires!
I believe economic collapse will be evident and cause the gears of the economic machine to seize way
before the literal bearings even start screeching.
Of course I dont yell and spray spittle or have a
host of canned noise buttons like Jim Cramer
http://www.youtube.com/watch?v=-aqcTR-lRsE
On CNBC's MAD MONEY. But Ive also never told the entire world of investors that Bear Sterns is fine and you should buy more shares.
Or oil was set to crash http://www.youtube.com/watch?v=gUkbdjetlY8
I seen monkies who could toss a dart at the stock page
and be more accurate.
Cramer is famous for saying "Some people want to make
friends" And that he only wants to "Make money"
I think anyones future investment better be friends
and community myself...but hey...I dont have a multi
button canned sound machine either!
"lets make mere billionaires trillionaraires and then the poor will be
millionaires"
- it worked in Zimbabwe... :-)
I think one critical point thats missed when talking about demand destruction is that people focus on individual consumer demand and assume that this will be the primary driver of demand destruction.
I won't repost again but I've looked into to it and found that the current demand destruction is probably not from individual conservation but from the crashing housing industry. Losing a major industry like housing will obviously drop demand and overall the housing industry is very transportation dependent.
Along these lines demand destruction can be seen as income destruction first followed by reduction in fuel usage.
For example as the economy slows people eat out less shop less etc. This leads to direct reduction in fuel usage and indirect reductions in the form of stores closing and people being laid off. As more people are out of work they will accept lower wages and will consider the high cost of gasoline when taking on a new lower paying job.
You actually get the same in elasticity pattern but for different reasons demand drops because fuel usage drops as secondary industries collapse. But as you approach the core industries demand becomes very inelastic.
This is in my opinion the real route to demand destruction while individual conservation efforts are probably not a huge issue. For example you buy a more fuel efficient car so you take more trips and total expenses are the same but your usage pattern changes. Or the price of fuel drops and others either don't change or increase their usage. Jevons paradox pretty much prevents individual acts of conservation from working to lower overall demand. Demand is only destructed when people can no longer afford goods and services and abstain leading to a reduction in the industry and further impoverishment.
If I'm correct then given that the housing industry is pretty much done this year then we won't see further demand drops until another industry begins to fold. The next big one is commercial real estate and boutique stores closing along with various services such as karate schools and nail salons. As these people look for work in general they will take lower paying jobs and be forced to curtail fuel usage to match the lower salary.
I think attempts at increasing efficiency while keeping our current infrastructure will have little effect on overall usage. Eventually of course people will change their lifestyles and businesses and people will again be located close together so that industries like nail salons will reopen in walking distance to neighborhoods.
Probably more likely is that people will only be willing to drive less than five miles or so to do anything thats not critical but the result is the same the pressure will be to rezoned to allow mixed used.
In the interim demand destruction will continue primarily in the form of lost jobs but it will increasingly effect more and more critical services.
Also of course employers that remain in business will be faced with higher fuel costs so the easiest solution is to cut staff to the minimum then start cutting wages to reduce price increases.
Its fairly obvious that this is a downward spiral. However the nature of the spiral is important since with the one I'm giving demand destruction does not result in lower fuel prices for any length of time. You may get brief periods of respite like we have now when a entire industry collapses nation wide but in general demand drops only well after the current prices is unsustainable since most people will try and hang on as long as they can in this business destruction scenario.
Companies will go deep into debt sell at a loss etc etc and only quit when they are bankrupt not insolvent. They where toast when the prices made them insolvent but they don't capitulate until they reach bankruptcy. By the time this happens the current prices are way beyond anything they could handle long term and now other industries are insolvent on the way to bankruptcy. As you can see you only get short windows of reduced demand vs supply and then only if the collapse is fairly coordinated such as what happened in the housing industry.
Going forward I see the collapses as bing far more scattered since they are dependent on more local issues thus nail salons wont disappear at the same time. Even the auto industry is fragmented enough that it won't go down synchronously like the housing industry did. This smoother crumbling if you will means we probably won't see any dramatic price drops.
For that matter although is a smaller component you have the same with individual conservation either forced by job loss or voluntary getting rid of the SUV is obvious but further conservation will not be as concentrated.
So its not just a issue of inelastic demand but the way demand is destructed without large sectors our groups reducing demand at the same time you simply can't get and sustained drops in prices.
There are other reasons to think that the housing industry isn't going to recover this year. Since the design hasn't happened, it isn't going to pick up, no matter what fuel prices do.
Yes-I think this year is the first one since 1982 that Americans spent more on gasoline than autos-so much for the vaunted shift in consumer behaviour-gasoline demand is down because they are tapped out.
Memmel,
This is a really good post and intersects with my beliefs on how it will go down. I agree completely that demand destruction primarily takes places when an industry collapse(such as the busting of the housing bubble) takes place.
It is also true, however, that aggregate demand destruction will take place across the board in the ensuing recession as the collapse of the bubble leads other unpredictable organisations to lay off workers.
As you say, most people will not cut back unless they are forced to (I remember not owning a car at all when I lost my job in 2001) and then will bid up prices as they are re-employed.
What if they are *not* re-employed?
What if even if they are re-employed, gas prices remain high?
Will they then buy a car? I think the answer is maybe not if they perceive that they can't afford it and mass transit is cheaper. Their resistance to using mass transit will be lowered as necessity will have already have forced the issue during the unemployed period and they will have realized that it's not that bad.
The interesting question is when (if) the economy recovers: will there be availability of substitutes such as plug-ins or electric vehicles which will permanently lower demand?
I agree but even with your post in demand destruction everyone uses the maximum amount of gasoline they can afford until the capitulate and make a lifestyle change. Prudent people switch from SUV's to cheaper cars simply because the level of affordibility drops for them. They are still using the maximum amount they can afford. Few go SUV->walking/bus/bicycle and change lifestyles.
Whats import is that because of the nature of demand destruction the changes for it actually resulting in and long term drop in prices is small. The price will on average continue to increases regardless of consumption drops from "natural" demand destruction. The problem is people believe that once the price gets "too high" then someone else will conserve and they will get to buy cheaper gas.
This other guy thats supposed to conserve for the common good so they can get cheep gas never seems to show up to the party.
The problem is that a lifestyle change is even more expensive than buying a compact car. McMansion subdivisions in the sticks will never have the population density to support a mass transit system. Even if you're willing to simplify and live in less space, housing in the city is expensive, and it will remain expensive as long as the anti-density NIMBYs prevail.
Actually I think thats one of the few problems we can solve. If you have ever seen the ugly housing thrown up in the Eastern Bloc countries or Hong Kong. Dense cheap housing can be put up rapidly when its required. Not to mention denser living in existing housing units.
One of the few things that I don't see being a issue in the future is a shortage of livable housing.
Probably not the best apts but at least something equal to Eastern Bloc apts.
Hi, memmel.
I have no doubt we will throw up cheap housing, but it will not be able to keep up with the need as people become unemployed and can no longer afford shelter. Many will live with relatives, but many will not. Thus, I think the number of slums worldwide will increase and the number of people living in the slums will skyrocket.
The future homes of many millions of people will likely look more like this:
Currently, there are tens of millions of people already living in slums:
(from Planet of Slums, Mike Davis; picture and graphic from the Wikipedia article on slums)
According to this page on the slums of Mumbai, its growth rate is faster than the urban growth rate. It's once again a matter of relative rates of growth. Can we add even the cheap East Bloc-style housing fast enough to keep up with the need? Not without inexpensive diesel to run the machines (cranes, concrete pumps, etc.) that lift the liquid concrete to the higher stories. We may put fifty people on "bucket duty" to create multistory buildings made of concrete (or use donkeys or horses) but in my view the housing needed won't come anywhere near being satisfied. (Preformed concrete walls are another alternative, but they require cranes to lift into place, too.)
I did this research as part of my presentation Staying Healthy in a Post Peak World for the San Francisco Peak Oil Task Force Town Hall Meetings. In my view, worldwide pubic health in cities is going to decrease as we go down the depletion curve in part because people will be living more in slums.
North America and Europe will attempt to prevent slums from arising, but eventually it will be clear that millions of unemployed who can't pay for shelter will need to live somewhere.
I do not know the current status of Tent City that formed earlier this year in Los Angeles, but here is a video of it by the BBC for those who have any doubt that we will have slums in North America.
Well something between these two extremes plus nicer units for those with more money.
Dense housing as you point out is possible with even ad-hoc construction i.e slums.
Assuming that even in a slum you can control the temperature within tolerable levels and that something like a public fountain is available and at least some sanitary conditions are met for waste removal even it its open trenches you have livable conditions.
And finally some food. Whats interesting is these can be substantially improved up to the level I presented i.e cheap flats with a reasonable investment.
So cheap housing close to public transportation is not a problem.
Public health would be touch and go esp in the poorest slums so at the minimum the danger to public health will be very high. Its a bit surprising that even with this our current poor slum cities don't have the disease outbreaks one would expect. I suspect this is simply a result of people aggressively practicing simple hygiene despite the conditions.
http://www.ghana.gov.gh/ghana/woes_slum_dwelling_urban_poor_child.jsp
Despite these issues the urban poor population does not decrease dramatically.
The survival rate is actually high enough that in general the urban poor population is increasing and I'm sure that not just from inbound migration.
http://www.peopleandplanet.net/doc.php?id=2059
http://www.cnn.com/2008/TECH/06/10/slum.city/index.html
Thus the urban poor manage to practice enough hygiene to survive and even grow their population even under these desperate conditions.
This sort of living is probably a shock to Americans but its obviously not the end of the world and in fact our population keeps rapidly growing even with estimates of up to 50% of the population living in slums.
So I repeat housing is not and issue and probably will not be in the future. The quality of life may be low but on average its livable. What can and will cause serious problems in slums is probably famine not the living conditions. Even serious food shortages or fuel shortages for cooking could quickly lead to serious epidemics as people weaken.
In the US at leas and probably most of the western nations even if slums form we should be able to keep and adequate supply of food. Of course this is the same food that previously was sent to the third world so the formation of slums in the US probably will eventually result in famine in the third world. Esp since we can be certain that biofuel usage will continue to grow.
But I repeat the living conditions themselves are not a huge problem. Sad unpleasant etc but people can and do survive given enough food.
Interesting discussion about slum living, but what about people still employed and in a position to pay for livable housing? A middle class American has an energy and financial budget vastly larger than a slum dweller. Let's assume middle class housing in the city costs $600 more per month than the suburbs. Even at $10/gal for fuel, $600 pays for a lot of fuel for commuting. If urban housing is miserable and/or unaffordable, suburbanites will bite the bullet and keep paying for fuel as long as they still have a job. The only way the urban person comes out ahead financially is to go completely car-less and make the suburban commuter pay for parking. Fuel savings alone won't make up the difference in housing costs.
Actually I've made a similar point in the sense that people in the US will seek cheaper living first.
Your best model is a rental in the suburbs given the current bubble in house prices this is half the cost of owning and since we are heavily overbuilt in the suburban areas we can expect that rents will probably decline over time. So regardless of how it plays out housing costs can and will decline to whatever level is required to offset increasing transportation costs.
I've written a number of scenarios where people opt for cheaper housing costs.
In general your correct that housing costs are higher esp for people with a bit of money as you get closer to the city center. Thus rents can and will adjust to other pricing pressure to remain competitive. This will also continue to pull down the purchase price of homes as the price at which they are cash flow positive declines. At the moment very little of our housing stock is viable as rental properties but this can and will change quickly. Rental properties that have been held for a long time can easily cut rents dramatically if they are forced.
But this just means that we can expect oil demand to remain fairly strong and oil prices high on average. As people become unemployed or have to take jobs that simply can't cover both housing and fuel costs they will eventually seek housing where they can live without a car. You can see that for many this decision is made only after they are at the bottom. Thus the slums or cheap housing units will still form.
Other people with money will continue to opt to move towards town given the chance keeping prices in town fairly high for the better areas. High relative to the depressed rents out of town which may well be a lot lower than todays prices since other costs will be much higher. I don't drive for example but higher food costs etc have still made a significant impact on my budget so you don't escape expensive oil completely by simply not driving.
Once important is not how each individual copes with peak oil but that demand destruction going forward will not result in any long term price declines for oil.
Eventually of course the dynamics will lead to a more traditional third world city with the slums on the outskirts and the wealthy on the inside. Whatever actually survives in Suburbia will either be wealthy people or a reorg around rail transportation hubs. Maybe these could be called village centers. In England the smaller towns are quite viable around the rail stops so we can expect some of our current suburbs to become small towns again around rail stops. Local EV traffic could potentially allow the best homes to retain some value.
I'm not sure all of Suburbia will die out I'm sure to some extents personal EV/Hybrids driving short distances to a Rail depo will allow some less dense areas to survive. But this is only a fraction of the amount of suburban housing we have now. Assuming the rest becomes slums I'd guess these affluent areas will put in green buffer zones but destroying houses between them and slum regions.
So my best guess is that you see and affluent core city surrounded by increasingly poor slums then suburban villages that have isolated themselves by destroying housing between them and the slums areas. I just don't see that these new mini villages will be all that common since they can only exist if the town area can take and condemn enough homes and destroy them before the slum spreads.
Probably in many places once the ratio of empty suburban homes is high enough fires could result in large sections getting cleared so you have a sort of chance for a natural break to develop.
But in general I just don't see that the low density areas that do survive are all that important only a small percentage of the population will live in the faux suburbs if you will and you have a good chance that it will be weekend homes of the wealthy that also have apts in town.
You can go through the various scenarios but you should be realistic and consider how many people will actually retain some wealth going forward. Given that the economy will revert back to one focused on necessities I'd say that the middle class and higher groups will be a fraction of what we have today.
Lets take the population of the US and do some rough estimates.
We have about 300 million people now.
http://en.wikipedia.org/wiki/Demographics_of_the_United_States
25% is already in the poor category.
Lets assume that 25% more move down to the poor category and say 10% of the poor become real slum dwellers.
In the other groups the middle class which is 30% will probably take the biggest hit say 20%.
The upper middle class is 15% lets say this is reduced to 5% with 5% moving to middle and 5% dropping to poor.
So in the new social order the new poor will be comprised of 50% of the population with 20% from people that where middle class and 5% that used to be upper middle class but had occupations and training thats of no use ( See Soviet scientists for example)
This leaves 5% of the population upper middle class and 10% middle class. 75% of the population would then be in the various lower classes. Check my math but all I'm doing is moving down 25% of the population from the middle class/upper middle class brackets right now its 45% of the population in the future as the economy contracts it will be say 15% of the population. This is enough to manage a society more focused on necessities and daily living.
This fits quite well with the demographics of India today ( I wont use Brazil this time :)
http://en.wikipedia.org/wiki/Poverty_in_India
The point is we can probably expand what your saying but the absolute number of people in the class your talking about will be declining over time. As they can they probably will do exactly what your saying but everyday you will have less and less people able to live a good lifestyle. Gasoline costs won't go down because we will always maximize the number of people in theses upper classes to the limits of the economy which itself is limited by oil prices but the overall number of people in the upper classes will continue to decline over time.
As near as I can tell it will end when the number of people that can afford biofuels/EV's equals the amount of these sources plus whatever oil production is still going on. At that point you stabilize.
The tremendous number of people willing to work for pennies keeps overall salaries low but the rapid decrease in education level adds job security for the remaining higher positions going forward. Similar to a large country in South America that I'm not allowed to mention by name but Spanish is not the native language.
Longer term of course the hope is that the remaining affluent people can develop technologies that allow the poor to have a increasing standard of living under the constraints of energy but today I'd say thats just a hope in the future it may become reality. I'd love to see us turn our technical capability to solving the problem of living with dignity/health and contorl of reproduction with little money and little energy. If/When we finally work on this problem I really think we can solve it and eventually in time as the population drops and the world recovers people will be able to live very nice lives that are not destructive to the environment.
It probably doesn't even with petrol (gas!) at $20/gallon - you just drive a mile or so to a pick-up point for public transport.
A lot of the discussion about low-density suburbs being impossible for public transport seems to preclude the possibility of combining modes.
Bikes or electric bikes mean that you are still better off keeping your house in the suburbs.
This is not apparent at the moment because relatively few people are affected and so transport modes have not caught up.
That is not to say that the inconvenience would not mean that suburban houses might not devalue considerably compared to urban houses, and the peculiarities of the American mortgage system might lead a great number of people to put their keys in the post - most places you would still owe the money.
We have that model already in suburban Park and Ride lots. The limiting factor there is parking space. Park and Ride lots are now huge sprawling surface parking lots. If the area around rail stations is developed into a small town center, real estate for parking space won't be cheap. That means high construction costs for underground or multi-story parking garages. With bicycles and motorscooters, parking space is more manageable.
But don't get your hopes up I'm not saying that people won't do this. Even a golf cart like EV works quite well in this scenario but remember the number of people able to even make these adaptations will be numerically falling over time as discretionary spending falls.
Since the absolute number of people who can afford anything close to current suburban housing prices will fall suburban houses will continue to lose value. Also your talking only about a region fairly near a train stop the vast majority of suburban housing cannot be within say five miles of a train depo and trains cannot constantly stop if they say have to cover 20-40 miles to reach the city center.
I'm not disagreeing and I think some of this will happen however its only important for a fairly small group of people even vs the population of the US.
A fair amount of people with some money will choose to move back into urban centers or at least the centers of small towns for example. So its not even everyone with money that would choose this lifestyle.
It does mean that some of the concepts of suburbia might last at least for a while its not 100% gone but its and easy guess we will lose 50-75% of suburbia and that the focus for most people going forward would be to live in the city center. So the direction of desirable flow is towards the city center.
Well, most people would choose to continue living in a comfortable suburban house even if they could only afford to heat part of it in winter and if in reasonable health ride a bike a couple of miles to central point to go by bus (maybe not rail) to their jobs in the city centre rather than live in the crowded city centre shacks you hypothesise.
As I said, the rather weird US mortgage legislation may mean that more will choose to hand back their keys, but although 70 mile commutes will doubtless pretty well die, there are an awful lot of other alternatives which people will likely choose before your alternative of Brazilian-type conditions - Brazil did not have the standing capital embodied in the suburban houses, so an urban shack was their best option.
I'd guess a 20% reduction rather than your 50-75%.
I've looked into to it and found that the current demand destruction is probably not from individual conservation but from the crashing housing industry.
One interesting factor of resilience of the US economy in this respect : A great deal of the pain of that crash has been borne by immigrant workers, both legal and illegal. Thus, an important measure of the effect is the decline in remittances of money back to home countries So Latin American economies are helping by sharing the pain...
And the illegals don't even show up in the unemployment statistics! How neat is that? (sark alert)
(The US financial sector has pulled a similar stunt : the financial pain of junk mortgates was shared by healthier economies. The Swiss financial sector, and franc, have taken a severe beating from it.)
This is an excellent example of the Vail effect : the next phase of demand destruction is going to hurt a lot more, unless foreigners can be made to pay for it.
Yep and whats surprising really as given the extent of the collapse in housing how little demand has actually dropped. Its one of the US's last large industries. You can imagine how much economic destruction that is required to drop demand say 10%. Makes a Depression look rosy.
I'm not saying it won't happen but the price points will be way higher than today before we get this sort of demand collapse in the US.
http://www.forecasts.org/house.htm
http://www.greencarcongress.com/2008/06/us-vehicle-mile.html
We see VMT with a 1.8% decrease in VMT while the housing industry has dropped by 50%.
Did I misunderstand this mornings numbers? Crude inventory up and refined gas inventories down. A price reduction of .30 cents a gallon and the American public is ready to roll again? I hope I heard that wrong.
http://thealternativeenergyinvestor.blogspot.com
I enjoy watching Jimmy Stewart in the movie (Its a
wonderful life) And thinking about Bedford Falls with
ole man Potter and Jimmy's(George's)angel,Clarence.
Its a great piece of Hollywood fluff,about the great
depression after the roaring 20's.Not to burst anyones
reality but...it didnt snow in October 1929 like the movie showed. And lots more was wrong with the historical accuracy of the film,but I digress. I wish Joe could "Say it aint so Joe" but it is so.
The P.O. story cant be written without economic collapse...like no Romeo without Juliet.The P.O. saga
is gonna open with economic collapse like Moby Dick
does with "Call me Ishmael"
Yet,that wont be "all she wrote"by a far cry. The
economy is gonna be the Canary in the coal mine in
regards to P.O.
Banks will fail...big banks...along with lots of small
banks.People will bail from IRA's & Roth's & 401-K's.
Getting a free toaster when you open a checking account will be a faded dream when the doors are locked and the drive/thru has a "Closed" curtain drawn.
Call me a doomer if it makes you feel warm and fuzzy.
Call me Ismael, but hunting this whale with reckless
abandon and no regards to the ship is doom...utter
doom.
TOD academics are great at tying the dollar to oil or
visa versa and there in lies why Jimmy Stewart threw
himself off the bridge into icy waters, wishing he
had never been born.
Clarence,that bumbling angel intent on earning his wings showed Jimmy "George Bailey" what life would have been for everyone in Bedford Falls, with him NOT being alive.
The "garlic eaters" as ole man Potter called them...
were happy and didnt own a car. It was George Bailey
and his wife who loaded them into a decrepit jalopy
along with their goat to drive to their in hock first
home.
George Bailey hated his jalopy and showed an amount
of hatred towards it.
Its about the people is what Iam trying to say.Always
has been."Youth is wasted on the young" is a famous
line from that movie. I disagree with that line also.
I would hope humans dont waste humanity for a "mess of
pottage" such as oil.
(Mess of Pottage) from "Pilgrims Progress" circa 1678
http://www.sacred-texts.com/chr/bunyan/pp08.htm
Ive found the world most impoverished to be the worlds
most generous,could it be the garlic?
A minor nitpick but I'm not sure where you get the year 1929 from "It's a Wonderful Life" at all. The movie is clearly WWII era, as at the very end his brother bursts through the door just back from the war. The movie takes place on Christmas eve, hence the snow.
My favorite movie. Ever. Query: why in the world would you watch "It's a Wonderful Life" for historical accuracy????
Oh, and Grey, the story actually covers from his childhood to that Christmas Eve. The scenes with the Angel occur only on Christmas Eve, of course, the rest are flashbacks. (Making this point on the chance someone out there has actually never seen The Best Movie Ever Made.)
Cheers
Jeff, great post. Couple questions —
1. If I understand correctly how GDP and other economic indicators are calculated, increasing the resiliency of the least elastic demand, at multiple scales, would itself look like a breaking/shattering system depending upon which sectors and at what scale the resiliency measures were implemented. Is this the case? If so, how can resiliency be distinguished statistically from brittleness, and how does one communicate that difference to politicians, investors, and others who make decisions based upon statistics?
2. I'm not sure I understand why you rule out a market response to inelastic demand. I would think the amount of traffic TOD gets would indicate a nascent market for resiliency consulting, info-sharing and products, and there are certainly many investors out there who would love to find a few companies poised to thrive as conditions deteriorate... and that's without any marketing. Why do you not see any possibility of market response?
Thanks, excellent work as always.
How about when the mushroom clouds start blooming,
you can make a killing hawking sunscreen lotion.
Wheelbarrel sales should sky rocket when it takes
something to carry enough dollars to buy a loaf of bread.
Tents seem a sure lock when homelessness is rising.
Fried pigeon can be called squab and you can jack up
the price.
Get a payday loan franchise for those cash strapped
consuming middle class smucks and charge em 300% APR
I can think of a bizzillion ways to make money off of
misery.
You surely cant be serious in not being able to think
of even a few.
Tubal Cain said he couldnt make a sword either...but
a couple sheckles across his palm and he produced a
slew of em.
Nephilim, I'm not talking about profiting off peoples' misery, I'm talking about finding a way to shift systemic predisposition to brittleness. Leaving such decisions to people who've spent their lives learning to win friends and influence people, as opposed to those who've spent their lives learning things like permaculture, makes me *very* nervous indeed.
1. I think you're right--based on our current modes of measuring economic "good" (such as GDP), increasing systemic resiliency may appear to be hurting the system... for those who buy the current growth mantra, I don't know if there is an effective way to convince them here. Maybe it would be more effective to attack their acceptance of the BAU/perpetual growth paradigm?
2. I think the market could properly address the value of reducing the most inelastic demand first and increasing systemic resiliency IF the long-term value of that increase in resiliency was somehow integrated into the price signal of decisions today. This is much like Lester Brown's proposal to include all future environmental costs of an action in today's price of that action. Easy to say, very difficult to actually do. Very unformed idea, but maybe the issue could be solved by some kind of derivative market that trades this kind of risk, much as the proposed carbon trading schemes would work. I'd say there's a 90+% chance that would fail, but it's at least a place to start innovating?
Ah okay, I see where the trick is. You probably wouldn't even have to go the derivatives route... you could issue restricted securities and just let them trade in the restricted secondary markets. Small number of private, passive investors means no need to crack the public herd mentality, and price signals there would translate over into public secondary markets when they become noteworthy — public companies would acquire the successful private companies and bring resiliency into the main markets. That would also solve the problem of convincing the growthsters. Plus, restricted securities aren't all shady and sketchy like derivatives :)
Depending on exactly what you mean by this, I might agree with you. Rebuilding small town surrounded by and involved in agriculture, and that are dense and walkable, would certainly introduce rid us of a whole lot of inelasticity. And it certainly not going to come about through market forces.
There are a whole lot of incremental steps that can be taken while this program is being carried out: living near work, (job swaps), public transit, etc.
The inelasticity comes from our resistance to restructuring our way of life. Instead, we keep our way of life for an ever shrinking minority while the rest fall into the abyss. Collapse will come when the shrinking minority starts falling into the abyss in mass.
Depending on the specifics I might agree with myself, too. I think the general principle I outline is valid, but I'm not sure exactly how to bring it to bear. The examples you list seem like good places to start, and I'm sure there are others. I think that most of the answers fall under the general rubric of "scale-free self-sufficiency," but probably not all of them...
"The inelasticity comes from our resistance to restructuring our way of life. Instead, we keep our way of life for an ever shrinking minority while the rest fall into the abyss. Collapse will come when the shrinking minority starts falling into the abyss in mass."
I agree that's a good possibility.
There is another, though and it's this:
Many of the middle class become no-longer-middle-class and learn how to make do with less (such as walking, cycling, taking the bus etc).
This will not be a straight road down: there will be ups and downs (lower highs and lower lows).
During the cyclical upswings if there is still enough capacity left to manufacture goods which will make the system more resilient then this will buffer each downswing until we hit a sustainable level.
For example: how many of us on here (except the die-hard olduvai gorge doomers) really believe that we couldn't power a large percentage of our transportation network off of electricity given the much greater efficiency?
The numbers add up: we currently use about 13 million barrels of oil for transportation but only 15% of this goes towards transport. The rest is wasted.
Electrical transport (both electrified rail, trolley buses, streetcars as well as electric trucks (such as smith electric vehicles 12.5 ton 200 mile range truck) and think city's 150 km range city car if implemented en masse would require much less, perhaps 4 million barrels if we kept agriculture, buses and long distance trucking on diesel.
I'm fairly sure this can be done in theory even if in practical terms we probably can't replace the entire transportation fleet before depletion sets in.
I'm cautiously optimistic.
According to the Hirsch report if we had implemented a crash program 10 years before peak we could address our transportation needs with no shortfall. Obviously we aren't going to make that.
The third scenario is that we do nothing to try to make our transportation system sustainable until peak hits.
We aren't quite so bad as that. Also there is the point that the data Hirsch worked on was as out of date as Jay Hansen's original data: there was no valid substitue for oil based non-tethered non-rail transport. Now there is. We have very acceptable substitutes for trucking up to a 12.5 ton size truck with a 200 mile range (lifetime costs including fuel are net net lower than an equivalent diesel vehicle) and we have adequate (if not broadly acceptable) electric vehicles such as the think city. Highly priced to be sure but not out of reach for SOME of the middle class. The production capacity is not there but in theory it could be so in that sense we are better off than the Hirsch report.
The second scenario is that we implement a crash program five years before peak hits. While we aren't quite there, it can easily be argued that progress is being made. Unlike when I first started reading this site, reasonable solutions are being talked about everywhere, even although the MSM are still pushing mainly drilling the outer shelf and hydrogen.
There are nuggets of good news coming out every day, indicating that while not functioning perfectly as we would like, we are definitely moving (slowly) in the right direction.
Personally, I'd give the possibility you outline only the slightest of chances. I think gasoline and diesel shortages and bankruptcies of key suppliers are going to keep a business person plenty busy trying to keep their operation going in the next decade or two. Forget growth for the most part.
Also, I haven't sorted out for myself how the fiat currency collapse I am expecting will play out.
Someone (maybe Mish?) pointed out that the destruction of wealth is occurring faster than the Fed can pump money into the system. This would point to deflation.
At the same time, when there are no goods to purchase with the "wealth" stored in bank accounts around the world (wealth of this sort is really an agreement, not anything physical or anything backed by anything physical, hence why I put it in quotation marks; people will soon discover exactly how non-existent their "wealth" is), won't people spend it while they can? This points to inflation, at least briefly while there are still goods to be bought.
One's choices to prepare depends on whether one thinks inflation or deflation will rule at the end of the day.
Personally I think the inflation/deflation topic is an interesting adjunct to the resilience thing.
If we are experiencing deflation (and I say IF because it's by no means certain) then this ought to crimp demand for many products. So whether this gives us more time would depend on whether the world in aggregate is entering deflation.
If we are experiencing inflation (we have been till recently) then if the money is spent on something worthwhile while it still has value then conceivably there could be a recovery.
Again, it's my position that the outcome of this whole thing is going to depend on how fast and how many of us can outrun the incoming tsunami if at all.
Dan,
There are many reasons to be optimistic when compared with "doomer " scenarios. The first big reason is that a lot of transport VMT are non-essential for the economy. I don't think prices of gasoline have risen enough yet to really cut into the private VMT, let alone changing the fleet fuel efficiency. The best evidence of this is that SUV's are still selling, even if at only 50% of last years levels. Same for housing, its not that no new houses are being built. Considering that less than 15% of the oil is used for really critical transport(rail and trucking;food,commercial supplies) and a lot of that could be moved to existing diesel rail which uses only a small part of that 15%, it seems that most advanced economies could still have a very high standard of living and use only a fraction of the oil used today. The 11,000 KWh per capita electricity production in US is way higher than is really needed and provides the best long term resilience.
There is really only one short term and critical problem; ensuring that the workforce can get to work at least 3-4 days per week using a mixture of public transport,walking, bicycling , private driven vehicles. These activities presently require about 30% of the 20M barrels/day, using vehicles getting 25 mpg. Car-pooling could probably decrease that by 20%, going to a 4 day work week, another 10%. The real big savings will be moving fuel economy initially up to European levels( when prices are at European levels;$8-10 a gallon) and then replacing vehicles with EV and PHEV's getting >100 mpg. At $4/gallon this will be slow, but WHEN we really start to see world decline in oil production, this will be a very rapid change, simply because it will be cheaper to junk a 20mpg SUV and pay $30-50,000 for a PHEV or EV and still be able to commute to work.
Why would a person abandon a suburban home worth $200-800,000, instead of abandoning a $30,000 SUV? and where would that person live anyway, on the factory floor, squeeze in with lucky relatives? If we are heading for a banking crisis caused depression that's a different issue , but not really a peak oil issue.
Perhaps. A peak oil-caused depression would certainly slow the market penetration rate of those PHEVs or EVs, wouldn't it?
It increasingly looks to me like what the credit crisis started peak oil will finish with respect to the economy.
Neil1947 you should really read some of my posts. Or at least check the housing prices in Detroit.
At the minimum ask yourself why someone wound abandon the suburban house they owe $800,000 on thats now worth $400,000.
Just removing assertions about the value of suburban houses using whats happening today much less when oil supply begins to declines shows your argument is a house of cards ( pun intended ).
Its better to consider a future driven by a banking crises induced depression on top of a peak oil induced depression coupled with some global warming induced disruption of farming.
Then lets talk about the value of the suburban house and SUV.
Memmel,
Sorry I missed your reply until now, I think what you are saying is that people abandoning suburbs is due to a banking crisis and has nothing or very little to do with peak oil prices.
Still not sure where all those people are going. Possibly house prices have declined 50% in some regions but certainly not everywhere in US. Similar declines have occurred in the past. Houses are still being built and the US population is still increasing. The economy is still increasing or at least not decreasing.
A lot of people own their homes outright. Some of these will begin buying up vacant homes at discounts and renting out to cover a much smaller mortgage, and eventually selling as has occurred about once every decade since 1945.
The SUVs are a different matter, many will not be sold and the solution will to scrap and replace with a much better fuel efficient vehicle.
I think this article gives a great explanation for why we should be pushing to electrify railroads in the U.S. I liked the article so much I linked to it on my facebook group (about electrifying rail)
http://www.facebook.com/group.php?gid=20700856380&refurl=http%3A%2F%2Fww...
based on my research, the system still has a lot of elasticity.
ok, i didn't actually do any research, i just counted the single occupant vehicles going by.
"ok, i didn't actually do any research, i just counted the single occupant vehicles going by."
Nevertheless it's still a reasonable starting point.
Next step is to count the number of empty seats on buses and figure out how much gasoline would be saved if this is substituted out. Then figure out how many extra buses would need to be run if everybody decided to do the same.
That's one way. There are others.
I suspect we won't start seeing real changes in consumer behaviour till we are definitely and visibly in recession.
For everyone to ride the bus to work would require 1 to 2 million buses. The US has something around 70 to 80 thousand buses and a similar number of drivers. We would need 15 to 30 times as many buses and drivers. I doubt if there are enough people who could and would be willing to do the job. The system I retired from had only 1 out of every 3 who started training were still on the job one year later. The number of school bus drivers is several times that of the number of transit drivers but the nature of the job is somewhat different as well as the design of the buses. It is like the difference between Arena football and the NFL. There is also the problem of that peak transit loads in the morning is the same time students are going to school.
Recession is likely to alter the willingness of people to work driving buses.
However, it seems to me neither practical nor desirable to go to a mainly bus driving future, as at any hour other than peak they are not really very efficient, as they are not too fuel economic when travelling nearly empty and you still have to pay the drivers wages.
Vast numbers of buses would also need to be built.
OTOH the software needed for a system of 'instant taxis' is trivial - you would check into the system, and within minutes a taxi would pick you up - the difference is that it would also pick up further passengers going to destinations en route.
Computerised car shares where there are lists of approved drivers and passengers and you log on to the system to get or give lifts are also trivial to implement via mobile phones.
It would be interesting to see a comparison of the cost of running a regular bus system vs. running a taxibus system in real life. The folks at Taxibus have put together some estimates in the meantime (look on their case study page).
That's not entirely clear.
For a start, the US still produces quite a bit of oil internally. Taking into account refinery gain and energy density, the US currently needs to import 12Mb/d (28% of net exports), but the hypothetical US would need to import only 4Mb/d (9% of net exports). While any remaining unsatisfied barrel would be more damaging in the low-consumption case than in the high-consumption case, there are likely to be many fewer unsatisfied barrels.
Indeed, due to the substantial domestic production of the US, it's arguable that the low-consumption case would be substantially less vulnerable to shocks than the high-consumption case.
The market isn't doing what you'd like, but that doesn't mean it's a "market failure". From your link:
"Market failure is the condition where the allocation of goods and services by a free market is not efficient."
Removing the least valuable/most elastic uses of oil first is exactly what the market is supposed to do. Your argument is not that this is inefficient; your argument is that efficiency is not what we need right now.
It's a reasonable argument to make, but it's not one about market failure.
This assumes that US domestic production remains constant, an invalid assumption. For example, if we assume that some of the worst case predictions are correct (shortest time frame) then in a mere 12 years global production could drop to 55mbpd. In that environment how much would be available for export globally? And further, in 12 years, US production would likely drop close to another million barrels per day.
If we assume a gentler global slide (longer time frame) then the US decline situation will be even worse as decline will have had longer to operate against the existing US fields.
Both your and Jeff's scenarios are speculative but I find yours far less convincing because the decline in US production is constant and ongoing. Only by creating a hypothetical 10mbpd USA right now (an impossibility) can you make your case. If you project your 10mbpd USA out into the future, then you must account for global contraction in exports as well, which worsens resilience.
Where'd that "12 years" come from?
Jeff presented a hypothetical scenario in contrast to today's situation, and claimed that the former was more vulnerable than the latter. I presented an apples-to-apples analysis - comparing the effect of an equal-size supply disruption to each of the oil-use patterns under the assumption of a current or near-future environment, and argued that his claim was wrong. Nowhere did "2020" appear.
If you want to talk about the entirely different question of vulnerability of a hypothetical US-in-2020 vs. US-now, you'll need to take into account a lot more than decline in domestic production. (Which, it turns out, is actually relatively low, about 1% per year.)
It turns out, though, that my analysis still holds pretty well, even for your assumptions about 2020.
I notice you haven't bothered to check your claim at all. So let's check it together:
US production is currently 8.7Mb/d, or about 7Mb/d energy-adjusted. 12 years @ 1-2% decline is 6Mb/d, meaning the 10Mb/d scenario would need to import no more than the 4Mb/d I discussed.
You suggest net exports would be hugely down; how hugely? 20Mb/d? The more-efficient US would need 20% of those exports, rather than 60%. 10Mb/d? 40% vs. an impossible 120%.
My analysis still holds perfectly fine, so why won't you address the question? Why is a 20% shortfall worse than a 60% shortfall? It takes more than "because I say so" to make a compelling argument.
Sorry if someone has mentioned it, but I thought the trampoline analogy illustrated another troubling aspect of the recent "demand destruction." The demand that is the first to be destroyed is precisely that which would the first to snap right back when prices moderate, which defeats much of the benefits, long term. This suggests that they are precisely the more "brittle" elements of demand destruction which need to bend (if it breaks, it won't be funny) for this reduction to lead to a longer term effect.
Elwoodelmore:
Had exact same thought this morning while tooling around (singly, I admit) in my car.
Got anymore humor to contribute?
Hello Jeff,
Excellent post and very clear logic. You’ve articulated something that I think many have been thinking.
In regards to the “free-market failure” I think you answer your own question:
Here is the question:
“The tendency of a free market to cut the most elastic demand first seems to be an example of market failure--that is, where the market action produces a long-term result that runs counter to the goals of the market mechanism. One of the classic causes of market failure is where the market acts to optimize short-term benefit, but in the process creates significant long-term problems that aren't adequately accounted for due to inability to incorporate these long term costs in the analysis of present decisions.”
Here is the answer:
“While this may be unlikely to happen at a national level, the need to increase resiliency is scale-free: individuals, communities, bioregions, and nations can all benefit by the increase of resiliency at any level. I have previously addressed one way to increase resiliency--by addressing the Problem of Growth that tends to "eat up" systemic resiliency. In this post I also recommended policy programs that would first transition our most inelastic demand to reliable, domestic, and renewable sources of energy.”
Maybe the free market is indicating that in an environment of scarcer resources that smaller is in effect more efficient. Most physical indicators, like food production for example, indicate that during the cheap energy era we substituted energy for labor and large capital investments that require energy input worked great. I say this because the energy required to consume a calorie of food in US agriculture increased. This is NOT energy efficient, but IS time and labor efficient. Now that same size (large capital investment) is working as a disadvantage as locked in costs begin to pile up. I can also say this because as a cattle farmer I see a transition to smaller cattle because they are more energy efficient (i.e. the convert low energy input grass into beef much better than their larger leaner brethren, the maintenance cost is lower). Corn-fed beef will be a relic of cheap energy.
To me this is all very ecological. Small organisms can always reduce their numbers and survive. Larger organisms have too many dependencies and are by definition more brittle. The Dinosaurs vs the mammals/insects/fishes comes to mind. The environment got unstable and the big ones were gone because they couldn’t adapt fast enough. I think this makes your argument more powerful in that it doesn’t indicate that the free-market is broken, but that our belief in scale and capacity as unambiguously better is more entrenched than we realize.
That’s my opinion anyway.
I'm not so sure about this Jeff.
Given a situation where we have successfully destroyed the more elastic demand, a very strong case can be made that we would be less susceptible to a supply shock. Let us consider our more immediate defenses against a supply shock; 1) our strategic petroleum reserve (SPR), and 2) our own domestic production (this of course is less applicable when the source of the disruption is domestic).
How can we judge the utility of our SPR? Although there are several important factors, for this argument I will focus on holding capacity and distribution capacity (the maximum amount we can withdraw per day). The former is 727 mb, the latter is 4.4 mbpd. When we apply these figures to our current domestic demand (21 mbpd) we find that our SPR capacity holds 34 days of US consumption and can be tapped on maximum for about 165 days. For argument sake, these two numbers, 34 and 165, will represent the utility of our SPR. When we destroy demand over the medium term (thus reducing overall consumption to below 21 mbpd), our SPR utility increases (assuming the two capacities are static over time).
Lets use a similar line of reasoning when it comes to evaluating our second defense. In short, if we reduce overall consumption, then the amount of domestic oil production relative to domestic consumption will be 'more favorable.' Of course, if domestic production (in absolute terms) were to decrease more than the marginal decreases in consumption, this would mean that our domestic production to domestic consumption ratio would become 'less favorable' relative to the current ratio. However, that hypothetical ratio would still be more favorable than the ratio we could expect to see in a scenario where we did not destroy domestic demand.
Ethan P. Sommer
Master's Candidate
Department of Political Science
Duke University