Where Is Oil Production Headed?: An Adverse Scenario
Posted by Gail the Actuary on March 4, 2009 - 10:22am
A lot of us have an image in the back of our mind of Hubbert's peak. Based on this peak, we assume that oil production will decline in much the same pattern as it rose. For example, in an analysis performed several years ago, Luis de Sousa shows this graph, based on the application of Hubbert's model to crude oil data available through 2004. Based on this analysis, he concluded that oil production was expected to peak around the Summer Solstice of 2006.
This graph is kind of scary, but it is also somewhat comforting. A person gets the idea that while there will be a decline, production will not go down too rapidly. Because of the apparently slow decline rate, it looks like we should be able to get along pretty well with a little adaptation--perhaps some electric cars.
I am concerned that the actual downside of the curve may look very different from the shape envisioned by Hubbert. The problem is that the limiting factor is likely not geology, but the failure of complex networked systems, particularly the financial system. Below the fold I show one view of what future oil production could look like, assuming the current unwind in world debt destabilizes the world financial system, and it becomes necessary to rebuild the system almost from scratch.
I obviously don't know precisely what would happen to world crude oil production if the world's financial system crashes, but here is one possibility:
Hubbert's curve gives us an idea of what maximum oil production might be, given geologic constraints. My forecast is more at the opposite end of the range--what the worst case might look like, if the current debt unwind results in a major world-wide financial collapse. It is impossible to assign a probability to this type of event happening, but even if the probability is very low--say 1%--it would affect planning models that consider a range of outcomes.
Background
Our financial system is debt based. Since 1971, the financial system has no tie to gold or any other physical standard. Instead, in our fractional reserve banking system, money is formed through the issuance of debt. The more debt that is issued, the more money there is, and the more demand there is for goods and services. As long as the system is growing, the system works well, because paying back debts with interest does not put too great a strain on the system.
When the economic system is growing, it is possible to pay back debt with interest, because even after paying interest, there is enough money left for other things. For a business or government rolling over debt, cash flow continues to increase.
When the economy hits limits, such as an oil supply that cannot grow fast enough to support the growth needed to keep the treadmill going, repaying the debt with interest becomes a huge burden. We have been reaching that point in the last few years, as oil production remained approximately flat and oil prices rose. Food prices rose as well, but real wages did not rise fast enough to keep the treadmill going. Soon defaults on debts started.
Once defaults started on debts, we suddenly shifted into a new cycle:
Peak oil -> higher oil prices, but little additional production-> stagnant wages -> defaults on debt -> banks not in a position to lend as much because of losses on loans -> debt harder to obtain -> lower demand -> lower prices on oil -> layoffs and less investment.
If it were only the oil industry with problems, one would think the problem would be self correcting, since less investment should lead to less production, and eventually prices would go back up, and at least part of the cycle would be fixed.
The problems caused by peak oil and resource limits are much more widespread than just with respect to oil. Besides the above cycle, we also have a more general cycle:
Peak oil -> higher oil prices, but little additional production-> stagnant wages -> little discretionary income -> cutbacks in buying many discretionary items -> layoffs (restaurants, newspapers, many businesses)-> more loan defaults -> banks not in a position to lend as much because of losses on loans -> debt harder to obtain -> lower demand -> lower prices on other commodities, like food -> more defaults and layoffs -> banks in even worse shape -> etc.
These cycles are leading to a huge unwind of debt that has barely begun. There are also a large number of derivative contracts outstanding, and some of these may generate huge payments (as has already happened at AIG). These also have barely begun to unwind.
It is not too hard to envision a situation where the worldwide banking system collapses, and it is necessary to start over, perhaps almost from scratch, with new currencies and new international treaties. As the result of such changes, there is at least the possibility that the world's financial system may function at only a minimal level, and world oil production will take place at only a very low level.
Some Thoughts on What May be Ahead
At this time, there is vastly more debt than there are assets to pay back the debts. Many times, two or three or four people or organizations think they have claims on the same assets. Think of a house. An investor buys the house, and rents it out. The renter pays his rent, and has a claim on the house. The investor is the "owner", so he has a claim on the place. The mortgage on the property is likely added to a package of other mortgages, and sliced and diced and resold to other investors. Each of them indirectly believes that they have some sort of claim to the property. There also may be an insurer guaranteeing the debt that also has some type of claim. The Federal government, through one of its loan or debt guarantee programs may also depend on the underlying assets. In addition, if the owner doesn't pay his taxes, the local government may also feel it has a claim to the property.
With all of the debt defaults, and the inability to settle all of the debts equitably, some sort of debt jubilee may be necessary. This may start with some small countries, like Iceland and perhaps the Ukraine defaulting on their debts. Gradually more and more countries will default, and their currencies will sink lower and lower.
After a certain point, it may become clear that virtually every economy in the world is in this mess together. There will be no way that more debt can be issued as "stimulus" to get the world out of this problem. The only thing that can be done is to start canceling debt, in some sort of debt jubilee, and to start over.
The problem with a debt jubilee is that there would be many too many claimants for many of the world's assets. If a wind turbine owner's debt is cancelled through a debt jubilee, who then "owns" the turbine--the original owner, or the lender whose debt was cancelled? If the debt of a factory making replacement parts for a wind turbine is cancelled, who runs the factory--the original owner of the factory, or the investor whose debt was cancelled?
The debts that are cancelled are likely to cross country borders, making for international disputes. Furthermore, countries may want to retaliate for a loss of one of their overseas investments by grabbing a business located in its own country that has overseas owners. In not very long, relationships among countries are likely to sink to deteriorate, and international trade will be at much lower levels than in the past. War may even break out, or border disputes.
"Demand" will be at new low levels, because there is likely to be very little cross-border trade, except with a few trusted partners. Without this trade, it will not be possible to manufacture goods, other than those using only local products. In this kind of scenario, prices (to the extent the monetary system continues to function) would continue to be very low, because of the low demand. (A factory that is not operating doesn't need raw materials!)
The credit market would be close to non-existent, because creditors will expect that any debt that is issued could easily be cancelled. New investment would be limited to what can be financed by cash flow. With low prices, this cash flow would be very low, further limiting investment.
It is possible that in some parts of the world, the monetary system will cease to function all together, and barter would become necessary. Because barter is so cumbersome, this is likely to have a further limiting impact on trade.
In such a scenario, I would expect that oil production would be significantly lower than the physical resource available. If nothing else, it will be difficult for the whole chain from local production to pipeline to refinery to distribution pipeline to consumer to function properly. Countries that previously exported oil overseas will see that their chances of getting paid are less than 100%, and may reduce their production to match what they can sell through arrangements with trusted parties.
Production of many other goods may decline as well, as the lack of an adequately functioning monetary system limits the ability of long supply lines to function properly. Natural gas and coal production may decline, as well as oil production. Food through mechanized farming may decline, as Liebig's Law of the Minimum makes itself known.
On Figure 2, I show only a slight decline in production in 2009, but then large decreases in 2010, 2011, and 2012 to a level not much above 20 million barrels a day. If it reaches such a low level, due to a widespread failure of the financial system, I would expect electricity to be affected in many locations, and because of electricity, water and sewer systems. Some large cities may become uninhabitable.
Under such a scenario, I expect all of this would take a while to get sorted out. If there is a widespread failure of the monetary system, it is possible that many governments would be replaced. Some countries may fall to pieces, in the manner of the Soviet Union after its collapse in 1991. Governments may not have much faith in other governments--except perhaps with a few trusted trade /strategic partners. New monetary systems will likely be put in place, but many will not be any better than the previous ones, so bubbles and further collapses may occur.
In such an environment, international businesses will find it virtually impossible to survive. Businesses are likely become much smaller and more local. As I have shown on Figure 2, it may be many years before oil production begins to rise again. In fact, it may never rise again, if international trade stays at a low level.
I would expect that the renaissance, when it comes, would begin with basic human needs, in local communities and local agriculture. People will grow their own food, and trade with others in their community. There will be small shops that make shoes and clothing and cooking utensils. People may begin to raise animals for transportation.
People will still need energy for heating their homes and for cooking. The initial impulse will be to cut down trees for these purposes, but with the world's large population, this will tend to produce deforestation. Neo-environmentalists may urge people to use other products for this purpose--such as coal or oil, if these can be obtained. There may be some local electricity produced, particularly water generated, if transmission systems can be kept in good enough repair.
If this scenario happens, it is difficult for me to see much of a future for large complex systems that require specialized parts from around the world. Thus, I would expect large wind turbines to fall into disrepair in a few years, and solar PV panels to be very difficult to obtain, after such a crash scenario. Smaller windmills, similar to what a person sees on old farms, may come back into popular use, as may coal operated steam engines (at least in the US, where coal is still plentiful).
If you have been following the interconnected threads of what is occurring in our system, you are aware that the above scenario is at least a possibility. Due to the complexities involved, it is impossible to estimate a percentage likelihood of this particular trajectory, but the odds are increasing of something like it.
If such a scenario should happen, it could result in our world becoming a very different place in a very short time. If the odds of this happening are more than very slight, what should our response be? Should we be devoting all of our efforts towards avoiding this scenario, or allocating some resources towards adapting to it?
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I want to thank Nate for his assistance on this post.
I also circulated my Figure 2 graph to Oil Drum staff earlier, and got some feedback from them on the subject. I am sure that if a survey were done among Oil Drum staff, there would be a wide range of opinions on the likelihood of a scenario such as I show, with some believing the probability to be 0.00%.
This is one fundamental flaw in economics - it parses stochastic events, (with imperfect information) at their mean, and doesn't remotely give appropriate signals for shortfall scenarios. (See Taleb). It is clear that there is less oil available for the future than there was a year ago, yet prices are 1/3 of what they were, so we know that the market prices at the marginal unit balancing short term supply and demand, not anticipating the future. Economics tells us we needn't worry about future and oil and gas supplies - maybe it is right after all. Would economics/finance predict it's own demise via price signals?
Whatever the odds of Gail's above scenario are, they are higher than the below scenario, which would be some sort of globally reinforcing nuclear exchange. In my opinion this is what has to be avoided at all costs. Diplomacy right now is measured and civil. If we do have a full blown currency crisis something like the below graph would have a low but non-zero possibility.
It would have been interesting to ask oil traders, at the end of 1998, when the average 1998 spot crude oil price was $14, what the average annual oil price would be 10 years later, in 2008. In any case, in early 1999, the Economist Magazine published their $5 Oil cover story, predicting low oil prices in the $5 to $10 range for the foreseeable future.
Average Annual US Spot Prices:
http://tonto.eia.doe.gov/dnav/pet/hist_chart/RWTCa.jpg
And my usual Great Depression reminder. It appears that after 1930, worldwide oil consumption rose throughout the Thirties, and here is a constant dollar (2008 dollars) oil price chart from Carpe Diem:
http://1.bp.blogspot.com/_otfwl2zc6Qc/SR7wlGrkytI/AAAAAAAAHvE/aOVvsxq_fP...
My outlook for the Greater Depression is a long term accelerating decline in net oil exports versus the expanding volume of world oil supplies that we saw in the Thirties. And of course we can show actual case histories of net export crashes. Indonesia for example:
The worst imaginable scenario is World War III, but production would perhaps only be cut in half.
For a world wide financial collapse scenario look to the Former Soviet Union's experience. (Perhaps you can post the USSR production graph?)
Discretionary oil use can reduced, but essential needs will be met. People will still eat and heat their homes and buses will still run. Police, fire and utilities will still function, although in the Soviet Union they often were not paid.
World wide economic collapse is happening, but the developing economies will recover quickly because they have unexploited potential in the form of basic industry and infrastructure needs.
The diagram above shows the development of oil, natural and electricity consumption for the Russian Federation for the years 1990 through 2007. During the five years post the disintegration of the Soviet Union, oil consumption were roughly halved, natural gas consumption fell with approximately 20 % and electricity consumption with roughly 25 %.
NOTE both y-axis’s are not zero scaled.
What preliminary data now suggests is that during this financial crisis oil, natural gas and electricity consumption falls.
That was certainly true for the Russian Federation, but as noted down the thread it also resulted in a huge drop in production, contributing to a large drop in net oil exports.
That's a very optimistic "worst imaginable" nuclear world war if I ever saw one!
From Mazmascience's energy browser (based on BP data)
[Edit: deleted graph as its creator Jonathan Callahan has posted the info below]
I just wish the fools try to maintain "status-quo" until they realize they don't have enough oil for wars. I wish, things unfold like its mentioned in the Long Emergency. But I'm scared to think of what the various nations will do given their latent nuclear weapons. They don't need (much) oil for firing these, anyway.
A self-destructing pakistan is good enough to start WWIII.
Paul,
The Former Soviet Union provides an excellent example of how any analysis based solely on past production rates can fail to predict future production.
The following graphs from the Energy Export Databrowser show production and consumption histories for the Former Soviet Union and for the Russian Federation. The data come from the 2008 BP Statistical Review.
Anyone looking at the FSU time series in the mid 80's would have surmised (or calculated with Hubbert linearization) that they were on their bumpy plateau and that their production (and exports) were about to suffer a decline.
Production did in fact drop significantly starting in 1990 but it was due to political rather than geologic factors. And consumption dropped almost as fast but with a slight lag. By the year 2000, FSU exports were at the same level they were in 1980 and they were significantly higher last year.
The bottom line is that political/economic factors are hugely important and less amenable to the kind of analysis that science and engineering types are comfortable with.
Techniques like Hubbert linearization, when applied to politically stable zones like US or North Sea production, let us know the outlines of possible production. But future production, consumption and price levels, especially in periods of political and economic chaos, remain very difficult to predict.
-- Jon
The HL method gives us a plausible estimate of the area under a production rate versus time curve, i.e., URR for a region. As such, it is far more accurate at predicting cumulative production than at predicting the production rate at a specific point in time.
In the comments section on my original post on the top net oil exporters, in January, 2006, after some discussion with Khebab based on HL modeling, I concluded that Russia would probably resume its production decline within one to two years. My premise was the ongoing rebound in Russian production was largely just making up for what was not produced immediately after the fall of the Soviet Union. I outlined the theory in this article:
http://graphoilogy.blogspot.com/2007/06/in-defense-of-hubbert-linearizat...
In Defense of the Hubbert Linearization Method (June, 2007)
I should add that all of this was based on using Russian production data through about 1984 to predict future cumulative production.
I have read articles suggesting that the decline in production (due to failure to adopt new technology) may have also been a cause in the failure. I haven't really looked at the situation in the Soviet Union, but all one needs is a flattening in oil available for domestic use, or a small dip, to start cause widespread debt defaults, and to begin a downward cascade.
Okay, I'm a little confused by this. What would have been analogous to "widespread debt defaults" in the Soviets' Marxist system?
Good question.
Simple answer:
____________________________
Widespread default of your Comrades' Promises.
The "promise" is a fundamental element (think H in periodic table) in all economic systems.
I do X for you to today in exchange for your "promise"
to do Y for me tomorrow,
where value of doing X today (as far as I'm concerned) =< value of getting Y tomorrow (as far as I'm concerned)
AND where I "trust" you to live up to your promise.
-----------------------------------------
Now in a capitalist system, "the promise" (basic element) is replaced by money (a complex compound) and the equation becomes something like this:
I do X for you to today in exchange for Money's "promise" (M amount of Money)
to do Y for me tomorrow,
where value of doing X today (as far as I'm concerned) =< value of getting Y tomorrow (as far as I'm concerned) based on having M amount of Money then,
AND where I "trust" society to live up to its promise that it will give me Y tomorrow in exchange for the M amount of Money I receive today.
---------------------------------------
You can see where this is going by substituting for Y, my expectation to receive Z barrels of oil for that M amount of Money I received today and where society is no longer able to deliver on its implied "promise".
When society can no longer deliver on its promises (be they capitalist money promises or commie comrade's promise to give to each according to his needs) you have default.
That is a good point. Even in this country, a lot of the promises that are going to be defaulted on are the implied promises that have been made. States have all kinds of programs - schools, universities, roads, medicaid, unemployment insurance. In the months and years ahead, states are going to find themselves unable to fund all of these promises.
The federal government has also made promises: Social Security; Medicare; war in Iraq and Afghanistan; keeping banks from failing; pay back its loans; money will hold its value.
It is pretty clear that not all of these promises can be honored. So far, there have not been major defaults on any of them, but they will be coming, as the amount of resources available decline.
That's the point Nate Hagens has been hammering, that we depend on real capital resources and that money is only a marker. Money doesn't even specify who owns the resources, but only the promise - the alleged promise. In a declining musical chair economy where there is more money than real resources, continual default will be the rule until that "excess money" collapses in debt and default. This implies to me a "flight to real resources" - not to cash, but to wheelbarrows, chainsaws and chainsaw parts.
cfm in Gray, ME
Paul Krugman in today's New York Times has an editorial that hammers in the point about folk not being able to live up to their "promises".
In this case he's talking about AIG, the insurance company that "promised" to cover the defaults of defaulting bankers but then itself turned into a "zombie" institution.
The insurance game is the ultimate in the making of promises, because they don't have to perform until after it is too late, and then what are you going to do about it? Sue them? Sue their ghosts?
But, but, but ... I've got it all here on paper, in the, in the contract. It says pigs "must" fly.
Some may wonder why "Gail the Actuary" would get into the oil business. Actuaries work in the insurance business and make all kinds of forecasts about claim experience, investment income, and most anything else that goes into insurance company operations. It was pretty clear from my early reading and thinking about the situation that peak oil would wipe out the financial system and with it the insurance system.
Insurance companies collect premiums, invest the proceeds until it becomes time to pay claims or benefits, and then pay out the claims or benefits. If everyone else is losing money on their investments, insurance companies are likely to lose money as well. Some actuaries work with pension plans, and the idea is the same --collect funding, invest it for a period or time, and then pay out benefits. Same problem.
Life insurance companies seem to be getting into trouble already because they promised more (on annuities and other products) than investments in real life are going to deliver.
Pension plans are likely already getting into trouble, but they can often hide the situation for a while. As I understand it, there is some flexibility in when a pension plan recognizes an investment downturn. Their payments are very long term in nature, so they likely have enough cash on hand for now, even if their investments aren't doing well.
Property casualty insurers (workers compensation, auto, homeowners, medical malpractice, etc) are doing a little better. They tend to invest in high-grade bonds, with much less exposure to stocks. Insurance regulations allow P/C companies to carry the bonds at amortized value on their books, unless there is a clear problem with the bond. With this accounting, unless there is really a default, the companies' financial statements still look reasonably OK. Also, if there is less driving, auto claims are likely down. I would expect homeowners' experience to get worse, with all of the vacant houses sitting around.
Gail, interesting perspective. Thanks.
I guess actuaries use a slightly different language. They don't call it a "promise" but rather a prediction or an actuarial projection with an assigned confidence level. But its all kind of the same thing. We are each trusting that somebody else in society will live up their end of what we believe they promised.
A key to understanding what happened to the USSR and their oil production is that oil prices crashed in the mid 1980's from the high levels of the 1970's and USSR lost its main source of external income. With low oil prices there was no incentive to invest in or even maintain their oil industry, nor was there money to pay for imports or their military, police, etc.
No doubt some of this is taking place today, not just with oil but also with mining and manufacturing.
I used to think that an economic collapse leading to social disintegration was something that was unlikely to happen, at least in my lifetime; however, when I read accounts of USSR and Argentina I see that it clearly is possibe.
We are living in dangerous times.
The Energy Export Databrowser allows you to convert to monetary units of constant US dollars (inflation adjusted to 2007). For the Former Soviet Untion this tells a particularly interesting story.
Just as Soviet exports were increasing during the 1970's:
the price spikes due to the 1973 Arab Oil Embargo and the 1979 Iranian Revolution brought hitherto untold riches to the USSR:
(Before this year, a billion dollars a day was considered a lot of money.)
What had been an economically tottering system was kept alive throughout the 1970's. By 1980 they were swimming in new money from the outside.
However, the price spikes of the 70's led to economic contraction and conservation in the West as well as new production in OECD friendly areas like the North Sea, Canada and Mexico. (Check the databrowser yourself.)
Together these brought the price back down to where the USSR had to rely on its own internal economy which, by that point, was no longer sustainable.
Then came the collapse.
True, this is an overly simplified story overly focussed on the economic rather than the human dimension. But I believe it is at least a large component of what the history
booksblogs will eventually say.-- Jon
Russia had the advantage of the rest of the world being in good shape, and an economy that in many respects continued to function (people had homes, public transportation, their own gardens). I think it is a better situation than we could hope for here.
The most troubling feature of the FSU collapse was the lack of law and order that Dmitri Orlov told of in "Reinventing Collapse".
I remember in 1996 being on a business trip to Norway, just across the border from St. Petersburg. When I told my hosts that I wanted to go to St. Petersburg they where emphatic that I not do so and that I would most certainly be mugged and possibly killed, as several people they knew had.
Uh, perhaps you meant Finland, not Norway?
You are correct, I was in Karhula, Finland.
Paul-the-Engineer "World wide economic collapse is happening, but the developing economies will recover quickly because they have unexploited potential in the form of basic industry and infrastructure needs".
Could you expand more on this line of thinking? I am living in a developing country in Asia.
I disagree with your assessment and my background includes many years of work with nuclear, biological, and chemical weapons, along with the forecasting and scenarios associated with them. A full scale nuclear war could cut oil and gas production by far more than half depending on targeting choices, strategic goals pursued, and weapon configurations used.
The USSR was held up from the full impact of collapse by the surrounding nations. A global collapse that effects everyone has no one left to hold the rest up.
I suggest that your scenario is excessively optimistic, especially for one involving the exchange of several thousand strategic warheads.
Hello Greyzone,
I would also imagine the nuke targets would include the P & K mines and processing facilities, the H-B natgas into ammonia & urea factories, plus the huge sulfur stockpiles. In short, ICBM-targeting existing I-NPKS infrastructure would guarantee full-on O-NPK recycling for any survivors!
"Diplomacy right now is measured and civil."
This is not universally the case even among "civilised" countries. e.g. Israel and the Palestinians.
the old turkey farm thing eh...
what gets me in hindsight is how strong the correlation is between peak and the melt down of wall street was. Lehmans bros is right on the nose.. why should it be so tight i don't know, I always thought the lags in the system would take way longer to play out and be more hidden. PO turned out to be an actual event.
odd that
The role of complex networked systems currently under threat is indeed vital, as is the recognition that a credit bubble creates excess claims to underlying real wealth. In contrast to currency inflation, which merely carves the real wealth pie into ever smaller pieces, credit expansion creates multiple and mutually exclusive claims to the same pieces of pie. Everyone feels wealthy, but that wealth is largely illusory. Once an inherently self-limiting credit expansion can proceed no further, it implodes, and excess claims are extinguished. This is the deleveraging we are currently seeing worldwide.
The effect of the on-going destruction of credit, which constitutes in excess of 90% of the effective money supply, will cause a global crisis of epic proportions. Money is the lubricant in the economic engine, and with an insufficient supply of it, the economy will seize up as it did in the 1930s.
For my take on the interaction between energy and finance, see Energy, Finance and Hegemonic Power.
Agreed! You say it very well.
Good thing you agree as her view contradicts yours.
You posit that "when the economy hits limits, such as an oil supply that cannot grow fast enough to support the growth needed to keep the treadmill going, repaying the debt with interest becomes a huge burden." And you argue from this that the current financial crises is a consequence of crisis in oil supply.
Stoneleigh argues that "once an inherently self-limiting credit expansion can proceed no further, it implodes, and excess claims are extinguished. This is the deleveraging we are currently seeing worldwide."
No mention of oil supply as a factor. You need to decide what you think is true and stop confusing yourself.
Here's are a couple of articles expanding on my view, which is essentially that credit bubbles have their own internal dynamics that are far older than the fossil fuel era. They are thoroughly grounded in human nature. I would argue that energy subsidy has driven this one to unprecedented heights, and a lack of energy will be a very significant factor in the severity of its aftermath, but I do not believe that lack of energy is a proximate cause of the great deleveraging.
On the nature of credit bubbles: From the Top of the Great Pyramid
On the fate of credit bubbles: Inflation Deflated
On the genesis of this particular credit bubble: The Resurgence of Risk - A Primer on the Developing Credit Crunch (August 2007)
I thought it was interesting that in the paper This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, the authors Carmen M. Reinhart, University of Maryland and NBER and Kenneth S. Rogoff, Harvard University and NBER found makes this observation (page 15):
The authors of the aforementioned study did not make the connection to fossil fuels either. I would argue that fossil fuels have allowed the US growth bubble, and in fact the current world growth bubble to go one much longer than would be the case without fossil fuels. Once the fossil fuels, and particularly oil, growth stops, the ability to keep the economy expanding stops, and the defaults become much more likely.
The authors of the paper didn't see that connection, but if one thinks about the situation from a cash flow point of view, it is all too clear. Without growth, interest takes too big a bite out of future cash flow, and defaults become inevitable.
So then. if I understand correctly, without having read all these links (though I would love to, sometime soon...), Stoneleigh and Gail are saying that there were credit bubbles, which we have had previously, that got perhaps even bigger than they might have, facilitated by cheap oil, that would have popped anyway, but Peak Oil made that additionally inevitable, and is making the recovery unlikely. So this time, it will be different.
From a bird's eye view - it is sometimes comical that we humans seem to require a perfect 'explanation' for the causal events that brought us to this moment, almost so we can sigh 'ahhhh' and feel content about it, instead of just looking at the facts of this precise moment and what are we going to do about it. Some pervasive blindspot in our wiring perhaps.
Hey, I can't help it - I used to be an academic ;)
Seriously though, having a good model helps when it comes to having a view of where one is going and therefore how much preparation is required. If you look at the credit bubble as a Ponzi scheme, albeit an unintentional one, then it sheds light on why government bailouts will be ineffective, and leads one to prepare for a much deeper collapse than might other wise be the case.
Rest assured that anthropogenic "collapse" will be at least as deep and broad as the end-Cretaceous event. The extinction of vertebrates much larger than a rat is virtually certain. How does one "prepare" for such a thing? What distinction can be made between adequate & inadequate preparation? Do you really think that financial bubbles & Ponzi schemes & government bailouts are even relevant to the situation we or our children face? Could it be that fascination with such things serves as an avoidance mechanism, distracting attention from the gravity of the real issues - which are ecological & biogeochemical, not cultural or sociopolitical at all?
Damn straight. A certain paralyzing effect, deer in head lights feeling but the train is so seemingly large that I will just watch it come but staying in the middle of the tracks to insure that when it does come the blow will be effective. No reason to be maimed and if it is a large collapse only luck with the preparations in place will "save" me and those that adapt to the new paradigm.
Ron,
Whilst I agree with your somewhat sobering conclusions about where the future is heading, collapse is likely to follow a number of distinct phases the first being economic collapse and if attempted survival is our goal then a deep understanding of each stage is required. I’m thinking along the lines of:
(1) Transfering wealth to the most stable currency. Norweigian Kronas anybody?
(2) Exchanging currency for presious metals. Whilst there is still a functioning economy.
(3) Exchanging presious metals for beans & bullets. Tthe final barter stage.
Of course survival in the face of population overshoot will as much a matter of luck as preperation & nature will be playing with loaded dice.
Of course we feel content (and sigh 'Ahhhh' about it).
It validates our inner predictive models.
We rely on our inner predictive models for survival. Validation of the model --with a good sounding story-- implies increased likelihood of survival. That makes one say, 'Ahhhh'. Evolution would have it no other way.
Stoneleigh and Gail, I'm not so sure there isn't another way for things to play out. Debt can be repudiated, cancelled, written off or whatever you call it, but it can also be inflated away. "Quantitative easing", i.e. printing money seems to be the answer they are coming up with. Yes, credit collapse can eat up a lot of this, but at a certain point inflation, severe inflation may break out in some commodities, e.g. food and energy. I'm not sure food inflation isn't taking hold now.
I certainly don't dispute collapse, but I think it can happen more than one way. Inflation allows some debts to be paid off, and TPTB (try to) protect themselves by accumulating hard assets like land, energy, farms, etc. The mountain of debt is huge and can never be repaid, that's for sure. But there are two ways out, not just one.
There is ultimately a floor, not everything goes to zero. Now it is extremely unlikely that we'll reach the floor without massive chaos, so it could be purely hypothetical floor. What is for sure is that the middle class as we know it is going, going, gone here and around the globe.
There remains a distinction between money and credit: money doesn't have to be paid back, even in principle. You can hand it out, and they are handing it out, and they will destroy the currency. You can exchange money, but how much of what you can exchange it for is completely outside of any contract.
I also have a problem with attributing everything problematic to complex, networked systems. Our bodies are complex networked systems, as is the web of life on the planet. It doesn't improve things to cut off fingers or simplify the biota by killing off species. But this is a whole other issue to debate -- not now.
I personally resent complexity, being a pure mathematician by early training -- it's only very late in life that I've come to accept both its reality and necessity, but like I said -- not now.
Of course, I do agree that we do face a drastic simplification as the underground resources become less and less accessible. But that's simply because the resource base for the complexity will no longer support as much complexity. The moon is simple for that reason, sort of. But, like I said -- not now.
And ...
It is possible the collapse will come through widespread hyperinflation. Not only will it do away with current debt, it is likely to put an end to future borrowing. It seems like trading with other countries will not work very well either. We still end up with the system not working, and the economic system likely collapsing at some point.
Hyperinflation? Not any time soon.
I don't think it's necessary to figure out how exactly Americans are going to go broke. Most will get there the old- fashioned way, they'll lose their jobs. No jobs, no money. No money, no borrowing. No borrowing, no spending. No spending and the businesses that depend on spending fail. The circle is closed when these businesses fire their workers.
Any debt held by any of the above is more or less uncollectible. Bankruptcy clears the accounts.
Here are foreclosures:
Here are personal bankruptcies:
Unemployment:
If anyone thinks demand is going to pick up anytime soon, they are totally insane. Few are creditworthy and those that are treat credit like it is a contageous disease.
Inflation takes place/causes and is caused by credit expansion. A 'virtuous' cycle causes GDP to expand. This is what the government and the Fed are trying to revive.
Hyperinflation takes place when money velocity increases and GDP declines. It might happen yet, but money velocity is in the toilet:
You can get the sense that available cash to fuel demand is falling faster than the depletion rates for just about everything else. No 'Mon' no 'Fun'.
Soon, probably not -- I agree. But the basis is being laid for it. Productive capacity is being destroyed by a host of factors, disinvestment for one, and it will hit certain sectors first. There is part of the food demand that will not be readily given up, or given up only after everything else is. I think inflation is not dead there yet, nor will it be. Amazingly enough, the MTA in NY is preparing to raise fares and cutting service! Local taxes are certainly rising. There is deflation in many commodities, especially discretionary items, and there is certainly asset deflation (housing, real estate, etc.)
I haven't researched it yet, but was this true of the Weimar Republic?
I agree, the groundwork is there for hyperinflation in the future, after a long - and confidence crushing - episode of deflation. Deflation is customers getting out of assets and into cash money (not credit). When assets are priced @ zero, and the people uncertain whether the cash money will be next to lose value, the mad stampede to get back into some other asset or some other currency will begin. This stampede is the hyperinflation.
Hyperinflation is usually the result of war or defeat or a government under siege. A long depression could trigger it.
Ordinary inflation is a large (if not the largest) component of what we Americans call, 'growth'. The supply of money in circulation increases - in this case by increased 'fractional lending' by banks as well as the increasing numbers of transcations taking place repeatedly with that borrowed money. Some money is held as profits but a large part of the surplus of credit is captured or sunk into all the different goods and services.
A car might cost $25,000; $3,000 of that might represent the materials and the actual hourly and management time and effort spent to build and sell the car ... the rest is debt that has been assigned against the car and must be recaptured by its sale: the factory which was built with borrowed money, the equipment built with borrowed money, the mortgages and credit cards of the workers that have to be serviced by their wages, the loans to suppliers, dealers, transporters, etc. etc. etc.
Just like there is 'sunk energy' (usually in the form of burned hydroarbons) in every service and good sold, there is 'Sunk Debt' in the same products. This debt is responsible for the increase in price; petroleum is responsible for production effiencies which reduce costs; the sunk credit has the effect of increasing costs. The higher prices of goods include the debt incurred by their making; this isn't a problem since the same credit conditions increase the purchasing power of consumers of the goods. The pie - both supply and demand - gets larger and larger.
There are perceived benefits to inflation all around. A low, equilibrium level of inflation is unnoticeable; that rate will cancel out the interest or borrowing cost while reducing the value of the principal over time; these are the benefits to borrowers. The government gains the benefit of an invisible tax that cannot be evaded, a taz that ironically increases the government's economic leverage by its exercise. The lenders gain transactional benefits they would not have otherwise; inflation creates customers that would otherwise not exist. This is why a desperately poor, third world country, China, lends the USA and its wealty citizens money - it's vender financing. Even if they 'lose' by lending, they gain in profits on the sales themselves.
Hyperinflation is different; the money supply expands but - there is no equilibrium, the pricing cycle increases and becomes self- reinforcing.
This is a good explanation of hyperinflation.
Another, more technical explanation is here.
:)
I would add that even with inflation, the lenders have to have the impression that they are getting more back in interest than the inflation rate--that is, that the "real" interest rate is greater than 0%.
Steve,
Thanks for the nice charts!
I agree that deflation is our problem today, and it is hard to see a way around it.
I don't think hyperinflation will save the day either, assuming the government could figure out a way to get there.
The counter-point to a deflationary boom, of the kind that we enjoyed in the late 1990's, is an inflationary bust.
Standard recessions tend to be disinflationary because spare capacity grows and demand falls but each of these occur outside of a catastrophic framework. Production shuts down more slowly, and more reluctantly. Credit carries onward, and the anchors of the banking system remain intact. Much of the work done in a standard recession is preparation for recovery. Much of that work is intentional.
In a collapse of the kind we are experiencing now, however, the future is canceled as the system both behaviorally and structurally can no longer make plans for it. Production is closed immediately. Labor is let go at an uber-fast rate. The collapse has started out in textbook fashion with a demand crash, and the result has been what I call a petite deflation. The petite deflation feels strong, because of the rate of change. However, I expect it to be short in duration.
While I don't "expect" it with certitude, I would say the highest risk now is that we move next into the heart of this bust--which will be an inflationary depression. In its nastiest form, it won't matter one whit that entrepreneurs want to raise more cattle when beef prices skyrocket, pump more oil when goo goes back up, deliver more fruit when juice demand rises, or innovate. When the future's been canceled there will be no credit for any of these business propositions and lenders will say "I don't care that X is rising and that your plan to more efficiently deliver X looks profitable now."
This monster of a crisis is unfolding much faster than other debt-deflations. I anticipate we are already in the last stages of the petite deflation which started in July 2008. My view now is of an inflationary depression brought about first by the destruction of credit, and then a destruction of money, that will run roughly from July 2008 to say July 2011. The first 9 months of that 3 year period being felt as "deflation" with reflation coming next, and they eventually strong inflation and then hyper-inflation.
The return of inflation this time will be a marriage of the cascading shuttering of productive capacity (which leads to the current de-stocking) and then the destruction of money/government bonds as faith in governments fall in the midst of gargantuan government bond supply. While it's true that velocity of money is dead, it's also true that all the hoarded capital in government bond markets will be called upon to live (consumption), just as capital in equity markets will be called up on for consumption. For those who think there's an unstoppable deflationary trend that is set to run here for several years, well, it just can't. If it does not run into my inflationary depression first, it will run into war.
Deflationary depression is not sustainable as a long, chronic condition.
Best,
G
Dave, I absolutely agree that inflation is an alternative over the long haul, and I think that was the thought of the previous administration. Perhaps that was the reason for a weak candidate running against Obama, and after a round of unbelievable inflation, the thought was then to try to get repubs back into power. If the dollar loses 30% of its value and then we have some semblance of a recovery, the debt may well be reduced, mathmatically, to a reasonable % of GDP. If our government could be convinced to exercise fiscal restraint, even austerity, there could be an end game with nonviolent consequences. That, however, will also require the same kind(s) of measures across the globe. The chance of that are slim to none.
Nate, I would like to think that the "worst case" prediction to reflect something in the neighborhood of say 3-5 MMBO/D worldwide. Some isolated pockets will continue to produce, even in the case of war. Not all production will require all of the nicities we have today, like transportation, gathering, pipelines, etc. and many wells can be produced with gas engines vs. electric. The oil industry was once only local, and could be again, and could be more efficient. If I had to construct a micro refinery, I think I could, although it would not produce sophisticated products, and I could sell everything locally, except maybe the cosmetic grade parafins. Thus, my otherwise meaningless production could continue, along with countless others. I know, that is effectively zero production, but should be accounted for in some small way.
Thank you Gail! As always a clear and thought provoking article.
I am certainly with you in thinking that the chances of such a scenario are more than 0%. Indeed, it may be much more than that.
I'm especially interested in jubilee as a means of correcting some of the problems with our current economic system. For jubilee to work, a few things need to happen;
1) It needs to be explicitly a one shot deal
2) It has to remove all lenders claims on the debtor, not just the debt.
3) It has to be the prerequisite to significant limitations on the creation of debt post jubilee.
This last item is critical. Our economic system as developed into a bizarre twisted system where debt equals wealth. This must come to an end.
There is a decent blog site dedicated to jubilee that is worth checking out for anyone interested in the idea.
http://cancelourdebt.blogspot.com/
The good news is that I personally don't think that lower wages (the real cause of the current crash) were caused by peak oil, but rather by policy choices to change income distribution. If we can solve that item (admittedly a big if, but a question of macro economic policies, not a physical impossibility) then your scenario becomes more remote.
Otherwise, as I wrote to you, your scenario is both pessimistic (fast decline) and very optimistic (quick stabilisation thereafter)...
Choices to change income distribution are certainly part of the problem. It seems to me that these choices are very much tied to a world view that a few large corporations, and a few top people at these corporations, can control a large portion of the wealth. This can only happen in a debt based system, which is dependent on growth.
If one goes to a less debt dependent system, we are likely to have a world where the smaller players are more valued, and thus receive a larger share of the wealth.
Interesting you bring this up. When I was in Indonesia I realized there are really two monetary cycles or flows.
The first flow we could call the primitive flow. Farmer->crops->worker->farmer->>>
I simplified it but basically all the money circulates within the local economy it never becomes concentrated its simply passed around in a fairly small circle paying for local goods and services.
A bit larger but similar is regional trade using regionally local goods.
On top of this we have layered our global trade and mega corporations this is a quite different form of trade in the sense that on a fraction of the money goes back into the local economy in the form of wages the rest is concentrated in the hands of the wealthy scattered all over the world.
The key for the ability to concentrate wealth is not even in the means of manufacture but control of ownership and economies of scale. The problem of course is that it has basically no mechanism to recycle the wealth instead for all intents and purposes the wealth is effectively destroyed at the top as its converted into ever larger ownership slices or over priced luxury goods. A large part of the wealth at the top is thus concentrated into taking control of ever larger slices of the means of production. Periodically of course these companies perform poorly or loose money and the wealth is simply destroyed. Obviously a lot of it went into ever more aggressive leveraging and we are losing vast amounts of this sort of wealth as our global economy contracts.
In the ends it becomes obvious to me that the problem is our economy is very efficient at generating the means to concentrate wealth but very inefficient at redistributing this concentrated wealth so that the poorer classes can actually buy the produced goods. This was hidden till recently by the use of consumer debt in the western countries thus China and India produced a myriad of goods that their own populations could not afford and these goods where exchanged for debt.
Despite the immense wealth of the global corporations it seems to me at least that they are intrinsically unstable the cycle becomes to extended and the wealth can no longer flow back towards the poor. Effectively no matter how hard they labor they can no longer accumulate any wealth and eventually more and more can no longer service the debt loads they take on in exchange for their weekly paychecks.
In fact we can look back into the past at companies such as the Dutch East India Company.
http://en.wikipedia.org/wiki/Dutch_East_India_Company
Just reading the history of this country should cause you to realize we have almost exactly the same problems today.
These large multi-national corporations that in the end depend on effective slavery eventually fail because in my opinion they subvert the natural flow of wealth and deprive producers of their returns. With many things their seems to be intrinsic limits and economies has to become circular or eventually they fail. The real rate of accumulation of wealth is actually very small say 0.1% or 1% or something like that. I wish I could fined older texts and determine the real rate of wealth accumulation say while Rome was a republic I suspect that wealth concentration was a very slow long process.
You make some good points. The bigger the company, the easier to divert money to the top of the pyramid, and the less likely income will get back to those producing the goods. Oil and fossil fuels have enabled these huge companies, both directly (transportation) and indirectly, through permitting the economy to grow rapidly enough to support a lot of debt.
Very good point about cheap transportation.
The original mega corps first trans-continental shipping empires then canals and railroads where critical to forming the first mega-corps additional ones where leverage on top of these transportation networks. Sears for example.
This suggest that once cheap transportation disappears the mega-corp will crumble.
This also suggest that most middle class jobs are probably not long for this world since few large corporations will survive.
In my own area telecommunications.
Offhand I'd guess that computer chip manufactures because of the expense of the facilites would survive ( at least technically ). Board manufactures and assembly may move regionally.
So I could see expensive components esp small volume ones continue to move but stuff thats easier to make probably will move to local manufacture. Drugs are another area which probably will continue to have large corporations involved.
Paradoxically I'd not be surprised to see lower value goods that are regionally scarce but stable continue to be shipped. Things like grain and wood and of course oil. A lot of this could move to cheaper sail based transport.
Regardless trade will happen for good reasons not simply because of wage arbitrage and of course as the middle class collapses the global wage differential will also collapse along with economies of scale.
Yet again expensive oil practically seal the fate of our current system as they are forced into collapse.
This bring you back to the case that we seem to have hit peak oil and peak debt at the same time. Even though its really hard to prove the combination it just can't be a coincidence.
For me at least this just confirms that our final collapse must take place in a expensive energy regime. As long as cheap energy remains available we can struggle along. This does not mean we won't see a depression level economy even with cheap oil as Nate often points out but it does mean real collapse is not imminent. Expensive energy is a critical part of collapsing the large corporations and thus most of our complex global trade and associated mega corps.
Depends on what you mean by 'imminent.' Not a day goes by I wish something had clicked for me back in 2005 when someone gave me a peak oil presentation but for whatever reason I just sailed into the night afterward thinking, "Well, that was certainly interesting." Then I forgot completely about it until 2007 when I started to investigate the likely impacts of oil depletion on CO2 emissions. My everyday experience now is that it is imminent.
But moving emotions out of the way for the moment and assuming some degree of steady degradation, when are the rich countries of the world more like what we now call third-world countries?
a) starting now, very clear by 2011
b) starting now, very clear by 2013
c) starting now, very clear by 2015
Not tomorrow, to be sure. But then there is that whole Black Swan catastrophic collapse event that could happen at any moment...
I think Jerome has it backwards. Income distribution changed because of resource limits. The petri dish was filling up, and that dried up the wealth that was flowing to the middle levels of the pyramid.
Don't forget the thousands (millions?) of "super-commuters" who drove until they qualified for their 3000 sq ft balloon frame insta-houses. Their commutes became a lot less super at $4+ per gallon, and drained a bit of wealth off these would-be exurban barons. Suburban land values are inversely related to commuting costs. It was fun while it lasted.
Good point!
"It was fun while it lasted."
No it wasn't.
I am reading "Deep Economy" right now. The most interesting thing about it is he shows that not only was the exurban/SUV explosion hugely wasteful, but it didn't make us any happier.
"Suburban land values are inversely related to commuting costs"
or is it commuting time? if it was costs, suburban fringe prices would have risen again with gasoline price declines.
Not if everyone thinks gas will go back up. This seems to be the prevailing attitude of almost everyone I talk to, and not just TODers, but most of the everyday, GOP-voting Dallas-ites I know too.
Commuting costs are a function of both the resource requirements (depreciation on vehicles, gasoline, oil, etc.) and time.
My statement above was simplified; commuting costs are one component of suburban land prices. All things equal, yes, land prices would rebound with declining commuting costs. But, another factor in land prices is aggregate regional demand, itself a function of population and income. Incomes are declining, and as noted, their is a more widespread appreciation of gasoline price volatility that may be influencing buyers' willingness to lock in to distant residential sites.
Incomes will be redistributed alright, albeit somewhere so low compared to current scales that it's hard to imagine today. The redistribution process will involve pitchforks, that much is certain.
Other than that, you're right that peak oil has nothing to do with lower wages; nor does it with any other aspect of the financial crisis. It's a tiresome shame that that is so hard to understand for those focused on energy prices and supplies. Down the line, no matter what the price for oil becomes, you won't be able to afford it anyway. Did I mention that it won't be transported any longer either, at least for personal consumption? Just look at how the shipping sector is tanking already.
Financial institutions need to write down debts and cut their loan portfolio's in far higher amounts and percentages than they have so far, a process that will kill off the majority of businesses, of production, manufacturing, transport, you name it. It will all be made much worse by governments saddling their nations with trillions of dollars in additional debt through rescues and stimuli that have zero percent chance of accomplishing anything other than delaying downfall by a few weeks or months, instead of using that new-found debt to supply basic needs for their citizens.
Debt levels throughout society dwarf any and all measure of accumulated wealth. hence there is no wealth left. None. The blind belief that this is somehow related to peak oil keeps people from recognizing what is truly happening all around them. Well, be prepared to be unpleasantly surprised.
Ilargi, personally I think the credit implosion is the first (and quite possibly fatal) blow. Peak oil will inflict the next blow (if the financial system is still alive, this will surely kill it). Then, for variety, climate change will reduce crop yields and promote mass migration and possibly wars, if they haven't started by then already. No wonder why I don't get invited to too many cocktail parties... ;-)
Ha! Classic. My life, once I became a DINK, was one long cocktail party, with stuff. Once I re discovered Peak Oil and Peak Housing (ex - was a mortgage broker) out of the house and now only cocktails! It is a disease, but the consequences are so dire...OH well!
Only by current standards.
Imagine if all money, credit and debt went away. Imagine further that the IDEA of debt and credit went away as well. Then what we'd be left with is remaining natural capital (significant but declining), built capital (significant but needing a large energy surplus to keep it going), human capital (huge, but a large % rendered obsolete, but can be regenerated) and social capital (potentially huge if we can get used to lower living standards and have a different carrot).
All wealth is not gone, only as measured by current system. It remains to be seen if this is the same thing.
Hey yeah,
Let's all imagine we don't have to pay off our debts, that we can throw out the system when it doesn't please us anymore. The world's accumulated debt, meanwhile, is much bigger than the world's accumulated wealth. The debtor may dream of discarding the current system, but the creditor would have to comply, and why would (s)he want to "imagine" that (s)he's not owed anything?
And what would the creditor be able to do to collect on the debt if the debtor can't pay and doesn't plan on giving up the collateral. Creditors are much more reliant on the good faith of the debtor than the other way around.
Nice fantasy. Now you go tell that to the guy who comes to evict you from your home.
Ilargi, I'm not sure I fully understand you ... IMO money and debt are not wealth, they are a support system, a tool to make bartering of wealth easier ... take all the money/debt away and all the world's accumulated wealth remains ... it's just that the ownership of the wealth may have changed in the process and the money is no longer worth what people thought it was.
Also, IMO, the way the world works is very complex and interconnected ... it is a world of completely abnormal growth, nobody understands how it works (especially experts and politicians!) ... any growth is typically exponential and unsustainable.
IMO what we have at the moment is a cluster of linked failure modes all feeding off each other ... hence the difference of opinion on the proximate cause(s).
We are now post peak oil, post peak 'net exports' of oil, post peak energy per person, in systemic world economic failure, in a systemic banking failure, the ecosystem is failing around the globe etc. etc, all caused by an unsustainable exponentially increasing human population striving for a better life through economic growth.
The cause of the exponential growth of population and all it's support structures is the exponentially increasing consumption of fossil fuels.
My point is it depends how you define 'wealth'.
You are wealthy in insight in knowledge and insight. I am wealthy in potatoes (or I was). Society HAS measured weathth in financial marker terms, (and continues to do so based on the Reuters news story I just read 'Is There Life Below Dow Jones 7,000?'.
If you only meant paper wealth then I mostly agree with you. But after paper system is over, and the casualties be what they may, there will still be a great deal of wealth existing. For one thing, we get 10^16 W of annual insolation from the automatic sun:
So we're not broke, just in hock.
Nate,
While I agree with the spirit of what you are saying,
the graph you have used appears to have come from this source:
http://www.oecdobserver.org/news/fullstory.php/aid/2083/
While the numbers for wind(100TW) and FF(10TW) seem to be about correct, the statement about wind energy:
"annual load factors of wind generation in countries with relatively large capacities, such as Denmark, Germany and Spain, are just 20-25%: large wind turbines are thus idle for an equivalent of 270-290 days a year!"
suggests no understanding of wind power, even a turbine that has an average capacity factor of 20%, generates some electricity >90% of the time, but rarely ever at full capacity.
The value of stream runoff of 1TW(1000GW),( if this implies hydro electric generation) is a gross underestimation, the US and Canada with 8% of worlds land area, have a potential of 500GW.
Not sure what happened to nuclear?
Smil's graph see seems to be used a lot without critical evaluation.
A couple of comments..
First, I fully agree that the current financial crisis is not related to peak oil in any significant way. The curves that track wealth distribution, credit outstanding, etc, mimic those of the Great Depression, except current ones exaggerated compared to the late 20's. We've been heading to this collapse for a while.
To Nate's point on capital one the debt unwind progresses.
The difference between the 1930's and now is resource availability (and, to some degree, human capital). In the '30's, we had vast, relatively untapped sources of raw materials (oils, metals, much of the raw material needed for a growing industrial society. We also had a workforce that had far more experience in agriculture and small scale basic manufacturing than we do today.
Now, while more people are learning small scale farming as a skill, it's far rarer than it was 80 years ago. Too many of us are service or 'knowledge' workers. I'm a systems analyst. I can swing a hammer and use a hand-saw, but I don't have the skills of even an apprentice carpenter. My wife and I are just starting to try and figure out how to supplement our food with backyard gardens, and, if last growing season was an indication, we're a long ways away from being good at it.
As the debt unwind progresses to the point where whatever society is left starts to recover(in 3, or 5, or 15 years), that society will face the issues of lack of resources, climate change, food availability, and perhaps a lack of the right kind of human capital.
I think any significant recovery from the financial crisis will be short-circuited by human overshoot. The time of a growing economy is over. Sharon Astyk thinks that the most likely future for the US, and the world, is poverty. I think it's poverty, and fewer people.
I don't think the current unwind this year is peak oil driven, I do think peak oil, and other issue will dominate when we start to recover from the financial unwind.
Michael
I simply don't believe that
getting into the mess may or may not be independent of the actual amount of stuff you burn but the actual point at which it breaks is linked to "peak net bonfire day".. basically a "rob peter too pay Paul tomorrow" economy is fine as long as the rate at which you create new wealth is enough to pay the "net global interest rate"(can't think of a good term go with me I'm a bit thick) and creating new wealth means making things and services..and making things and services is basically a consequence of how much stuff you can burn..
so that the rate at which you need to de-leverage has to be matched in some broad sense by the rate at which you can increase the rate of burning stuff...
if the banking system becomes stressed then the answer was to increase wealth creation to pay it back.. and duly off "they" went (they being the human race, the market, whatever..insert political bias here) ....to try and make the bonfire bigger
at $157 dollars a barrel the flames still grew no higher game over... how much lag is in the system too absorb differences between the required de-leveraging rate and the rate at which the the bonfire must grow is complex and debatable but in the broad analysis is actually pretty obviously not infinitely stretchable..
in hindsight the elastic snapped almost immediately! surprised me a bit that..
The perception issue of "what happened" arises because spectators dissect the problem into components and analyse part of the problem as though it was the whole thing.. which doesn't work.
you need to look at the whole thing...
think of the counter-factual.. there is another 10 trillion barrels of easy oil in the ground.. the bonfire could have expanded for some time and the problem would never have occurred this decade. Even if we all concede the issues concerning the regulatory failings of the financial system are the same.
an over simplification? perhaps but my point is many observers over complicate the issue and take too detailed a look at some specific part. which in this instance is going to throw up the wrong answer
The credit bubble was going to burst anyway, it just needed a proximate cause. $147 oil was as good as any. Plus, people forget that after every oil shock there has been a recession in the past 100 years...when each $10 increase in the price of oil per barrel takes $70B of money out of the U.S. economy, it's no wonder.
A $100 increase per barrel over a one year period is equal to the entire stimulus plan. Which is why the stimulus plan will be almost completely negated once oil increases in price.
It is strange how quite a few of us were talking about the likely impact of peak oil on the financial system for years before it hit. I know I mentioned it way back in 2007, when I wrote an article for actuaries about the it, and when I wrote a guest post for The Oil Drum (before I was on the staff).
I don't have a link to the original, but commenter MicroHydro reports that Hubbert's writings include the following, which was the subject of a seminar he taught, or participated in, at MIT Energy Laboratory on Sept 30, 1981:
It is impossible to have a monetary system that needs to grow exponentially, when resources do not!
"We've been heading to this collapse for a while."
And we've been heading up the slope toward peak oil for a while.
I wonder what angel thinks inflated the credit bubble if not the expectation of ever more growth based on ever more access to ever more oil (fostered by an insane ideology that eternal economic growth was possible, desirable, and essentially inevitable).
Blind belief somehow?
All our money is a claim on resources and energy in the present and in the future. All our energy and resources generation and extraction are all tied to the current infrastructure we use. All our current infrastructure is tied to petroleum production.
This is not a one-theory-fits-all argument. It is merely stating the obvious that our financial problems are, in fact, driven by our energy and resource problems.
If you want to truly realize what's happening to the world around you, you can't be tied down to the broken abstraction of money. Tied to that abstraction, one cannot see the real yet declining wealth still available, as Nate alluded to.
It is most certainly not. To understand that, you have to look at the specifics of money itself, as used in a fractional reserve system. 99% of our money is a claim on nothing at all.
Actually, Ilargi, he's right. That 99% that you are worried about really is a claim on present and future energy and resources, even in a fractional reserve monetary system. Of course, that claim may not be satisfied or the real value of the claim may drop. But it seems like you both agree on the bigger picture.
No, only the remaining 1% is. That is the essence of the problem here.
No, the essence of the problem is that you already understand that money, as a tool invented by humans, is about to break because in the future when people actually try to spend the currency, then the realization will hit that there aren't the resources to back 99% of those dollars.
The tool has not broken yet, and as such, each person out there still has the valid idea that their bills and coins will be useful in making claims on resources and energy.
And for each individual person out there, they are right. Each dollar out there is still a valid claim on energy and resources, as long as not too many of those dollars start making claims at the same time.
We are on the same page as far as the big picture is concerned, it's just a dangerous idea that our monetary problems are somehow self-contained within the realm of finance and not connected to the real world. This abstraction, the confusing of the map for the territory, is also part of the problem.
Correlation is not the same thing as causation. However, it may very well suggest that the two things that are correlated share a common cause.
You are right that peaking of oil (and all non-renewable resources, really) may not have directly caused the festival of over-leveraging and the catastrophic de-leveraging that is now following. However, I would suggest that the two phenomena might both be sequillae of a common pathogen: a pervasive, ideologically-driven, delusional structuring of an entire society (world, really) around the patently irrational and unsustainable idea and ideal of infinite exponential growth. When you have an entire economy structured on this idea, then what you get is an economy that burns through its non-renewable resources as rapidly as it can, rather than trying to conserve them as the priceless irreplaceable things they really are. When you have an entire structured on this idea, then what you get is an economy that piles debt upon debt and risk upon risk until the entire edifice must inevitably fail massively and collapse in a ruin.
Our thinking has been wrong for decades, centuries really. It has misled us, and now we get to see the inevitable, catastrophic consequences.
+5
Every increasing resource extraction and a highly leveraged financial system both assume the same thing: growth is good/desirable and possible for many more generations.
an analogy: it all seems to me a sort of old fashioned spring run geared clock. The clock can be of any size and have a bigger or smaller spring but when the mechanism is fried it doesn't matter about the size of the spring or how wound up it was the whole thing is toast.
From the dedication issue of the Hubbert Center Newsletter. According to Ivanhoe:
"Hubbert wrote virtually nothing about details of the “decline side” of his Hubbert Curve, except to mention that the ultimate shape of the decline side would depend upon the facts and not on any assumptions or formulae. The decline side does not have to be symmetrical to the ascending side of the curve - it is just easier to draw it as such, but no rules apply. The ascending curve depends on the skill/luck of the explorationists while the descending side may fall off more rapidly due to the public’s acquired taste for petroleum products - or more slowly due to government controls to reduce consumption."
http://www.hubbertpeak.com/Ivanhoe/HubbertCenter_97-1_Ivanhoe.pdf
I believe he also wrote some about the likely financial implications of peak oil. I would need to do a little looking to find the references.
Very sobering Gail. And a nice logic flow IMO. As you say, even though the probability can’t be quantified, the pieces of this potential puzzle appear as though they could readily fall into place as you describe. I’m sure others here can detail it better but the little bit of pre-WWII Germany history I do recall reminds me of the position many countries may find themselves in under your model. Perhaps even the USA to some degree. The one aspect of your offering I find difficult to accept is the possibility (let alone probability) that most of our 300 million population could adjust (read: survive) the type of transformation you offer. Such as you say: “I would expect that the renaissance, when it comes, would begin with basic human needs, in local communities and local agriculture. People will grow their own food, and trade with others in their community.” If only 20% of the population cannot function in such a system we would have 60 million folks with no method of supporting themselves. And as I look around I feel the 20% figure is grossly optimistic.
From this starting point we can each paint our own worse case scenario. But let the historians correct me: there have never been a people who willingly accepted such a fate without striking out violently against those who have the necessities of life. Such force could be applied domestically but, if history is any model to adhere to, governments have commonly turned such angst against other countries.
I suppose one could write an article on these issues alone. I am not sure I want to do it--it would be a depressing and worrisome thought exercise.
It does seem likely that if an adverse scenario such as Figure 2 happens, population will fall, with some parts of the world affected more than others.
The big problem with the 'loan repayment problem' is that you basically assume that the amount of money existing is related to the size of the economy.
In fact, with printable fiat currencies, it's perfectly possible to repay a loan plus interest as long as the inflation rate that results exceeds the interest rate on the loan. This is how Germany managed to pay off it's WW1 debts in time to re-arm for WWII..
Was that possible only because its currency was situated within a context of stable currencies around it? What happens when everyone is in the same (poor) situation?
fluffly,
What you suggest works for only a very short time. Then lenders figure out that they money they are getting repaid does not have adequate value.
When I have written about this issue before, I have tried to go into more detail, talking about nominal dollars and constant value dollars. I didn't want to get into these details here.
Actually, no. They were required to pay the war reparations in Goldmark; the inflation affected the Papiermark.
The war reparations went largely unpaid.
Gail:
Dumb question: How did you get the "noise" (small fluctuations) in your projection (red line) in figure 2?
You have basically described a deflationary spiral. To counter this, money is made cheaper by the central bank pushing money into the economy by various means.
-- Goldfish
My thinking behind the small fluctuations was that perhaps some parts of the world would stabilize a bit and raise production, before new problems broke out elsewhere. Natural decline from reservoir depletion would also be decline going on underlying all of this, so if production remains sort of level, this would imply that some modest progress is being made over the long term.
I understand that a decline in production of this magnitude is going to be uneven.
But what mathematical model did you use to generate your bumps? What is interesting me is the magnitude of the fluctuations.
The bumps are just numbers I put in so the tail wasn't perfectly flat. There is no particular model behind them.
When I describe the possibility of this sort of decline, I often point out that complex systems can fail catastrophically. To make this clearer, I ask people to picture one of the Twin Towers falling.
Then I ask, "Can you imagine anything stopping that process once it has begun? That's the force involved when complex systems fail catastrophically." This often brings a lengthy pause in the conversation as I let them think this over.
Some people push back by suggesting that the failure mode won't be catastrophic and will instead be more gradual (perhaps catabolic if they are familiar with that). They often say that other countries have recovered after their currency collapse. To that I respond that those countries have had a functioning world financial system around them. What happens when everyone is reeling from debt defaults because reduced oil availability is worldwide? Who can come to the rescue then?
Good analogy for catastrophic collapse. Catabolism can be rapid as well though, although it may begin slowly.
Here's a comment I wrote here at TOD to that effect in December 2007:
I think this is an important point. IMO we would not have been able to construct the incredibly complex, globally-interconnected society we have now - including our complex-to-the-point-of-impenetrability financial system - in the absence of the fossil fuel boom of the last hundred years. Our fossil fuel production can no longer keep pace with the exponential growth in demand, partly due to population increase and partly to increasingly unrealistic expectations of a better standard of living for all.
Actually, I would argue that that has been the case since energy per capita peaked some 30 years ago. What has occurred since then IMO has been catabolic in nature. We in the rich world have increased our reach spatially in order to suck in resources from the rest of the world, and we have borrowed more and more from the future in order to maintain and increase our standard of living. (In other words, we have used an energy subsidy to drive entropy into reverse locally, at the expense of increasing it elsewhere.)
The implication is that we are already some 30 years into catabolic collapse, and that much of what we have called progress in the meantime would be seen in hindsight (from an energy-poor future) as converting capital to waste (negative added value), as most of it would be useless without cheap and reliable energy supplies.
The credit bubble, which is essentially global, is one manifestation of this process, and so is the extent to which we have cannibalized our natural environment and that of others. That these should peak roughly coincident with net energy production is not particularly surprising. With net energy set to decline potentially quite quickly even before taking 'above ground factors' into consideration, and our ability to reach into the pockets of the rest of the world being challenged by a new power in the ascendancy, our ability to maintain our accustomed level of socioeconomic complexity is arguably beginning to falter. Limits appear to have been reached.
Of course financial affairs have their own internal dynamics (IMO grounded in crowd psychology - or herding behaviour - rather than rational thought) which interact with energy availability in highly complex ways. Concentrating only on energy availability in trying to understand how peak oil might play out would be far too simplistic - ignoring a vital level of complexity. It would also lead readers to believe that they had more time to prepare than they actually do, and to make only energy-related preparations despite facing a multi-faceted crisis. IMO those who are peak oil aware must also act to preserve capital in the short term if they are to be able to use their energy knowledge in the longer term.
You have a gift for writing, Stoneleigh. Articulate, eloquent and interesting. (Not to mention correct).
I agree!
Thanks :)
I came for a visit here just over a year ago, looking for a bit of comfort (and found it, thanks). But now that things seem to be escalating toward worst-case (how low can the Wall Street numbers drop!?), I wonder what have I really learnt?
Because the comfort thing's gone again. Perhaps "denial" is the best place for an Average Joe afterall?
Regards, Matt B
Still living in mainstream
We can offer friendship more than solutions. The solution thing is pretty elusive.
If they fall back to the long-term, pre-1985 trend?
S&P: 400
Dow: 2,000
Numbers are approximate.
Of course, in a full collapse they go to zero. Along with society.
Cheers
Thanks for pointing this out, Stoneleigh (and good comment).
Perhaps here is a good place to put some definitions:
catabolism |kəˈtabəˌlizəm|
noun Biology
the breakdown of complex molecules in living organisms to form simpler ones, together with the release of energy; destructive metabolism.
As you point out, nothing in there about speed.
catastrophic
adjective
catastrophic (comparative more catastrophic, superlative most catastrophic)
1. Of or pertaining to a catastrophe
2. Disastrous; ruinous.
Indeed. The often discussed reindeer of St Matthew's Island are a good example of slow catabolism followed by a fast catabolic crash. They consumed the means of their own survival faster than it could replenish itself, by a small margin a first and then by a large margin as the supply continued to fall as the population continued to increase. The population crashed from thousands to a few individuals in the space of one generation. This brings home the point that the opposite of sustainable is terminal.
We have been consuming our artificial carrying capacity through the use of fossil fuels. As our erstwhile energy subsidy disappears in the coming net energy crash, we must revert to our unsubsidized carrying capacity - a carrying capacity that we have been actively undermining for decades as our population continued its rapid ascent. We are now in deep trouble. The financial crisis is merely the first challenge we will face, but we must deal with it before being able to address the many other aspects of our predicament.
Don't forget the most salient point: this relict population bounced around at its greatly reduced level for a decade or so before becoming completely extinct. Likewise can we expect relict human populations in the Southern Hemisphere to fluctuate around some radically lower value for K until Allee effects take them down to the absorbing boundary of zero, from which there never can be any recovery. Then ecosystems slowly begin to mend and biodiversity expand to pre-AME levels over the course of several million years.
what is an "Allee effect"?
Effects such as inbreeding depression, problems finding a mate, etc., that push a collapsed population all the way to extinction.
A classic example is the passenger pigeon. People eventually stopped killing them, but by that time their internal population dynamics had passed some 'event horizon' and extinction became inevitable. I believe it had some odd relation to breeding hormones and minimal colony size to activate them properly. Some population biologists say the same fate awaits the spotted owl because habitat patches are too small to give nesting females sufficient opportunity to find males. These species are sometimes referred to as the living dead.
Ditto the cheetah, some species of whales, and the great apes.
Edit: Notes on the spotted owl. Here in New Mexico, the Black Range, Mogollons, & Chuskas have sufficient areal extent that they host "source" populations of spotted owls, i.e., are big enuf to support multiple territories of nesting pairs. But suitable habitat is saturated; dispersing juveniles can't establish territories unless they are lucky enuf to take over the territory of a pair that are killed. Hence, juveniles must disperse across lower elevation scrublands to smaller outlier ranges. These ranges aren't large enuf to support a viable population; rather, they serve as "sinks" for the birds. You may see spotted owls in the Sandias or Manzanos, say, but these birds don't represent a sustainable population there.
Most of what I have read on conservation biology suggests that a population over 500 is capable of avoiding the loss of heterozygosity which would lead to declining reproductive fitness. Are you suggesting that the capacity of the earth to support humans would be that degraded? Also, are you aware of the studies on human inbreeding conducted on island populations in the Caribbean? What numbers came from those studies? How are inuit populations getting by?
It's not just capacity but the whims of environment and chance. Genetics and microbiology have given pretty solid proof that homo sapiens declined to just a few thousand members during a crisis of some sort about 170,000 years ago. From that small base, our population expanded again but that was in a world not degraded by human activity to the extent that the current one is. So population collapse can occur even in "good" environments.
I think many people find it impossible to consider the extinction of homo sapiens. Yet that possibility does exist. There is also the possibility that we might not go extinct in the next few thousand years. No one can say authoritatively today that one outcome or the other is absolutely certain. But the chance of extinction is certainly rising. Regardless, the healing of the biosphere is going to take a long time and that time frame is so long that humans are likely to be extinct before it is done anyway. Whether that extinction comes from homo sapiens being a dead end or from a successor better suited to surviving in whatever environment comes after is impossible for us to know. But dead end terminal extinction is definitely a possibility that should be considered.
Greyzone: I think the event you referred to was about 70,000 years ago, not 170,000 years. Stan Ambrose has a theory that the human population had declined to as few as a few thousand in the breeding age population with estimates as low as a few hundred to as many as 10000+. The hypothesized event could have been the eruption of the Toba supervolcano in Sumatra.
thanks.
On a related note if I couldn't find a mate I am quite sure I would be in breeding depression.
No worries! Back to the future with a nice little party.
A raiding party.
Cheers
Everyone should review Richard Duncan's Olduvai Theory if you haven't lately. We are now entering the social collapse phase. Refer to the graph on page 7 and plan accordingly.
http://www.thesocialcontract.com/pdf/sixteen-two/xvi-2-93.pdf
Thanks for posting the link. Is this the most recent update? I haven't kept close track.
I have met Walter Youngquist, who I believe was involved with earlier versions of this. He is in his late 80s, but came to the last ASPO-USA meeting with his son.
Rich has an update. I will either do a keypost or forward it to Leanan. I don't have it yet.
Actually I don't see the words "social collapse" on the graph or p. 7. But it certainly feels like the current unwinding is, for the theorized population crash here, part of the postulated ultimate, underlying cause (lack of credit and investment, unraveling of trust in trade, etc.) versus the proximate, precipitating cause (power blackouts)--as if, with enough of the present turmoil developing over some quantity of years, the groundwork is laid specifically for a failure to recover from regional blackouts.
Well, I hope this doesn't sound simplistic, but people like to be busy---there is that saying "work expands to fill the time provided". People who were busy getting new cellphones and choosing the color of their granite countertops or putting the finishing touches on their grant proposals (if they are like my husband!) will instead be busy, very busy, finding a single piece of bread. Complexity is also a measure of the contours of our own minds....humans hate to sit still and do nothing and once we are panicked, truly panicked and hungry, truly hungry, then our brains will suddenly focus and concretely on the things that TODers have been focusing on for a bit longer.
For example, Oprah did a segment called "Inside a Tent City", and one factoid which came out was that the people living in this tent city (in California) spent 60% of the day just trying to keep clean, finding water, a toilet, and trying to brush their teeth. In a way that's good because they're not consuming more resources. Of course it gets worse when food is scarcer. But we may almost all of us eventually be living that way. Just finding a cup of clean water will be a challenge worthy of the effort that one used to put into writing a term paper at Harvard. So....good.....the brain gets to engage directly with its environment in an unmediated way, with death, not an "F" being the sign of failure.
What I'm saying is there's no need to be so dire about all of this. Because humans have been dealing with death since early times..........we demand engagement and challenge above all and we'll work to attain these things.
Aside: doesn't Buddhism say that all life is suffering? And that everything we see is just temporary? (So lighten up...get your tent ready, and your cup.)
Love your work, but on this point you've got the myopia so often afflicting specialists. If you leave dealing with ACC to when the economic crisis is over, then the game is over. Period.
1. By your own logic as pronounced here and at TAE, this is a years long problem, and almost certain to last up to a decade.
2. Climate tipping points have been crossed. The current inertia of changes we have caused will already carry temps and sea levels to ranges that will alter how we live on this earth, and that if we stop producing carbon today. Obviously waiting a decade to begin acting, as you imply above, is suicide.
The ridiculously simple thing about this highly dangerous point of view is that the economic downturn and PO provide the perfect opportunity to reduce carbon outputs very significantly now. We do not have to wait. What we need is vision and action. Now. Those two things depend on knowing what your endgame is. That is, where do we need to end up and, secondarily, where do we want to end up? To answer that we must ask, what are the deal breakers?
THE deal breaker is temperature. There is credible concern that the path we are now on is leading, even with mitigation in the future, to as much as 4C warming. That's a different world. Forget what the population might be for a moment and realize that renders the entire middle latitude zone uninhabitable. WTH does a financial collapse matter in that context? Not much.
The argument goes we can't mitigate without money. To which I say bull. Food and shelter. That's all that's necessary. The rest is gravy. An intentional power down, a controlled "collapse" which includes people subdividing into small groups, growing food and building their own power supplies from the detritus of society would deal with the fact that collapse will happen anyway if we don't arrest climate change at 2C - 3C.
Power down, reorganize, go to steady state/barter. Survive.
This is not meant to provide THE answer, or even a realistic one, I suppose, but it is intended to raise awareness that you cannot ignore the climate issue. It's suicide. Even for just ten years.
Cheers
Dr. Colin Campbell discusses the likelihood of this sort of collapse in 2005 and the response he received when he discusses the loss of oil to the bankers:
http://www.energychallenge.tv/index.php/archives/226
Thanks for writing this post, Gail. I'm in the camp that rational people should give this scenario a great deal of consideration. Complex systems failing catastrophically is far from a rare failure mode (see the bridge collapse in Minneapolis
http://en.wikipedia.org/wiki/I-35W_Mississippi_River_Bridge).
Nice post Gail. Gail was a guest on Radio Zapata George http://www.zapatageorge.com/zapatag/web_radio where she discussed this topic with George. Scroll down the page to December 20, 2008, click the white dot next to first segment, then Stream Audio on the right side of the page. A player will load under the date; click the bottom left corner of the player to stream the audio.
Your scenario seems quite possible Gail. Trade would most likely freeze-up from lack of a complete business and transaction cycle. It could take years to institute a new monetary system to say nothing of rebuilding trust between trading partners. Getting one's personal plan-b in order makes perfect sense based upon the potential for collapse of our current system.
You are right. I was on that program a while back, talking about this subject.
My Financial Forecast for 2009 also alludes to a scenario such as this happening, but doesn't go as far a putting together a graph of future oil production.
An alternative viewpoint to this scenario (and I am aware of this because my wall st friends tell it to me everyday) is that companies that have low cost reserves and are self-funding don't need the debt markets. By extension then, shortfalls in production (from the elimination of non-self-funders' production) will cause prices to rise to a level at which the marginal producers are able to self fund or afford the cost of capital at which they can be profitable on an economic-value basis.
Though this view is technically correct, it misses the big picture that society couldn't afford the resulting prices - furthermore- perhaps only 1/3 -1/2 of production falls under those terms, meaning that we would either have mucho higher prices for society in general, or have to use considerably less oil in a very short time while maintaining the rest of the complexity. If anyone has a copy of that Deutsche Bank analysis of oil costs by tier for global reserves, pls email it to me.
I too have heard all sorts of small exceptions that people bring to the conversation depending on their background. They point out this thing and that thing as though they were material. Someone in the clean technology field will bring up the fascinating technology just now coming to market, for instance, completely ignoring the time it takes for energy transitions to occur. In your case, your trader friends find a very small possibility and forget that it is, a really small part of the system. (How many companies now are truly self-funded i.e. don't dip into the debt markets at all for new product lines or even everyday cash flow management?)
In each case, I think that when considering that the whole system will inevitably enter failure mode (in my view), they are simply in the "bargaining" stage of accepting the future. They have to work through their "how abouts," "what if's" and "ya, buts." Eventually they will see that the current financial system is doomed. As Jeffrey points out, what value do the ten largest banks have without the ten largest oil fields? The answer is left to the reader...
As I think it was you who mentioned 'denial' yesterday as a real cognitive phenomenon even the PO aware deal with, think about it on an even higher level. Think about the BREADTH of topics we have discussed here and follow updates on everyday (thanks largely to Leanan). Think of the intertwining pieces of the complex jigsaw puzzle that is modern civilization and 21st century ecosystems. It is IMPOSSIBLE to use computer models or even the smartest minds to piece all this together. Our brains just weren't designed for it. We're adapting well, at least some of us, but are all these datapoints, perspectives analysis really going to help us? An open question.
For my part, I find my short term multitasking abilities are better than they've ever been, but my short-intermediate term memory has gone to crap...;-)
I have been watching the food fight at the various econ blogs since the world blew up. They are in denial/realizing that their "science" is useless at generating operable policy options. Fascinating article reposted at Economist's View by Willem Buiter, a member of the Bank of England policy committee.
http://www.typepad.com/services/trackback/6a00d83451b33869e2011168a73fbd...
"Most mainstream macroeconomic theoretical innovations since the 1970s .... have turned out to be self-referential, inward-looking distractions at best.; Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes; rather than by a powerful desire to understand how the economy works - let alone how the economy works during times of stress and financial instability.; So the economics profession was caught unprepared when the crisis struck.
"Both the New Classical and New Keynesian complete markets macroeconomic theories not only did not allow questions about insolvency and illiquidity to be answered.; They did not allow such questions to be asked. ...
"it would soon become clear that any potentially policy-relevant model would be highly non-linear, and that the interaction of these non-linearities and uncertainty makes for deep conceptual and technical problems. Macroeconomists are brave, but not that brave.; So they took these non-linear stochastic dynamic general equilibrium models into the basement and beat them with a rubber hose until they behaved.;
"The practice of removing all non-linearities and most of the interesting aspects of uncertainty from the models ... was a major step backwards.; I trust it has been relegated to the dustbin of history by now in those central banks that matter."
Apparently a humiliating experience for those in the field able to open their eyes....
Here's my contribution to the debate: Markets and the Lemming Factor.
As someone here on TOD recently pointed out, the "lemmings jump off cliffs together" turns out to be a Disney fabrication. I am still recovering from that little bit of enlightenment. Is anything true anymore?
Yeah, I loved the erudite way that Buiter was able to tell all of his colleagues that they were full of crap.
But the telling statement:
That is exactly why the oil depletion models such as the oil shock model and dispersive discovery are so useful. We finally have models that seek to answer the distasteful questions that economists would ordinarily not touch with a 10-foot pole -- i.e. those of rsource constraints.
Unfortunately, a backlash against practical math may have begun, and we may be in the middle of it. People scorn the "quants" right now.
Nate,
Very timely that you bring in the self-funding vs. the debt-funders in the oil patch. There's been a growing chatter around Houston the last couple of weeks regarding corporate acquisitions/hostile takeovers. To put it your terms: the self-funders smell blood in the water and are beginning to circle the unfunded. I have been approached twice recently to aid in such efforts by some folks who were able to secure some serious private coin for just such a siege. This could quickly get rather messy and ugly. And also potentially very profitable. Just last night a cohort on the financial side pointed out that companies will have to be adjusting their books within the next month or so with the results for many being borderline catastrophic. And therein appears opportunities. Such consolidations might greatly benefit the industry. How much such efforts help/hurt the consumers in the short/long term remains to be seen.
A somewhat funny anecdote: the same financial guy was contacted by a head hunter last night regarding a position with Company A. He immediate recognized from limited details that A was a company he had been negotiating a merger with his Company B. Company A just discovered how limited their future looked and wanted to find a hired gun to help them survive. From the little I’ve heard so far half of the folks walking around downtown Houston seem to have confidentiality agreements in their pockets and that “don’t ask” look on their faces.
I think the international trade issue becomes a huge problem, even for self-funding companies. There are also issues with supply lines and lack of inventories when disruptions occur, even if the supply line is entirely in this country. What happens when a major supplier enters bankruptcy, and is liquidated?
Its assets are sold to the hightest bidder, that will logically continue operating or convert them into another industry. Liquidated companies don't just do poof and go away...
Marco -- some do...some don't. I've seen a fair number of heavy industry companies liquidated by competitors looking to reduce production capability. They figure if they break even on the decommissioning costs they'll come out ahead in the long run. The hardware is sold off or sent to scrap yards. When the drilling bust hit in the early 70's hundreds of drilling rigs were cut up and hauled to the scrap yards. Motors and such were sold off or also scraped. We'll see that same scenario in the next year or two. Thus when ever oil/NG prices recover it will take expensive new investments to get us back where we stopped. Given the ever declining EROEI those investments will be all the more difficult to fund. And the drilling contractors still functioning will have even more control over the market.
I was having a discussion with a friend about peak oil and the subject of the cost of extraction came up. I would think that when oil gets too expensive to get out of the ground, it will put a floor on the price of oil that it won't go below. At some point alternative sources will be cheaper and oil usage will drop in relation to total energy demand.
My question is, does anybody track drilling costs world wide? It would be interesting to see a graph of this.
It is available but a)is in pieces and b)is a moving target because costs are coming down.
Deutsche Bank came out with a report today I am trying to get my hands on:
Those are pretty much the same numbers I hear folks tossing around in Houston. But as I mentioned above, there is some potentially cheap oil/NG to be had out there. Maybe as cheap as $15 - $20/bbl equivalent. And it won't be generated with a drill bit but with a check book. And many of these acquisitions won't even require a check....just the cost of printing some new stock certificates.
As John D. Rockefeller said during one of the periodic oil price declines, "Gentlemen if we fail to buy now, we shall surely have cause to regret it."
But I wonder if you might see a bidding war break out, especially for oil reserves.
WT,
Unless those Yankee capitalist pigs (God bless them) start shipping their carpet bags full of money down here quickly, it won't be much of a bidding war. It's looking like a lot more targets are out there then bullets right now.
The same could be said about housing. Just saw a story about formerly $450,000 cottage within a 30 minute train ride from DC on the market for $90,000. Foreclosures in this town jumped from 5 to 950+ in just three years. And 92% of the homes on the local market are owned by the mortgage companies.
Except that we have seen declining net oil exports (with the decline in demand recently outpacing the long term net export decline), but we have seen an expanding supply of housing stock.
RM, love your first sentence. LOL!
There is LOTS of oil that can be procured at even under $10. But not remotely enough for 70-80 mbpd that would demand it. So your point is taken - some will benefit, but impact on society as a whole is less certain.
By focusing on the financial & other cultural aspects of collapse, the role of much more serious & pervasive biological & ecological factors necessarily become excluded or marginalized. It's difficult to remain concerned about the solvency of banks or the status of one's mortgage during a cholera or typhus epidemic. Does the breakdown of public sanitation facilities trigger the collapse of financial institutions, or is it the other way around? Does it matter? Soon there are going to be more exigent things to worry about than debt unwind - like, where is my next meal going to come from. Sometimes I think that my better acculturated peers really have their heads in the sand. Obsessive over-analysis of artificial trivialities keeps them preoccupied until they're blindsided by nature.
'Nuff said.
The most likely reason for having to worry about where your next meal is coming from over the next few years will be lack of money, as access to credit will disappear and actual cash will be in very short supply. A credit crunch is no triviality. With no means to connect buyers and sellers, people can starve amid plenty.
No one is belittling the very serious energy or ecological aspects of our multifaceted crisis, but finance has a shorter timeframe. If you want to have a long term to worry about, then you need to understand and deal with financial crisis now. Debt deflation can unfold very rapidly, leaving people with no means to prepare for other challenges.
Stoneleigh, Nate, Jeff Vail, Gail, and anyone else willing to take a shot,
As a college student using debt to pursue a college education in Engineering, what would you say my prospects are for the future? I'm pretty sure the future is looking quite grim, but I am wondering if what I'm doing for myself is completely futile or counterproductive. I cant seem to figure out whether there is going to be a deflationary or hyper inflationary spiral or how that may affect my well-being or indebtedness. I'm quite certain there is going to be a severe depression though imposed by oil depletion and the unraveling of growth based economies, financial derivatives ect. I've been reading theoildrum for at least two years now and I am well aware of net energy, geopolitical feedback loops, ect and their implications. However, right now I am just in desperate need in a bit of advice when all paths seem to converge into a foggy horizon. I feel a great disconnect between the societal and educational mechanism I am part of and a realistic view of the future. It seems like it's not too hard for people to recognize these sort of problems but whats impossible, is agreeing on a solution, for society or ourselves.
Thanks,
Crews
Forget formal education. Learn to farm.
My roomate is a botany major and we are messing around with guerilla gardening, which involves growing food and herbs in random locations in an urban environment. I'd need land to actually farm. I am getting the garden ready at home with red potatoes, peppers, beans and more. I like growing things alot and we already have several mature bean plants flowering that we have grown from seed that are growing by the window. Does that count?
It's a good start. Learn about plant biology and soil ecology. Apply it on the tiny scale to produce food then move up as you gain proficiency.
I think that some aspects of engineering will continue to be valuable, regardless. Keeping our current infrastructure going and engineering even the simplest replacements will take some skill.
I don't know what to say about debt. I personally am debt-free, and feel good about the situation. I don't usually advise people to go out and pay back debt, just to be debt free, because there are so many people in the same boat. The government has every motivation to engineer hyperinflation if they can. If they are successful, your debt will virtually disappear.
Sword,
The short answer is "I don't know". The long story: when I decided to major in geology in 1970 there was no future career in that field to speak of. But I was young and foolish and didn't care. I liked rocks. Flash forward to 1975 and I'm getting out of grad school. The oil boom was just starting and more and more jobs popping up everyday. Flash forward to 1984:the oil bust is well set in and I'm driving a Yellow Cab in Houston when I'm not delivering produce to restaurants. Flash forward to 1995: I’M a vice president of a small public oil. Flash forward: 2003: I'm working offshore 14 hours/day… 25+/days a month. Etc, etc, etc. I’m sure you get my point by now. I’m not sure if the future is more difficult to predict accurately today then it was 30 years ago. But my hindsight is perfect now.
I’m torn between telling you to pursue what you enjoy and the practical side would recommending a more sustainable career. But exactly what career is that? My 8 yo daughter wants to become a horse vet. Good idea? Pick a scenario: A) Less motorized farm equipment = more horses=good vet demand. B) Degraded economy=fewer folks can afford horses= little vet demand. You’ll get a whole string of such scenarios for your choices. But how do you pick the future? So what do I do with my daughter? As long as she holds on to that dream I’ll support it. If she ends up being a horse vet driving a Yellow cab so be it. The choice will be hers when she’s ready for college. Make your choice and deal with the consequences as they come. A little extra advice though: save every penny you can as you go along. And kept it invested as safely as possible.
The right sort of large animal veterinary skills will be extremely valuable in the near future. Unfortunately, vet schools aren't training students for the skills that will be necessary. Being skilled at taking care of horses sans antibiotics, antiseptics, anesthetics & surgical facilities, etc., will be highly prized. The graduate of modern vet school will be clueless under these conditions. I reiterate: forgo formal education in exchange for experience & practical skills in fields directly related to food production.
Everything bigger than rats is going extinct so why learn anything I say...
Well I've seen some optimistic posts today but that just takes the biscuit.
It's only the cockroaches survive, God Damn It!
:-)
I was being facetious (I think).
By definition if I really thought that was the case I would not spend my valuable time here trying to shift the cultural ship towards something more durable. The highest odds say that whatever we do/write here won't make a difference and events will happen as they will. But part of our genetic heritage is how our genes interact with new environments. All of us are the first generations to be born on an ecologically full planet, but we are also the first generations to have the tools to 'understand' these facts. Therefore there is at least a chance, however small, that 5000+ years from now there will be some/alot of humans living lightly in more respectful synergy with other denizens and the environment, long after we have practically exhausted fossil stocks. If I thought it was hopeless, I'd be spending time on my garden and walking my dog. (His name is Quinn, not Darwin...;-)
That'll give you more time to sing or throw rocks.
My dad was a petroleum geologist that worked offshore gulf of mexico for citi-service, or maybe it was elf-aquataine during the 70's. He never recovered from the oil bust and turned into mr.mom, and never got back out. He trades stocks at home all the time and has done well, shorting the markets recently. I'd like to see him get back into something but after that amount of time, he says they act like you've been in prison. I keep through the same sort of thing you go through in your mind with your daughter. One scenario makes engineering look great another might leave me homeless waiting in a long line for a food handout.
I agree with darwinsdog. I have a mechanical engineering degree and a job as an engineer and project manager. I dont' see my career prospects lasting more than a few more years. After that I'm left with skills that may or may not contribute to my family and me obtaining food and shelter.
If I were in your shoes I'd find a CSA farm like this one (http://www.wisconsingrown.com/) to work at. If things pick up again and engineering looks like a good career, go back to school when you're sure it will be worth it.
Don't get me wrong, you learn a lot by getting an engineering degree, but most of it won't be useful in our future world.
Tom A-B
Swords,
A college education especially in engineering will never loose value. Go over some of the comments by Engineer-Poet, Nick, as a counterfoil to the "doomer gloom". Dynamic exciting companies or countries will always value engineers, just hope that will continue to be US, but if not you can go where your degree will be valued.
Then again, you could abandon your college education and become a peasant farmer, joining the other 2 million peasant farmers of the third world, with a future horizon going no further than the next field or the next harvest.
Very good advice, which just might save you from starvation, if followed. Beware the technocopian reality disconnect.
My 2 cents: the peasant farmers are going to want to know where their fields stop and their neighbours' fields start. They're going to want irrigation and drainage, and "roads" that don't become swamps in the winter or spring, and buildings. They'll want their kids to have some numeracy.
Learn civil engineering at the trade school level, and then learn how to do it in the 19th century. Surveying with water-level, tape and theodolite, elementary hydraulics and geomechanics, basic structures (particularly timber and stabilized-earth), and draughting (on paper!). The school will teach you the math and theory but you'll have to learn the old methods elsewhere.
Sword,
You might look at auditing the courses that really appeal to you. The more practicle engineering courses in addition to horticulture and others that would be useful in the world as you see the future bringing. You might not end up with a degree but you will have a good education, and unless things have changed I don't think the professors would ban you from their classes if you met them at start of term and explained what you are trying to do.
Keep in mind that your life is going to take turns no one can predict, but knowing how things work and how to repair them, and being able to grow your own food are surely a big step in the right direction.
I ended up with a shallow oilfield and the ability to repair pumpjacks, motors, and pipe-fit have been just as important to keeping it going as knowing where to drill next ( my degree is geophysics and has served me well but I saw my career having me be in an office for the rest of my life - glad it didn't work out that way !!)
I'm now trying to talk the surface owner into letting me plant a garden so I can start climbing that learning curve.
Best of luck,
Gig-em
Rockman, Do you still go out and sit wells??
TexasSweet,
From time to time I do well site. These days I'm fairly office bound doing pore pressure analysis. Like you, I can only take so much office work. In a couple of months I'll be heading back to the GOM Deep Water for an extended rotation gig. And then maybe next fall to offshore W Africa again for a 28-day rotation schedule. The rotation schedule is my favorite...nice to have 6 months vacation every year.
Rockman,
Just curious, but what is the age spread on the offshore rigs you work on? I haven't been offshore in a number of years, but in my neck of the oilpatch they start in their 20's (roustabouts and worms), no one 30-40ish, and then people like you and me in their 50's -- no oldtimers left - uh, unless thats starting to be us!!
PS - I would not sell oil at < $10.00/BBL and worked construction and building pools in the "tween" years.
Many in our society see education as preparation for a job or career. There are others who see it as an end in itself. I think that since you are already in school, stay there. Study in your major, but also study and learn about other things. Even if everything collapses into the doom and gloom scenarios, you can recite poetry, think about the stars, wonder about past collapses as you chase the rat for your next meal; even in oil-free societies, there will be a need for poets and story-tellers (like Homer), for thinkers to make sense of it all, for dreamers with an engineering degree who wonder if x or y or z could be built to improve your immediate lot in life: a swing set, a water diversion, an underground dwelling to escape the sweltering heat, whatever.
So, stay in school, learn, develop practical skills. Rabbis are all required to have some practical skill in addition to their rabbinical training. Spinoza was a great philosopher at night, but a lens grinder by day. Learning to grow green things is a wonderfully practical as well as aesthetic or even spiritual experience. Learn as much as you can. Most of it will have no practical benefits, but at least your mind will be full and you can entertain yourself forever.
Good question, and a follow-up of my own for the knowledgeable: I'm a bit farther along in academia, but not terribly (haven't quite finished my Ph.D yet). I'm managing a lab that has now acquired a plant guy, with specific access to the university's greenhouse facilities. With these resources available (and possibly access to the outdoor growing plots on campus) but no land of my own, what skills would be best to have him teach me, re: cultivating, gardening, etc.? I am a [marine] biologist with a strong understanding of plant biology but little practical experience working with them (I primarily study animals). In terms of climate, I live in Seattle.
I'm a retired mechanical engineer. Our son has a masters in ME and can't get a job in the L.A. area. However, IMO this is because the boomers are clinging to their jobs on account of crashing retirement funds and home prices... pretty soon they will perforce retire.
Personally I don't agree with moving to the country and farming unless this is what you like doing. The US didn't fall apart during the GD even with unemployment at 25%, IMO it won't any time soon, and for several reasons: far better USG response (FDR was slow and half hearted to intervene, and the intervention was cut off around 1934-5); depositors are not losing their money; small and medium banks are being taken over and not failing, so the heartland will not see widespread farm failures; and the ongoing deflation will not turn into hyperinflation because the extra money printed simply drops into bank black holes to replace imploding debt, it is not circulated and therefore cannot inflate either goods or services. I do believe that PO is past, but OPEC (SA) will be careful to not squeeze enough to crank prices much past 80... the effect of PO, a continuous squeeze that never lets up, has been postponed IMO to at least 2012, and there is good evidence that really high prices quickly stifles production sufficiently to bring back low(er) prices... I doubt we will ever see the price that Simmons thinks represents the real value of oil products.
And the boomers can't hold on forever, so IMO useful engineering will continue to earn a decent living.
Just one comment about farmers...they seem to be hanging on by their fingernails according to the visit to several of them I made a couple of weeks ago in Oregon...more bankruptcies on the horizon for sure.
Gail,
I think your sharp cliff scenario is possible under certain future financial scenarios. I think geopolitics could also produce this type of cliff scenario, as I discussed in my posts on geopolitical feedback-loops:
While my TOD posts on the topic (1 2) are in desparate need of an update, I think there is interesting potential interaction between our financial/economic troubles and future geopolitical impacts on production. On one hand, destruction of oil demand and purchasing power will dampen geopolitical impacts as it will (at least initially) reduce price pressures and provide other problems/scapegoats for groups at all levels to focus on. However, if your dramatic production decline scenario is correct, this will exist in a positive feedback-loop relationship with geopolitical disruptions: newly destitute groups will be more likely to turn to violence, the price of oil when measured as a percentage of median wealth/income will skyrocket, further driving the targeting of energy infrastructure and exports, and the lengths to which states will go to maintain their "required" share of a rapidly shrinking pie will drive conflict between states as well as oppression within states that will, in turn, drive insurgencies and the disintegration of the Nation-State.
This last point is critical: even if these kinds of sharp production declines only occur in places where the marginal cost of production is very high (e.g. Angola, Mexico, etc.), the rapid decline in revenues that once kept the state ahead of the demographic/social-spending curve will cause rapid destabilization. We're already seeing this in Mexico...
Hi, Jeff.
As long as we're showing each other our collapse graphs....
This is a neatly constructed chart.
It might be worth brainstorming the feedback loops we can expect to increase the decline and those that will work to decrease the decline. (some must exist or countries would collapse and vanish forever).
Things that increase:
1. Geopolitical chaos increases as the rate and level of increase goes up (UK puts Iceland on terror watch list for defaulting on debt).
2. Net Energy means down side of curve is much faster than upside.
3. Export land increases collapse rate from an importer perspective. Importers compete at a disadvantage for the energy needed to create valuable goods and services, thus increasing the rate of decline in importing countries.
4. Banking system paralysis means that even though we have the materials good and services, our system of trade breaks making all transactions become very slow. Companies fail because of lack of cash flow rather than a broken business model.
Some things that decrease the rate of collapse:
1. Smaller, less resilient companies, nations, are wiped out quite quickly, leading to much less demand pressure and dropping prices for materials in shortage.
3. Anyone with cash flow can pick up needed assets very cheaply.
4. Vast stocks of skilled labor still exist. Even if education budgets were cut drastically, it would not result in an instant loss of skill (it is not like the electrical system in fragility).
5. Vast stocks of capital still exist. Roads don't fail instantly (but they are getting older) etc. These stocks create a buffer. And they can be a source of revenue to the few areas that do have a working economy. In the same way the Soviet Union was able to sell stocks of weapons and uranium.
6. There are still substantial inefficiencies that can come out (at least here in the US) such as shared housing, shared vehicles, eating much lower on the food chain, etc. As behaviors change, these will tend to slow the rate of decline.
7. Export land means that those with energy supplies have the opportunity to come out of the down cycle first and grow fastest. They will suffer, no doubt, but as failed companies and nations are shaken out, they have the needed energy to have a viable economy. Everything will be for sale cheap. Food, labor, factories, etc.
Increase:
Cumulative environmental degradation means diminishing returns to agricultural and fishing effort. Net food declines, and its proportion of household expenditure rises; market-induced supply increases are capped by ecological limits, so food's proportion of budget continues to increase. Less saving: less investment and less maintenance.
Global warming: more extensive, more intense, and more frequent droughts, floods, storms, famines and disease outbreaks consume an increasing amount of existing capital, and attempts to fix things up consume an increasing proportion of industrial output, leaving less for investment in new industrial capital or new energy capital.
Re Jon's points on the positive side.
1. Small countries don't have "much" impact, because they are small. Unless you are talking about eliminating ALL of the bottom 130 of the league table...?
5. Saleable capital: If there are no buyers...? Yes, the former Soviet Union could sell weapons and uranium, because these were
portable
, and other countries paid for them. This time around, there is no "elsewhere" that is unaffected by the crisis. In this context, changing ownership merely concentrates wealth and does nothing to stimulate demand.
6. This -- changes in social norms and behaviours -- will be by far the most powerful force, given time.
Other positive point:
Barter systems can start very quickly.
I very much agree on the geopolitical feedback loops. These were glossed over in my post. If nothing else, I keep wondering what these low prices will do to social programs in the oil producing parts of the world. It seems like the possibility of a revolution keeps going up, the longer the crisis goes on.
I hope you will have some time to do some more writing on the subject soon.
I don't see why your graph should drop to zero like that. So the economy tanks, people are still going to demand oil at some price. The production infrastructure is already in place to pump it, and refine it. It's mostly sunk costs. Even if oil prices drop severely in response to a tanking global economy, oil production and consumption will remain, if not the same as before, certainly in the same ballbark, possibly slightly reduced. Exploration and new development may suffer, but that's not going to have much of an effect till 2015.
However I find your main thesis quite interesting and believable, namely that limited oil supplies might cap growth, and that the growth is necessary to sustain a debt based economy.
One wonders if the expectation of growth might actually create the debt based economy by making optimistic promises about the future more profitable than they would be under other conditions. The opposite of debt, being saving, would the expectation of shrinkage create a miser economy where delaying gratification is rewarded more than it otherwise might be?
On a side note: I think the mortgage/financial meltdown was causally unrelated to the oil price spike ( at least with respect to the most significant digits ) because I have seen no compelling evidence to the contrary.
Why invest in the developed world if it's possible to do so in a developing country with a stable government? Technology is already developed. In the developed world, it has already been applied to the task. Applying the same technology in the developing world gets you more bang for your buck. Japan hit this wall to growth - being completely developed - 15 years ago. The US and Europe has hit it now. Why invest in developing world manufacturing with the idea of exporting to the developed world if they can no longer afford to import so much? We'll see the most growth in developing economies with stable governments with good domestic consumption. That means India, Brazil, and China if they REALLY float the Yuan and allow their domestic consumption to grow.
Japan is second only to Zimbabwe in national debt. Much of this debt being the result of 15 years of economic pork, er, stimulus. The Yen is stronger than ever - too strong really, especially in these uncertain times when people flock to safety. Japan is the canary of the US and Europe IMHO. I don't see the Yen or the Dollar or the Euro collapsing under even mountains of debt unless investing elsewhere appears safe. If investors start investing in the domestic economies of less developed nations around the world, while the developed world stagnates, the demand for the safety of dollars, yen, pounds, and euros, may fall to the point where these countries newly massive debt leads to hyperinflation that will bring the living standards and wages of those countries' residents more in line with the developing world allowing competition once again. Even without this, look at Japan where the same result has been happening agonizingly slowly under a deflationary regime. Wages falling faster than prices have helped Japan to compete as well as it has. The function of international trade is, over time, to level the playing field. Those who consume will help those who produce to grow, and at the same time decrease their remaining buying power until everyone is at the same level.
Oil will tend to cap total growth, and make it a zero sum game. Once everyone is playing the same game at the same level, it's more efficient to produce and consume at home if possible. But everyone will want that greasy black stuff. Who gets it will depend largely on whose needs it the most, and when. If they happen to have the money to buy it, or the power to steal it when they happen to need it, they'll get it.
In my graph, oil production doesn't go to zero. I think Nate had a graph like that in the comments, talking about the possible impacts of nuclear war.
Heheh, serves me right for trying to read an article at work. Alt-Tabbing quick to look at pictures and then reading the text using lynx ( a text only browser that looks more like I'm working than firefox ) tends to break up the continuity and flow.
All in all a good article though.
Peak oil -> higher oil prices, but little additional production-> stagnant wages -> defaults on debt -> banks not in a position to lend as much because of losses on loans -> debt harder to obtain -> lower demand -> lower prices on oil -> layoffs and less investment.
I don't understand this cause-effect relationship: higher oil prices, but little additional production-> stagnant wages, maybe it's a +.
I think high commodity prices across the board are one of the reasons for the housing bubble burst and the subsequent financial meltdown. The downward spiral (positive feedback) you are describing is a cause for concerns. If oil prices are collapsing for an extensive period of time, they will slow down and eventually stop the efforts on 1) energy alternative developments; 2) traditional oil&gas exploration and developments. I already see criticisms on the new US budget around incentives for energy alternatives that are seen as a luxuary in this time of recession. If we experience an economic recovery, it's very likely that oil prices will shot back up and basically sterilize all the recovery efforts. One good policy would be to create a green stimilus package that will create an alternative energy infrastucture, create jobs and lower our dependency on oil.
I'm with you, Khebab:
There's no such thing as "proof" of causality for the financial collapse, but as I've asked many times before, why now? It's one heckuva coincidence that the huge runup in asset classes as diverse as real estate and natgas timed out to coincide with the economic wave breaking. The crash of the Saudi stock market in 2006 sure looks connected to their peaking exports, for example.
But maybe it's moot, since we're here now, and there seems to be much broader agreement that PO will prevent a 1930's-style recovery that's fueled by - well - fuel. Cheap, plentiful energy has always been the requirement for expanding our footprint endlessly.
Gail, your repeated use of the words "threads" to describe the interlinking of systems and their potential for cascading collapse is terrifyingly reminiscent of the 1984 film of the same name:
http://www.youtube.com/watch?v=eT96sgTwmvo&feature=PlayList&p=A819EDA8E1...
In "Threads," nuclear war was the singular cause of the collapse, not one of its effects, as may be the case now.
Without increasing oil production, we get economic stagnation. Arguably wages could increase while profits and bonuses for executives decline, but that is not what happens in the real world. The model that is followed seems to assume that the financial managers should get a disproportionate share of the wealth that is generated, since they have come up with all the debt-financing that allows it to grow. Wages thus stagnate, even more than the economy as a whole, rather than working on a counter-cycle.
The graphs above by jeffvail and aangel show TOTAL global production of oil. The work you have done with Westexes on the ELM indicates that the experience post-peak on the downside by different countries will be very different to what a simple aggregate curve would imply.
(We built a highly complex world on the upside in the last 60 years or so and a big chunk of that complexity relies on countries that have used up their own internal resources being able to obtain oil from countries who have not yet even started using theirs but are now 'catching up fast'.)
For this reason the downside is likely to be far more brutal than any form of symmetry suggests. I predict it is more likely to resemble a staircase structure as countries simply 'fade-out'/collapse due to their inability to continue as part of any remaining trade network. Even for those 'blessed' countries with large natural resources who endure little internal hardship the psychological impact of seeing the rest of the world 'go to hell' is likely to be very tough to endure.
Nick.
Excellent point, Gail. I already had though to write about some of these interdependencies, which might be called the "Oil Goodbye Mechanism".
Unlike Gail I'd expect a few more up+downs, as there may be a complex interference of several mechanisms. These are (at least) the following:
Encouraging production:
- High oil price --> more investment in hydrocarbon production (+ CTL etc.)
Curbing production:
- high oil price --> weak overall economy, less capital for oil investments
- high oil price --> weak purchase power --> oil demand destruction
- increasingly high cost --> more investment in energy efficiency + alternatives (renewables, electric car etc.)
- high oil price --> high purchase power in OPEC countries --> OPEC exports down
- high oil price --> no need for OPEC to raise exports --> OPEC investment + exports down
Looking at the overall set of interdependencies I expect that one day there will be a "tipping point" : This is the point when the increasingly expensive and risky oil (and oil-dependent structures like conventional cars) gets less attractive than the alternatives (renewables, efficiency). This transition could happen in a smart & smooth way. But at present it doesn't quite look like that - which may mean that we'll get poor before we get efficient. I don't look as black as Gail does but I do expect serious trouble.
And it is far from sure that it will be the increasingly indebted OECD countries that will lead the economical reconstruction.
China seems to be in a comparably better position now and if they manage to stay economically self-sufficient during the crisis period and manage to have a sufficient supply of natural resources (which may be the major issue) then they may be able to dominate the world: They won't need to declare war on us - they'll simply go shopping abroad to get hold of the resources they need.
I am having a difficult time seeing where all of your high prices might come from. In a debt implosion, the likely outcome is lower and lower prices, not higher ones.
We should see lower and lower prices in nominal terms during a debt implosion as deflation undermines price support across the board. However, in real terms (ie adjusted for changes in the supply of money and credit relative to available goods and services) it could easily be a different story, as purchasing power is likely to be falling faster than price. This would mean that for most people nominally lower priced oil would less affordable then than higher priced oil is now.
Unfortunately, the period of nominally lower prices is likely to lead to projects becoming non-viable. In addition, both financial and physical risks would be rising. In a capital scarce world, far less exploration and development would occur. If maintenance becomes unaffordable then older fields could be closed prematurely. All these factors point in the direction of supply collapse down the line. Where demand and supply are both falling, and which is falling fastest may vary over time, one would expect high price volatility. Eventually, loss of supply is likely to dominate (even more so if we see resource wars), which should lead to very high prices, if there is still a global market for oil at all.
You got it Stoneleigh,
I always mean the purchasing power-adjusted price. Or you could also look at the deteriorating relation of production cost and revenue - just the same issue as with EROEI.
Nate, Jeff Vail, Gail, and anyone else willing to take a shot?
As a college student using debt to pursue a college education in Engineering, what would you say my prospects are for the future? I'm pretty sure the future is looking quite grim, but I am wondering if what I'm doing for myself is completely futile or counterproductive. I cant seem to figure out whether there is going to be a deflationary or hyper inflationary spiral or how that may affect my well-being or indebtedness. I'm quite certain there is going to be a severe depression imposed by oil depletion and the unraveling of growth based economies, financial derivatives ect. I've been reading theoildrum for at least two years now and I am well aware of net energy, geopolitical feedback loops, ect and their implications. However, right now I am just in need in a bit of advice when all paths seem to converge into a foggy horizon. I feel a great disconnect between the societal and educational mechanism I am part of and a realistic view of the future. It seems like it's not too hard for people to recognize these sort of problems but whats impossible, is agreeing on a solution, for society or ourselves.
Thanks,
Crews
How far along are you?. To what extent do you plan to acquire student debt? Do you (or will you) like engineering? What alternatives are you considering? At the Houston ASPO I sat at a table with a lady whose son was going into engineering. I suggested nuclear. She did not like that idea though we had just heard a good nuclear presentation. Does coal have a future? During my youth I was fascinated with vacuum tubes. Had I gone into engineering I would have probably become an unemployed vacuum tube or aeronautical engineer. Or perhaps I would have lucked into a hot field. I did not like medical school - too young -too hard but eventually was glad that I finished. I would do that again if I could afford it, or would consider nursing. But nursing is not for everyone.
---To answer your question, I don't know.
See also: http://www.theoildrum.com/node/4615
Thanks for the response Robert,
I am a sophomore, so about a 1/3 of the way there. I will have to aquire debt to pay for most of my schooling, but it is a public school, so perhaps 30,000$-40,000$ or so when it's all done? I really like alternative energys, but I know at the moment they are not really renewable and require fossil fuel for their initial investment. I like passive solar, solar thermal, windpower and such indiustries but I am not sure these industries are really able to stand on their own without subsidies or the massive amounts of diesel, coal and natural gas it takes to run them. I am at this point just worried about finding internships for the summer ect. It's really frustrating to identitfy things that you can change at a personal level to prepare for such a future. I figured the engineering industry would have decent job security, as the baby boomer generation retires and people my age become disinterested in math and science?
"I like passive solar, solar thermal, windpower and such indiustries"
These will still be important and in demand. The systems will likely be smaller on average, but knowing thermodynamics, fluid mechanics, statics and strengths of materials, building energy load analysis, solar engineering, etc will certainly be in demand.
And yes, as boomers retire, Gen X and Y'ers will need to step up to the plate, and the numbers in this area are looking very thin indeed.
You are correct that the baby boomer engineers will retire and leave a vacuum. A lot of companies have no replacements in the ranks.
There will be jobs for young engineers, just choose your discipline carefully. Biotech, computer, electrical are good fields. Also, anything related to health care, such as making medical equipment, is good.
If you look at the science timeline you will see that most of the scientific advances of the past decades are in genetic engineering. This will lead to new industries and jobs.
There will always some demand for civil/structural, HVAC and controls engineers. These are not industry specific as chemical engineering, where you might work in refineries or various chemical plants and only with those areas.
Engineering offers practical skills that you can use in every day life, particularly with the kind of future I foresee. I used my background to design and build an advanced home for myself.
How many boomers will actually be able to afford to retire?
It depends on what you mean by "retire".
If by "retire" you mean a life of leisure (as "retirees" in the USA have by-and-large enjoyed for the past few decades now, and is held up pervasively as a goal and a norm), I'd say something in the very low single digit percentages, and maybe even just a fraction of a percent.
If by "retire" you mean discontinuing doing the full-time employment they were doing, and transitioning into doing some other employment that is less physically and mentally demanding, maybe less than full time (or maybe a combination of several part-time employments), and maybe less remunerative, then I'd say something in the very high double digit percentages, maybe in excess of 99%.
What type of engineering?
Thank you for your response Jeff,
I'm am a sophomore studying Industrial Engineering, which involves analyzing processes, logistics, operations management, manufacturing and systems. With peak oil in mind I didn't want to get into a field too specific to any processes so instead I decided on a field that can be applied to almost any industry or field. I see peak oil and many of these issues as a logistics/process/systems problem and many here have long advocated a systems analysis type approach. Maybe its too broad, I'm not sure, but with the economy the way its going I'm not sure how my debt will be payed off, if the economy is in a depression and I can't find a job, or deflation makes it damn near impossible to play off debts with a job? I'd ideally like to get situated in some sort of company involved in energy infastructure or agriculture. I am just not too sure if what I am doing is a good path to be taking. Sometimes, I think it may have been better to go along the trade/vo-tech path being an electrician, welder, machinist? I really don't know..
I think it's not so much the specific degree you get that matters, but rather the process your head goes through in getting it. The process will change the way you think about things, it will give you the knowledge of the giants of history, and the means of understanding.
Paul
I would say that industrial engineering is a good degree to get, but it ties you to working in organizations large enough to require a systems analysis approach. So I would recommend getting a dual degree, with a second degree in something that can be applied on the smaller scale. Something based on science and knowledge of nature that will remain in demand (I always thought, for example, that medical knowledge is always valuable, but a legal degree could be rendered useless through political upheaval).
Besides medical fields, you might consider environmental engineering (water resources), agricultural science/engineering (if you can find a program that emphasizes low-energy, low-chemical input agriculture), or electrical engineering (power distribution, renewable electricity sources).
Vo-tech paths like electrician and welding can be lucrative, especially if you can get into more lucrative fields like electrical controls systems (chem e also touches on this). There are lots of niche fields that you can pick up, often from employers, just by asking.
Something that I think will be an interesting niche will be small biodiesel plants, designed to provide fuel for a group of a farmers in a local area, perhaps on a coop basis. The simpler the design and manufacturing process, the better.
This builds on Rudolph Diesel's original reason for designing the diesel engine--to provide farmers with mechanized power independent of petroleum supplies.
Agreed...biodiesel will not save the current scheme but it will become very valuable to own a biodiesel plant, in my view.
Not to be coy, but the "system" can force you into bankruptcy over your student loans, but it can't take away the engineering knowledge you gained. And I think that knowledge will be very valuable in the future. Will it be more valuable than learning to weld? I don't know--much like an education as a nurse or as an M.D., one may provide a better return on investment, but both will have lasting value. I'm sure you do or will have many opportunities to learn the hands-on skills as well as the theoretical (e.g. learning the welding and not just the theoretical stengths of the various methods), and I would actively seek out these opportunities.
I haven't used my engineering degree much, but I'm very glad I have it. It gives me just enough understanding to wade into the shallower waters of fascinating topics like passive solar systems, earth-exchange HVAC, modifications on vernacular building techniques (various modifications on compressed earth blocks), etc. I think you will do well if you specialize on some energy or alternative-energy or alternative transport related area of engineering, or if you work on the vernacular technologies angle... I would probably avoid electrical engineering or civil engineering to the extent that it focuses on roadway/highway design, just to name a few!
Bankruptcy won't free you from student loans. That is why some people are actually fleeing the country to avoid paying them back. They can't afford to pay, and they can't wipe out the debt via bankruptcy.
I am waiting for a group of young hotshot heavily-indebted lawyers to take this on...
Student loans can be discharged in bankruptcy by proving that repayment of the loan will create an undue hardship on the debtor/borrower and his family.
This standard is generally interpreted to mean that the debtor cannot maintain a minimally adequate standard of living and repay the loan. It usually requires showing that the conditions that make repayment a hardship are unlikely to improve substantially over time. Many courts use the test for undue hardship found in the Brunner case.
This was generally taken as impossible to prove over the last decade (since the non-dischargability clause was instituted) as the economy was "booming", but now we have the beginnings of the "Greater Depression" I suspect that it may be open to attack...
(Note: I have no student loans, I funded my education by accidentally making enough to cover it)
The reason they are so harsh with student loans is because the boomers abused them so thoroughly. They took out loans and used them to invest in the market or go on vacations...then never paid them back. Even people who ended up becoming extremely wealthy. So they lowered the boom.
But now...I think if any debt deserves to be jubileed, it's probably student loans. It's especially hard for people who didn't finish school. They have the debt, but not the degree. (The percentage of students going to college has increased steadily, but the percent who actually graduate has been flat for decades. Which means a lot of people are going but dropping out before they get the sheepskin.)
Maybe Obama will forgive student loans; I think that would be more palatable to the taxpayers than handouts to bankers or McMansion owners.
If not, well, you can work off your student loans by doing volunteer work or joining the military. That might be the template for the future. Pay off your debts via indentured servitude, just like in the old days.
You miss out an important part of the equation, though. The non-dischargability clause meant the loan agencies were comfortable lending out ever-larger amounts, as they had the ultimate guarantee. In response the cost of education rocketed as students could borrow to pay radically inflated fees. The whole thing operates as a government-sanctioned protection racket.
Which means I'm screwed or fighting world war 3 over in the Saudi desert if I don't get a job... great
True, even in Chapter 7 you cannot discharge student loan debt. However, my intent was figurative--the "system" can make you "broke," but it can't take away your engineering knowledge.
I think you're point about the need to "jubilee" student loan debt is very important. The 2005 amendments to our bankruptcy laws really tilted the playing field against consumers, but it wouldn't surprise me if there is a swing back in the near future...
One has better protection under current bankruptcy laws if one puts college costs on their credit card.
I guess I'll start praying for hyperinflation, without the cholera epidemic, as far as debts are concerned. How did you end up working as an intelligence analyst for the air force?
I don't believe you can discharge student loan debt via bankruptcy, as the laws are currently written. Once incurred, it's a perpetual millstone.
as I said:
Student loans can be discharged in bankruptcy by proving that repayment of the loan will create an undue hardship on the debtor/borrower and his family.
This standard is generally interpreted to mean that the debtor cannot maintain a minimally adequate standard of living and repay the loan. It usually requires showing that the conditions that make repayment a hardship are unlikely to improve substantially over time. Many courts use the test for undue hardship found in the Brunner case.
admittedly, it has been very difficult to actually do.
somebody who did it:
http://www.amazon.com/Bankrupt-Your-Student-Loans-Strategies/dp/1425928552
From the point of view of having a few years of experience behind me, I would say the best course has always been to study something that has "useful" applications, but that you are passionate about. There has got to be something.
And while you are doing it, now that the future is so uncertain, don't put all your eggs in one basket, or try to do it all at once. Don't get into any more debt that you absolutely need to, don't buy a house and have a couple of kids, don't work so hard on one thing that you can't keep your ear to the ground, and do become skilled at plain survival (which, for me, is learning to grow food, and developing ties to community).
Another way of thinking about this is in Chris Martenson's 20th episode of his crash course, which I think he said is fleshed out on his website - a way to list assets and liabilities and think clearly about what options are and will be available.
The future being difficult to predict, flexibility will be key.
I also think that liabilities that have affected people in the past (from my physician's point of view, substance abuse and depression/anxiety issues, lack of education, being tied to folks with substance abuse, etc...) become even bigger liabilities in the setting of society collapsing. So perhaps an investment in personal growth (hard to define, I know) could also be very important in some cases.
Thought-provoking essay and great comments by the peanut gallery, thanks.
I'm still not sure that I necessarily buy the notion that expensive commodities were what kicked off the great fiscal deleveraging. It's possible, but I think unknowable. The debt leveraging was building to arbitrarily high levels like a steepening slope of connected sand grains, a self-organizing criticality which by its nature would progress until it reached sufficient sensitivity to have collapse triggered by an arbitrarily small perturbation. Thus, focusing on a specific kind of perturbation might miss the point.
A drastic complexity collapse of the sort some are discussing here might be good for the nonhuman species which are not easily accessible to scroungers, and in terms of lowering CO2 emissions. Our non-resilient evolved complex extractive and distributive systems enable a large part of our overconsumption. A case could be made that losing this complexity abruptly might, in the long run, be one of the optimal outcomes to overshoot, one of the best of unacceptable alternatives. I guess we'll see.
Gail,
This evolving scenario description is becoming much more detailed and dovetailing closely now with current events. It certainly appears to be a plausible possibility, and denial by the BAU holdouts in the general population will eventually give way to the follow-on stages of grief.
Absolutely, and there will be widespread interruption of heating energy sources, which will highly motivate people to take whatever measures they can to keep their family from continuing to freeze. This is one reason people should be taking steps now to mitigate this high risk by building or retrofitting passive solar and energy efficiency measures into their homes to the greatest extent practicable. Firewood might be viable, but expect gasoline and chainsaw parts and supplies to become difficult to come by or afford. Even cooking heat would best be mitigated by acquiring or building a solar cooker between now and then (which could happen faster than we realize).
Forgive me if this has been asked before (I am sure it must have been...)
Hubbert's peak is generally shown as a bell curve with equal tails. I know that the US lower 48 followed this, but will the remaining major fields, given the radical extraction techniques developed over the last 35 years to keep the extraction levels high? I ask because depletion rates at more recently developed fields seem to tend to more rapid than "expected".
WebHubbleTelescope has done some modeling using his shock model that addresses this.
A closely related and even more contentious topic is reserve additions or gains. Often these are tied to expectations of further extraction based on technology. They are also dependent on technical improvements in finding oil.
The fact that we can basically see a lot more of the oil we are extracting may be a bigger problem than advances in our extraction technology itself.
Personally I don't know of a easy way to extract values for technical over extraction or over statement of reserves.
My best guess is we may have overstated our current situation by about 25% thus for example instead of us being 50%
depleted we are really 75% depleted. HL tends to predict decline at 60% of URR so using 60% as the baseline its a bit
less of a factor 15% vs 25%.
Technology has two basic effects it allows us to extract the older declining reservoirs at a higher rate and it allows us to extract new developments faster. Both effects tend to boost the current production rate at the expense of steeper long term declines.
Next search technology improvements allow us to find and size reserves faster/better this gives in my opinion a higher chance over time that we will find most of the reserves in a region and produce the best ones earlier rather then later.
Next since in general the search for oil goes on regardless of the economic conditions we tend to build up a number of well defined regions to exploit again providing at the regional level the ability to select the best fields.
Thunderhorse is a perfect example of this for example. In what may prove to be one of the last fields developed in the GOM in my opinion we succeeded in developing the best first.
Regardless of the actual skew that technology has caused overtime it can't be small and it seems very hard to detect.
Think of loggers moving from hand saws and horse drawn extraction of logs to chain saws and large equipment. How do you detect the technology effect ?
Memmel--I think you mean EOR and other techniques tend to boost production at the expense of ***shallower*** long-term declines.
One thing that has been pointed out is that we have a number of very big fields that are near to decline. Cantrell in Mexico is now past peak. Ghawar's condition is less clear, but it is likely not too far away from rapid decline. As these big fields decline, it seems like production will go down pretty quickly. This is especially the case where horizontal drilling has been used to keep production up artificially. Once the water level gets too high, production can fade rapidly.
This is already getting silly.
It's unavoidable, but I guess the idea is that we will be better able to adapt if the country isn't comatose on the ground from a debt disaster.
That chart showing a drop from 74 mbpd to 20 mbpd is pretty silly.
Oil producers will pump as much as they can as they live off oil profits; (sales-costs) x quantity.
The variable costs of pumping oil out of an existing field are tiny.OTH, the costs of developing new oil are large.
If existing fields are declining at 5% per year it will take 26 years of depletion (and with no new production) to reach 20 mbpd. In that time you'd be extracting 400 Gb of world oil(a lot):
Int(27 *exp(.05*5)(0...26)= 27/.05(1-exp(26*.05))=405 Gb
World oil would fall by around .6 Gb per year.
For Americans this would reduce our per capita car travel(12 barrels per year) to the level typical for most of the world today(a couple barrels per year-Eastern Europe))--which is certainly not fatal.
It's a good thing that there aren't examples of rapid declines in net oil exports.
http://tonto.eia.doe.gov/country/img/charts/ID_net_imports_large.png
People should listen to you more jeff, net exports are far more important than production, yet people get all myopic on production numbers.. i really don't know why..
It's only silly if people can afford to pay more for oil than it costs the oil companies to produce that oil, not counting sunk costs of production. If it costs $10/barrel of ongoing production to keep an offshore oil rig running, and oil goes below $10/barrel, then that production doesn't deplete by 5% per year--it stops. I'll agree with you--that's a very severe scenario. Additionally, as noted above, geopolitical factors have the potential to cause both an accellerated decline OR a grinding halt.
There are fixed costs which are averaged over time and variable costs.
I read somewhere that 2/3 of the costs of oil production are in exploration and development, long term fixed costs. I also heard that it cost the Saudis $1 to pump a barrel of oil. The Saudis were pumping oil in 2000 when the world price was less than $20 per barrel.
Most of the world oil production comes from state oil companies that will continue to operate regardless of financial markets.
I also see no evidence that demand for oil is evaporating. I do see that the health of the financial system which bankrolls development is very bad so the outlook for additional production is terrible. Therefore I project based solely on depletion of existing oil fields.
You assume political stability across the board? Even in places like Saudi Arabia, Iran, Iraq, and Kuwait? How about the situation in Russia right now? Or Venezuela? Or Mexico? None of those states has collapsed yet but all are facing increasing internal pressures.
A wide Mideast war could easily end up shutting down 30-40 mbpd of production for an indefinite period. While the most likely scenario (currently) might be to project based on depletion of existing oil fields, that is certainly not the only possibility. Gail's article was intended to consider worst case scenarios, not the current scenario, therefore your comment appears irrelevant to the current discussion.
I wonder how secure state oil companies are, if there is major civil disruption in the parent state--Mexico, Saudi Arabia, Venezuela. Also, if they stop paying their debts, they will have a hard time getting drilling rigs.
Okay, good point.
Some NOCs are really incompetently run.
The Soviet oil system imploded under low oil prices.
Hugo is capable of destroying PDVSA(his political enemy)for no earthly reason. Logically, these NOCs need to pump more as rentier states need income but that level of dependence is a very high fixed cost.
Perhaps they need to invest in good some riot control equipment!
Of the top 15 producers, 5 are shakey IMO, Russia, Mexico, Venezuela, Nigeria and Iraq and I doubt that any of these will economically collapse in a few years. China and Iran no way. Saudi, Kuwait, UAE also no way. JMHO
As far as more drilling rigs go, none of the NOCs look very competent at exploration and development(all that cash goes elsewhere--they want foreigners to pay for that). They will obstruct rather than encourage exploration and development so I assume their production will be just depleted with few if any additions.
So I will stick to geological depletion of existing fields scenario for now.
It's a good thing that we can rely on regions developed by private companies, using the best available technology, with virtually no restrictions on drilling:
My interpretation of the steep decline and leveling off at ~20 Mb/d is that the scenario is modeling an economic situation that destroys demand faster than geologic factors reduce production.
Just because certain ostriches refuse to consider worst case "possibilities" does not mean that other people might not want to consider those possibilities. If you find this discussion so silly, go stick your head in the sand elsewhere.
Hello TODers,
Fascinating thread and discussion. IMO, we need to 'real asset' recapitalize our system from the 'roots up' while we still can to add some resiliency for Optimal Overshoot Decline-->thus my prior posts on Strategic Reserves of I-NPK to help buffer a transition to full-on O-NPK recycling.
Recall earlier links where Pakistan & Indonesia will be striving to build their Strategic Reserves--much easier said than done as their economies implode, but wish them luck.
Will the USA proactively move in this direction? Or will we wait until our nuke-powered aircraft carriers have to be pressed into emergency service moving Morrocan P, Canadian K & S, and Trinidad N, while cholera is running rampant because our sewage is running rampant Zimbabwe-style from our failure to ramp O-NPK recycling?
Have you hugged your bag of NPK today?
EDIT: Or should we dead-reckon that these carriers will be loaded with deadweight tons of 'immigrants' to be dead-headed back to American topsoil? Would that require 250 million/year to stay above a Liebig Minimum?
Bob Shaw in Phx,Az Are Humans Smarter than Yeast?
@ GAIL the Actuary
"...it looks like we should be able to get along pretty well with a little adaptation
--perhaps some electric cars."
GAIL, due to the number of green cars that can be sold in the USA during a year,
I do not believe that electric cars, hybrid vehicles, Plug-in hybrids and diesel cars are
enough for an easy adaptation, even in a good scenario.
I think that a Smart JITNEY transport system will have to be implemented.
A JITNEY system as described in chapter 11 of the book PLAN C, by Pat Murphy.
I think roads are going to be hard to keep up over the long term. This may make it difficult for many kinds of vehicles to use the roads. If nothing else, travel will be much slower, if one has to deal with uneven roads.
There's a billion Chinese out there and they hold the notes while the western world holds their d*cks in their hands.
Those notes are trade-able just like cash (it works like "third party checks".) We don't even need to pay up. We can become flat broke and it won't matter to the oil economy.
So everybody now has a leg up on us.
China used the mechanism to get Venezuelan oil and cut us out for the next round.
The decline in oil reserves is going to be steeper than that smooth slope of the bell curve.
The back-side wont look like the front-side because, instead of only wales getting relief by the use of rock-oil a.k.a. "petroleum", and one incredibly greedy man setting up Standard Oil, and slaughtering the competition instead of wales, that back-side has got a lot more people competing for whatever oil is going to be left.
Gail,
Nice to see you have put some numbers on a prediction of future oil production. I accept that world production may be as low as 20million b/day if not as early as 2012 at least in next two decades.
I thought it may be interesting to challenge some of the assumptions you have drawn from a 75% reduction in oil use, especially with regards to the electricity supply;
"...2012 to a level not much above 20 million barrels a day. If it reaches such a low level, due to a widespread failure of the financial system, I would expect electricity to be affected in many locations, and because of electricity, water and sewer systems. Some large cities may become uninhabitable."
This is a commonly held idea that you have expressed many times including on your post about the electricity grid.
I live in the State of NSW, Australia, which has a population of about 6million( 2% of US population) and produces 78,000 GWh of power per year(about 2% of US 4,000 TWh). This is distributed by a Government corporation, Transgrid which produces the coal generated power and distributes this and power purchased from interstate to the local retail power companies.
http://www.transgrid.com.au/trim/trim301906.pdf
From their 2007 annual report they have 930 employees including 57 linesmen, 71 trades people, 52 power workers and 232 engineers. If we estimate that 200 are in the field at least 50% of the time, and travel in pairs, 300 miles a day( using a 4WD vehicle at 15 mpg) this company would be using at most 20 gallons x100=2,000 gallons of diesel or gasoline/day or 400,000 gallons /year. If some of the other employees work at remote locations they may need an additional 100,000 gallons( assuming 250 employees, 60 miles/day, 30mpg vehicles,).
So in the state of NSW, Australia the electric grid which is much more widely dispersed than in US, would use approx 6 gallons of oil based fuel(1/7th barrel) per 1GWh electricity. If the US uses a similar amount of fuel/GWh to keep the grid operating( not building just maintaining) that would be 24,000,000 gallons/year or 10,000 barrels oil/day. I would expect the US grid would need less than this per GWh but if anyone has actual figures that would be of interest.
If in 3years or 30 years the US only have 25% of today's consumption, (5million barrels), it would be using 0.2% of its oil for keeping the grid maintained. This is equivalent to what is used by 50,000 of today's drivers, or 200,000 under the rationing needed to cut oil use by 75%.
What would people prefer an extra 1/5 oz in addition to their 2.5 gallon/week gasoline ration or have electricity 24/7??
If I have made some major error in calculating oil use by the grid I would welcome being corrected.
Your not including embedded oil in the manufacture and replacement of the lines and other parts.
Your also not including the pyramid of oil use below the primary worker. They also use food thats shipped in and their families use their earning to drive and burn oil. Beyond the direct costs I also did not see you including billing and other services and support staff.
Next your not including the fuel usage by consumers of the electricity to pay for the electricity itself its not free.
I think you would be surprised how much fuel is actually used to maintain our electric industry. Same concept holds for the oil industry itself.
As a rough estimate in the US Housing construction contributed about 4-5% to the GDP of the US.
http://www.ipabusinesstodaymagazine.com/Winter08/Construction.asp
Thus the collapse of home construction closely matches the decline in oil usage.
For this argument just assume they are equal on a precentage basis.
For Canada this gives a GDP contribution of probably about 2-3% for electric power.
http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=A1SEC81...
Second page if the link does not work.
Thus its reasonable to assume that the entire electric industry in the US is actually responsible for 2-3% of the oil used esp if you include consumption of oil to do work to buy the electricity.
If your not getting this sort of number then you probably have not correctly done the calculation.
The food industry is actually at least 10%.
http://en.wikipedia.org/wiki/Food_industry#Industry_size
This does not include indirect work done to buy food so I'd say double that and food is probably closer to 15-20% of our overall fuel usage maybe twelve since you have to remove the workers in the food industry itself otherwise your double counting.
And in addition to all this you still have to account for the accountants bankers lawyers etc directly involved in the industry.
Now this is oil inputs needed to run the entire industry without changes. Overall most industries seem to quickly become self similar in their oil usage and close to the amount contributed to the GDP. This is because secondary usage i.e oil consumed to buy the primary product and support make up a big part of the overall usage and these tend to fall into the same general amount. Most people use most of their oil outside of direct work on the job. Few people burn tremendous amounts of oil while they are actually working. A obvious exception would be say a trucker, taxi driver or police officer but in general regardless of the industry most of the oil is burned transporting people about the same distances to work places to earn money to buy the products of other people.
So I'd argue that the precentage contribution to the GDP is probably a very good estimate of the total amount of oil devoted to any particular industry.
In some case like housing and the auto industry the high cost of the product causes us to underestimate the oil contribution on the consumer side i.e many people spend 25% or more of their salaries on housing so the real contribution of housing itself to our overall oil usage is closer to 25% not the lower direct estimate. But housing is pretty unique. Cars are similar but almost a order of magnitude less.
Whats important to understand is that as consumers can no longer burn oil to pay for electricity i.e they simply can't afford it the electric industry itself can't continue as it is today. This also include industrial customers. In many cases fairly cheap electricity for consumers is very dependent on steady industrial customers that ensure that the baseload is utilized.
I'd argue that its impossible to take the current web of support for any particular industry take the current prices and use these to justify future scenarios. With electricity for example as the web that supports it breaks down its easy enough to foresee that electricity could get very expensive esp in different regions. You need only look at third world countries and the grid there to see plenty of examples of dysfunctional electric grids because the support simply does not exist to create the unified infrastructure we have in the US.
To be flat honest I'm going to get a good laugh in 8 years when people that bought EV's find out that the grid went down all night and their precious EV did not charge so they end up buying a diesel generator to charge their EV.
Bottom line is if your serious about solutions in our future your best bet is to take a very hard look at what works in the third world and what does not.
memmel,
Thank you for giving a very detailed reply and some thought provoking arguments.
"So I'd argue that the percentage contribution to the GDP is probably a very good estimate of the total amount of oil devoted to any particular industry."
The link you gave to Canadian electricity generation actually shows the industry employs about 1% of labor force, but accounts for 3.6% of GDP.
"There were almost 91 000 people directly employed by the industry in 1994, about 1% of total Canadian employment. Total revenue was $27 billion in 1994. Of this total, approximately $1.3 billion or 4.8% came from export earnings. The electric power industry has steadily increased its contribution to Canada's GDP, from 2.3% in 1960, to 2.5% in 1970, to 3.0% in 1980 and to 3.6% in 1994."
Different industries are going to differ greatly in oil use, so the aviation industry would be a very big user, while the Pharmaceutical industry would be a very small user. You could also include the oil used by employees but as with EROEI analysis it only makes sense to compare direct inputs to see the consequences of a 75% decline in oil.
I was discussing the grid because of the concept that only essential services and essential industries will get oil if rationing is needed. Hospitals, water, police, agriculture, electricity supply and some transport would be included in essential services.
For electricity production and distribution we would include the embedded energy to produce electricity; direct burning of oil( very small), mining and transporting coal(1gallon diesel/1,000KWh), nuclear(small?), hydro(very small). If we are going to replace ICE vehicles with EV's and power by wind and solar energy, need to know the embedded oil content to build new capacity. For wind, a Danish study indicates 1g oil/kWh(30year life, 3MW turbine using recycled steel). Since 1kWh will replace 1/4 gallon of gasoline( say 1liter=900g) wind energy is going to reduce oil consumption by 900:1, ignoring the grid maintenance costs. If grid maintenance costs are as I suggested 6 gallons(20kg)/1GWh, that's another 0.02g/kWh. That dose not include the indirect uses of oil, for essential services ,food, transport of employees, BECAUSE they have to be set aside anyway, even if the people are unemployed they still will need those essential services.
Presently in US about 60% of the oil is used by cars and light trucks, perhaps 2% essential services that cannot be replaced by EV, but replacing the other 58% (11million barrels/day) by essentially electricity is going to give a very very big reduction in oil use( at least 95%) including those employees of power generation. Eliminating 90% of air travel again will save another 10% with almost no impact on industry( except overseas tourism). Another 25% is used in truck(12%long distance) and rail transport(1%), and short distance truck( 11%). At least half of the long distance truck transport is essential(food manufactured products) but some of this could go via rail, so could probably save 6% of the 12%. That leaves about 4-5% for direct agriculture( tractors, fertilizer,chemicals).
I take your point that 10% of GDP is food related, but <5% is for producing and transporting food, a lot is related to processing, marketing, retailing NOT high oil using, except for employees vehicles( they are going to be EV's).
Your statement:
"Now this is oil inputs needed to run the entire industry without changes. Overall most industries seem to quickly become self similar in their oil usage and close to the amount contributed to the GDP."
is only true if you ignore the differences of specific industries and just base it on GDP, AND the population DOES NOT change personnel oil use! But gasoline rationing of employees alone will cause changes as well as price rises, or changing from ICE to EV.
Your argument would be valid if every industry used large amounts of oil that cannot be replaced by other forms of energy, but this is not the case, most oil is used for transport of individuals, a smaller amount for transport by industry or directly in growing food or manufacturing. The US can manage with 75% less(5 barrels/person /year), most of the world already uses less than this!
I was hoping that someone has some real figures for other essential services, eg how much oil do police use( at work), or medical services?
I frequently hear the argument that 'essential services' will be covered in a shortage scenarios, or that fundamental infrastructure will get extra attention (like maintaining sewer and water systems, for instance). I think that is a bold assumption and will hold true only in some areas with forward-looking planners and politicians who will have to twist their budgets into pretzels to free up the money for those services.
The San Francisco police force reduced their police patrols when fuel prices rose, and I imagine other 'essential services' were cut back, too.
Looking at history, and other countries, there is simply no reason to believe, in my view, that as the price of oil rises the most important parts of society will get all the energy they need or even most of the energy they need. And of course shortages make things difficult for everyone. As Jeremy Leggett points out in 'A Farm for the Future' (BBC):
Aangel,
"Looking at history, and other countries, there is simply no reason to believe, in my view, that as the price of oil rises the most important parts of society will get all the energy they need or even most of the energy they need"
Do you mean history of oil shortages in US( WWII, 1972-79 shortages), Sweden WWII. The US has gasoline rationing plans in place. The question should be will 5million barrels/day be enough to supply all essential services( not necessarily police vehicles issuing parking tickets), AND have some gasoline left over?
I have tried to calculate oil use for maintaining the electricity grid(0.2%), I suspect essential policing would be higher, but unless you have figures you are guessing what an oil crisis will mean and how much cutting back will be necessary.
For workers not having mass transport available can always use this:
http://europe.theoildrum.com/node/4500
Sweden managed during WWII with virtually no oil, running vehicles on woodgas.
http://www.woodgas.com/History.htm
I think that 5million barrels/day will allow some gasoline for private vehicle use after essential services are accounted for, not much possibly 1-2 gallons per week. This would allow car pooling ( 4/vehicle) for essential trips for people who do not have access to mass-transit( from home to bus or rail station). All ICE vehicle manufacturing could be stopped, and converted to running triple shifts for manufacturing, electric scooters, EV's, wind turbines, woodgas conversions, CNG conversions.
On the other hand if your assumption is that nothing will be done and society is going to collapse, I see no argument to refute this, it could happen without an oil crisis, we could have WWIII, the earth could be destroyed by a comet, you just cannot plan any future on that basis.
My girl is cfo for large non-profit that takes care of elderly, disabled, homebound. 400 or so on staff alone. She figures she's going down with the ship - present tense, now. Here in Maine, new DHS rule says they will pay expenses only to median. Think about how that works over time. [I'm not sure of the overall context for that rule.]
It's interesting how her industry responds. Not with any sort of solidarity, but they circle each other like vultures looking for other similar organizations to fail so they can cherry pick cheaper clients, facilities and workers. Which then drives the median down again. Meanwhile, the cohort served grows.
The ship is going down from her POV. Her Board of Directors don't get it - no understanding of the context.
What will we do, wheel our elderly and infirm out into the freezing night? What about the wheelchairs?
cfm in Gray, ME
It has not been uncommon in history for the sickly young and the firm or infirm elderly to be cast aside...
I think your point about looking at what works in the third world is good.
I think there is also the issue of networked systems. If workers don't get paid, will they continue to do their jobs? If they live in homes far from the electric company, will they be able to get to work? Will theft of wiring and other supplies become too big of an issue? Where will replacement parts come from? Lots of details we don't think about.
Gail,
I was really thinking about what has worked in developed countries such as Sweden or Australia in WWII.
Given this is a supply side doomer scenario I found this link posted on CalculatedRisk today it forms a good basis for the demand side doomer scenario.
http://www.tradersnarrative.com/inflation-adjusted-chart-of-sp-500-2328....
A good discussion follows with the link I'd suggest you read the link.
But one thing stands out to get the same change as the Great Depression we would need to see our economy drop back to about 1982 levels.
For housing for example this would mean housing costs would fall substantially.
http://mysite.verizon.net/vzeqrguz/housingbubble/
This indicates the median falling from the current 250k to 150k or a fall of 40%
assuming some overshoot and also assuming that the inflation adjustment itself will unwind to some extent as median salaries also fall suggest a maximum drop of
250k -> 75k or about 60%. Taking into account absolute oversupply and the baby boomer retirement i.e in 1985 the housing prices were supported by a expanding economy a 75% drop is not impossible in the least. So average prices of 60k would be common at least in many parts of the country.
Now for wages we need to look at both inflation adusted and non adjusted in the sense that deflation will force real wages down.
http://pewsocialtrends.org/pubs/706/middle-class-poll
So about a 17% drop in wages assuming the inflation adjustments hold.
42358/50811 = 17%
Going to the census gives 20,171 as the real wage at the time.
http://www.census.gov/hhes/www/income/histinc/h05.html
So a 60% drop in wages as inflation is unwound is very possible.
For a lot of reasons I think that this is very possible esp with peak oil.
Now for oil usage we must adjust for population growth.
Just using the wage earner numbers as a proxy overall precentage change is similar.
2007 wage earners = 116,783
1982 wage earners = 83,918
So 25% more people.
Now looking at VMT
http://www.fhwa.dot.gov/policyinformation/travel/tvt/history/
2007 = 2,995,748 miles
1982 = 1,592,481 miles
Correct the 1982 figure for population change of wage earners
1592481+1592481*.25 = 1990601
We get a potential drop of about 30% in VMT.
Overall population seems to have changed a bit less but wage earners is probably better measure anyway.
Now I'd suggest because many of the suburbs are physically further out and we have a higher precentage of two wage earner families now that 30% drop is a high estimate but its within reason.
Now the US uses about 25 mbd so a 30% drop is 7.5 mbd.
Maybe a better way is VMT per wage earner. The result is
thousands of miles a year.
1982 1543978/83918/ = 18
2007 2995748/116783 = 25.6
A couple of sources but.
http://askville.amazon.com/average-commuting-distance-americans/AnswerVi...
Here the average commute distance is given as 16 miles.
And here for 1985 it was 10.7 miles.
http://www-pam.usc.edu/volume6/v6i1a3s4.html
Hmm
10.7/16 == 33%
I think we just found out where all these extra miles that we are supposed to loose have gone.
Now hopefully you can see our real problem we can move 25% more population back into the inner core easily. Housing prices can and will fall dramatically lowering the precentage of income devoted to housing and wage can and will fall.
Oil usage simply can't fall that fast we cant get back our 7mbd of oil to match 1982 our housing is simply to sprawled out.
We are going to hit the peak oil wall and at some point declines in home prices cannot buffer agianst rising oil prices and almost certainly falling wages.
So we have good news and bad news over the next several years falling home prices should help a lot if wages don't fall to fast but oil usage probably won't change much if anything it will simply accelerate the decline in home prices.
I'd suggest that at best you might get back 10%-15% or 2.5-3.75 mbd but this is well within the range that oil production itself will change and this is over a span of several years at least 5 or so or about 1% decline a year in oil usage or 250kbd
Say its 2% per year then its 500kb.
I'm suggesting that it would take 5 years for wages and home prices to roll back to 1982 levels. So our Depression without including oil would bottom out in five years.
Using the export land model no way this is going to beat the natural decline in oil we expect.
Spiraling oil prices will in may opinion certainly force us much further down over the next 5 years or so.
Memmel,
As far as home prices vary over long term, need to consider demand; rising population smaller family sizes= larger potential demand. Affordability; interest rate x house price( =payments on a 30 year loan)/family income.
Homes became affordable at $200,000 prices with interest rates of 2-3%(subprime rate in 2004) but not at 6%(2008) and will become very affordable at 1% interest rates.
How do recessions end? When real interest rates decline faster than wages decline.
Recessions also cause deflation, so initially real interest rates rise, this is whats happening at present, eventually interest rates will be less than inflation, and again home ownership will be cheaper than renting.
Central governments can both lower interest rates and inflate the economy, it just takes time like turning an oil tanker.
It seems Obama is going one step further, by allowing existing mortgage interest rates to be re-set down( a reverse sub-prime), will buy time while economy is turning around.
I think your completely missing the real problem its not loans that are the issue but when a home value drops below the loan value. As you saw in the bubble itself as long as home values are rising then affordability is easy. Technically despite the long term issues with the various subprime loans they where actually affordable loans until the bubble popped.
The problem is most people simply cannot afford the risk of a house dropping 5-10% in value if they have a 3% down loan which are the ones the government is pushing at the moment. Once they go negative they face a stark set of choices since they don't have the money to cover the loss. You can play games with affordibility all day long and give out all kinds of loans but your default rates are going to be high and thus your foreclosure rates will be high. This can and will drive down home prices.
The only way out of course is to push the price risk back onto the borrower not the bank this means large downpayments 20%+ and values themselves dropping till the risk is minimized. People can deal with a less than 10k difference in value.
Now 200k requires a downpayment of 40k to meet the 20% down requirment and push the risk of declining home prices back on to the buyer and thus slow the foreclosure rate.
How many people today have 40k in the bank and are buying homes ? How many have 40k in equity so they can profit from the sale of a house and use that as the downpayment ?
I'd suggest not very many given the US savings rate.
At what price point is the risk finally offloaded onto the average American ? Well in 4-5 years I'd suggest that more people will have closer to 10k in the bank then not assuming nothing else happens. So just looking at housing alone assuming that it adjust to offload some risk onto the buyer one can see that we are talking about median housing prices in the 100-150k range.
Thus the decline in house prices on the way down is controlled by the foreclosure rate not nominal affordibility calculations and this is controlled by the amount someone pays down on a house. With a high enough downpayment if you look at the way loans amortize you see that after about 10 years with a large downpayment and building equity that any realistic decline in housing values esp once they reach the 3X income mark which for the US at a median household income of 50k is 150k that the risk is no longer on the banks but on the homeowner so foreclosure rates finally decline.
Rents work differently in that they follow both real income and the supply. Given that the supply of rentals is increasing and that people on average are facing declining wages we can expect rents to fall. During the first depression they effectively fell to zero in many places as owners choose to keep someone living on the property in exchange for sporadic rent payments or iou's vs leaving it empty. And of course you have people doubling up etc to reduce housing costs living with parents etc. So even without our current oversupply of housing we need less during deep recessions depressions.
And last not least as a long time renter I assure you that you don't rent exactly the same house you would buy in general you rent a cheaper one so you can save for a downpayment. Very few people rent at the level they wish to purchase at choosing cheaper homes to increase savings.
Now of course in my longer post if you include peak oil and spiraling food/energy prices and rising unemployment in the 10-20% range you get my conclusion that the bottom if you will is with a median household income retracting to about 30k from 50k and median housing prices in the 60k-100k range.
The low end of 60k requires a downpayment of 12k for example to hit 20% which is getting into range. For new home owners assuming down payments of 10% for example you get 100k.
The assertion is that you have to get fairly large downpayments to prevent foreclosures and thats all that will stop the slide in housing cheap loans with small downpayments do nothing to stop the slide. Or government is actually trying this right now and I'm certain you will see the default rates on loans made in 2008, 2009, 2010, 2011 remain at levels similar to today.
memmel,
"Technically despite the long term issues with the various subprime loans they where actually affordable loans until the bubble popped."
It was the re-setting of subprime loans taken out after 2003 at 2-3% interest rates, being re-set at 7-10% rates that precipitated the "banking crisis" originally called the "subprime crisis". Banks started loosing billions not because a few subprime loans went into default, but because they had to write off ALL subprime loans because others thought they would all default as re-set occurred.
Most people who have purchased a house before 2004 will still have equity even with a mortgage. Other cities in the past have had 50% declines in house prices, the economy doesn't collapse because most people only have "paper losses of paper gains" and sit tight. In US 30% of households do not have mortgages. Most younger families borrow a down payment from parents or grand parents( unless used subprime loans). families are reluctant to abandon a house even if negative equity because owning a home is the number one dream. Cut back everything else first( thus less spending).
Savings rate excludes home equity , pension plans, other real estate, shares.
In previous recessions in US from your graph wages decline 5-10%. This is probably due to reduced overtime, reduced hours of work. Possibly this recession will have larger wage declines but the US government seems to be trying to prevent deflation of wages and prices(especially house prices).
Its true what you say about renters, but nothing worse to be retired on a fixed income renting, during a high inflation era, you have almost no control. On the other hand, retired with owning a house, other costs are smaller, can cut back most expenses except medical? if you live in US.
Best of luck on continued renting, and no future inflation. It might be worth picking up a trailer home just in case. Where are those millions of foreclosed families going to live?, who are they going to rent from?
Look nothing is wrong with home ownership i.e real home ownership.
All I'm saying is that you can't run the scheme we have for the last 40 years as we head into a depression. It simply does not work. The risk has to be moved to the home buyer they have to put cash down and take the risk off the banks the banks obviously can't absorb the foreclosure risk.
All I'm saying is that depending on the various scenarios' the price points at which the risk can finally be absorbed by the typical American are much lower than today. Throw in the effects of peak oil and you have a relentless downward pressure on home prices.
Housing prices are set by the price homes sell at in transactions. Unrealized losses or gains are just that unrealized. Unless you take a HELOC out on your house then its value is not important. But the housing market is driven by people who have/want to buy and sell discussing people not in the market to buy or sell a house is irrelevant.
The fact that 30% of homes have no mortgage is not relevant to future prices. These people could give their homes away if they wanted to be out from under the expense.
http://money.cnn.com/2009/03/05/real_estate/record_delinquency_rates/?po...
Now which of these numbers has a bigger impact on the Mortgage market the 30% that own their homes and have not plans to sell or the 11% of the 70% of the total thats in deep trouble ?
Another market oil is the 50-60 mbpd of oil that every model shows we will pump for some time important or is it the last 15mbd ?
Back to housing the issue is not the financial position of the sellers if they own their homes or have small mortgages its about if the buyer is really able to purchase the home or if he is going to become a foreclosure at some later date simply driving down housing prices more.
For oil its like discussing the financial shape of say Saudi Arabia it not that important its important what the buyer can afford.
And last but not least looking at the stock market one has to wonder how much money the parents actually have to loan to the kids esp given most are entering retirement.
Eventually sure housing will bottom out the question is will it bottom out because
Or because housing prices have fallen to the point a young family can actually afford the house without extreme financial risk.
Given where we seem to be going i.e a decades long decline of some sort I'd suggest that the bottom wherever it is at is when people no longer have to take financial risk. This is of course because everyone that took risks have been wiped out.
Add in all the other financial issues peak oil etc etc and risk takers are going to get burned for a very long time.
I agree that down payments have to go up.
I don't think banks had any kind of clue what kind of risk they were taking. (After all, housing values go up forever, just like the stock market, don't the?)
Memmel,
thanks for your insightful posting.
In one of the links I found another graph even more impressive:
Here the bubble pattern is even more striking, but obviously none of the bankers had the idea of looking back on history.
(The only "good news" I see from this pattern: Perhaps we are already half-way through the descent.)
BTW:
In Germany, if you have a mortgage of say 1 Million this stays 1 Million, independent of the value of your house. And if things go wrong you have to pay to the bank for the rest of your life. So the homeowner bears the real-estate risk, not the bank.
Is it true that in contrast in the US (or was it the UK?) bank mortgages are only based on the real estate, so homeowners could simply give the (devaluated) house to the bank and then "walk away" free of debt??
This is the stunning information I found recently:
If this practice is (or was) common in the US (and the UK) then the banks must have been incredibly light-headed to have taken this risk without having a closer look at the real-estate market. It looks as if they got smashed by their own mousetrap.
I'd suggest that these bankers should get a "negative salary" for the damage they produced instead of the generous salary they get now.
Thanks for all the links and information.
I would agree there is a long ways to roll back. If we suddenly (or even not so suddenly) start losing imports, the situation will be much worse.
The increase in household income was to a significant extent because of the rise of two-wage families. The wage system has been sucking more and more into it (men, then wives, then overseas workers) to get wages down. Overall return on person worked seems to have gone down.
A fractional reserve system doesn't necessarily imply that debt explodes until it is unmanageable. Where is inflation in all of this? As the money supply increases, price levels rise as well, which includes wages and revenues. A substantial portion of the increase in debt over time is inflationary in nature, and as a consequence is manageable. Furthermore, old loans are paid off and new loans are made, allowing for an ongoing stock of debt. Economic growth relates mostly to what kind of real interest rate can be tolerated. And as far as I know, fractional reserve banking and commodity backed currency are not incompatible.
My understanding with the credit crisis is that instead of having general inflation result from expansionary monetary policy, financial innovation resulted in inflation being limited to a set of assets, including housing. Since wages were not rising at the same rate, the debt load did become unmanageable.
In that narrative, I'm not really sure that role Peak Oil has any substantive role in explaining the crisis. 20 percent per annum increases in housing prices are not sustainable even with forty dollar a barrel oil.
Gail,
You're confusing the monetary base with money. A gold standard ties the value of the currency to a specified volume of gold. A fractional banking system can exist simultaneously, and since both chequing accounts and currency in circulation are money, even with a gold standard the commercial banking system continues to create money.
The problem is that for lenders to keep lending, the real interest rate has to be greater than 0%. This means that if the inflation rate is 20%, the interest rate you are charged will be 23% or 24% or something like that. It is the excess part that is so hard to pay back without growth.
It's not clear to me that the absence of aggregate growth precludes a positive interest rate. The fact that my income is not growing doesn't necessarily prevent me for being able to take a loan and repay the principle with interest later. The question is whether the level of debt is manageable. Even if my income is shrinking, I may be able to manage the repayment if the levels of debt are prudent.
It's also not clear that fractional banking by itself necessarily leads to unmanageable debt loads. That depends in large part on the lending practices of banks and the regulatory regime. I don't see why the gold standard would prevent the creation of unmanageable debt, since there is no fixed relationship between the monetary base and the money supply. A lower reserve ratio with fixed monetary base results in a larger stock of money.
My point with a debt expansion is in fact the opposite of the claim that the nominal interests rate will adjust. It seems to me that the classical theory of inflation implies a sudden surge in debt creation will cause the money supply to expand, increasing the rate of inflation temporarily. If this is not anticipated and interest rates do not automatically adjust for inflation, outstanding debts will decrease in real terms, since the interest rate was established prior to the the surge.
Collectively, for society, what I am saying is true. There will always be a few individuals which can repay their loans, even when general conditions are bad.
I am fascinated by the intelligent, informed posts on TOD, it's hands down the best energy website I have seen. In regard to this thread, though, I'm inclined to believe that, while we are quite able to predict the apocalypse of the near future, we are completely unable to predict what happens next. There is a tendency to spin a "Lord of the Flies" scenario, in which man, left to his own devices in the anarchy of the post-apocalyptic world, reverts to his "true nature" which is assumed to be that of a cannibalistic sociopath. Perhaps I am a pollyanna but in my naivete I actually have a higher opinion of mankind than that. I am 49 years old now and, looking around, I see the world deep in an unprecedented crisis with no forseeable escape. On the other hand, it is a useful exercise to try and put myself in the mindset of my parents who were in their mid-forties in 1968. I was eight years old at the time and I perceived the world as a wondrous, beautiful place. No doubt, my parents were more aware than I that the world was in a state of chaos. Our country was mired in a disastrous war that makes Iraq look like a cakewalk, my older brother was soon to register for the draft, a beloved President had been assassinated, as had his brother who would probably have become President as well. The Civil Rights movement was fighting an uphill battle at best, and its most beloved leader had been martyred. Major cities were a war zone of racial violence, and at some point, I can't exactly remember when, a confrontation between National Guardsmen and undergraduate war protesters at Kent State University culminated in a massacre. When I look back in time, I see what must have looked like the Apocalypse from my parents' viewpoint. Of course, even 1968 pales in comparison to the wars and economic crises which occurred during the previous century which, starting with the American Civil War, included two huge World wars with massive loss of life, the Great Depression, and ongoing racial violence threatening to rend the fabric of American society to pieces. The '60s also brought the greatest fear of all, the perceived threat of nuclear annihilation at the hands of our monolithic archenemy, the Soviet Union. Yet, after each crisis, America continued to grow, each time evolving into something new that Americans could not have imagined a decade earlier. The year after 1968, American astronauts walked on the moon. Other numerous crises followed, the oil crisis of the '70's, numerous recessions, the shock of seeing shoddy American products being surpassed by the Japanese, the Y2K "apocalypse" ;) and of course 9/11.
My point here is that near-apocalyptic scenarios are certain to occur, as they always have throughout history, but what we are usually unable to grasp is that society evolves with the passing of each crisis and almost always for the better. Racism remains alive and well in America, but even in the deep South, outright genocide is no longer considered acceptable in most social circles, as it once was.
America is actually a much better place than it was in 1968. None of us has any idea what America will look like in 2048. We will probably have less oil, and what we have will be very expensive. But we will almost certainly have a different technology and a different economy than anything we have been able to imagine thus far. Remember where we came from, folks!
After posting my previous comments I stumbled across this article. Here's one example of a game-changing technology that I couldn't have possibly imagined but has the potential to revolutionize our energy future. Check out the "liquid battery":
http://www.technologyreview.com/read_article.aspx?ch=specialsections&sc=...
The battery looks interesting:
This looks like something to be used for large scale installations. The article talks about hoping to have a commercial version available within five years.
The problem is that all of these things take time, and a lot of them don't work out as planned. If we had stumbled across this 30 years ago, it would make a lot more difference to our world today.
Hi, richhav1. I started where you are now and over time discovered that this topic of Peak Oil and Energy Descent just gets worse the more you look into it.
Keep thinking about how to support the 6.7 billion people currently on the planet while the life-sustaining energy is taken away and the economy collapses (the economy is directly correlated with oil use). I think you'll eventually see that this particular crisis is:
a) inescapable (unlike the ones you mentioned above) and
b) will bring an unprecedented degree of social upheaval.
Using your 40 year spans, one notes that the technological advancement from 1928 USA to 1968 USA was incredible (although not as great as 1888 to 1928). The advancement since 1968 pales in comparison, one of the reasons why technological forecasts for 2009 made in 1968 were wildly optimistic. America is no longer an industrial economy and there is no evidence that a financial economy can support a country of 300 million over a long term-the scams are already imploding all around.
Brian T -- I think you have a good point about America's financial limitations. Technological advancement isn't just about having good ideas, it is necessary to have the capital or the credit to implement them. This is why "peak credit" is really the problem, even more so than "peak oil". Entrepreneurs will have the ideas which can potentially help us, but without any available credit it will be difficult to put their ideas into use. My key point was that it is easier to predict crises and chaos, which invariably occur, than it is to predict the visions of the future which may appear in the mind of an individual innovator. If we could predict future technological innovations, we would all be geniuses. From my point of view, I humbly admit I am completely unable to predict the future.
Inspired by Richhav1´s optimistic posting, I also state my concern that sometimes there is a bit too gloomy consensus developing on the sites like TOD. I think it is a natural tendency of likeminded people to encourage each other. I admit I´m pretty frightened about the future, I read Richard Heinberg´s works some 5 years ago, it is not a nice road ahead, probably. This post began with a collapse scenario, oil production going to 20Mbd in a few years - well maybe - but I would say anyway low probability. If things get pretty bad I think governments will take over and introduce kind of command economy which keeps up the basic necessities.
The global energy supply seems soon to be on declining path, but as someone noted, the decline may be smooth as well. And after all, think how much less is really needed to support our basic necessities than what we westerners are consuming now. With some optimism one can think that a really sustainable technical culture is possible to emerge during the smooth decline of fossil based culture. "The problem" is abrupt drops of social/economic functions which may result "lost nerves". Even the eternal Rome declined, and faded away, but a completely new form of society emerged, the Christians that had been living in isolated communities, and when everything around dwindled away they gradually took over.
I have entertained myself with pondering what are the elements of current technical culture that remain to the next historical period. The Internet? Windmills? Hydropower quite sure. Television? Newspapers certainly. Water towers and piping? Bicycles? Sailships? Do harvesters run with biofuel or electicity? Or by real horsepower?
Somewhere on the web is that cool Google interview with William Catton, author of Overshoot. It's kind of frustrating to watch it because one expects him to personally project, at least to a greater extent, the direness expressed (so well and bitingly) in the book.
Instead, he is genial, in a familial, older way, and he even cautions against not ultimately enjoying life and family despite the dark beliefs of his that you may share (quite realistically). And isn't that where one sits with respect to Gail's post? One needs to continuously and starkly visualize the worst that can happen, so as to enjoy, seemingly fortuitously, overall circumstances (even economic conditions) that may yet be satisfactory and liveable.
At the least, I'm carefully tucking away into a convenient and admiring mental recess my exposure to the comments of exemplars such as Gail and Stoneleigh as I go about maxxing the business day.
So much tip-toeing around the 800 pound gorilla. I remember in 2005 and 2006 when the cornucopians authoritatively asserted that a housing bubble collapse could not happen here and that all would turn out better. So much for that line of BS, eh? Stoneleigh and Ilargi were right and those fools were wrong. Yet those same cornucopians continue to sound like quants - asserting that certain scenarios just cannot happen and therefore we should not discuss or even prepare for their occurrence. After all, what is it worth to prepare for a 1% likelihood event, right? Right?
Balderdash.
Unfortunately TOD has never been hospitable to being open to discussing the negative possibilities ahead of us in anything other than the most handwaving vague fashion. Indeed, I've even had people tell me TOD would be "shut down" if it dared to discuss such issues (an assertion I find more than a bit preposterous). So those of you who think the future looks bleaker than brighter would be well advised to seek your answers elsewhere. TOD is simply going to post numbers, document the decline in oil flows, and hint at the negative possibilities in front of us. There will be no in depth discussions of anything other than the most politically correct actions that the nanny state might allow you to take.
If you want even a small taste of our possible immediate future, try reading Lessons from Argentina's Economic Collapse (PDF). And that is just the beginning of where we might go. Argentina, even as a failed state, was held up from a full fall into the abyss by the states around it. If the entire world goes under, who is going to hold up the world?
I also have to laugh at the evangelists who preach a return to hunter-gatherer roots but yet refuse to discuss any of the nitty-gritty of how to get from here to there in one piece. I'd mention what some Native Americans I know are doing in preparation for the crap hitting the fan but it would be politically incorrect to post here on TOD.
In short, if you seek answers to the bleaker questions, TOD does not and never has appeared to be willing to host such discussions at anything other than the most abstract levels. Look elsewhere.
I think our content changes a little over time.
One issue with our posts is that we have to allow people to stand back and look at dire forecasts from sort of a distance, otherwise it gets too threatening. We can talk about a possibility of a scenario happening, but if we said we expect something dire was to happen next week, we would get people too upset. When we have tried a few posts that were not from a distance, the comment thread simply turned into a huge number of Cornucopians saying in one way or another, "That can't happen."
Let me look at your Argentina's Economic Collapse post. I had a friend whose parents lived in Argentina at the time, so heard a small amount about the situation.
Umm. This post here outlines drop to 20-30 mbpd. And I don't think it was handwaving. Perhaps you should look at the articles here over the past few months -I would say they explore negative possibilities, from a birdseye view, quite often.
But what are the consequences? What are the consequences to you, personally? How might you respond? How might others respond? Those are the direct and personal aspects of this mess that TOD dances around, ignoring the 800 pound gorilla in the room. Are you doing anything practical with this data other than armchair arguing? Or is this all just internet noise to you?
In pursuit of the one tonne CO2 lifestyle, we already consume one-quarter or less of the fossil fuels, water, meat and so on of the average Western household.
I imagine the consequences of peak oil will be that everyone is forced to live the lifestyle we're living by choice. It'll be a shock to some, but no change for us.
And again, this article isn't data. It's speculation.
And if Iran dropped a nuclear weapon on three US carrier battlegroups in the Strait of Hormuz, the world would be a very different place in a very short time.
But how likely is it?
Purely speculative scenarios are fun, but not very useful. We need scenarios which are based on things which might reasonably be expected to happen.
It may be that it's reasonable to expect oil production to not be symmetric in its decline. But you've not shown that in this article, you've just said, "imagine if something terrible happened! wouldn't it be terrible?!" Yes, it would be. But is it reasonably likely?
A valid point Kiashu. But then again how many US citizens expected the Japaneses to attack Pearl Harbor when their military leaders gained power after we embargoed oil to their country. The unimaginable (read: 9/11) is always unimaginable...until it happens.
The specifics of the attack were not imaginable, but that war with Japan was coming was widely-felt by people.
Likewise with the financial crisis, nobody predicted that AIG specifically would keel over, but they did predict that the CDOs would cause problems, killing some institutions and bringing about a general financial crisis.
Likewise with climate change, it was predicted that the Arctic sea ice would decline, we just didn't know how much how soon.
So what we see is that with these kinds of global things, people can clearly see the global trends, they just can't predict the exact details.
Thus, while someone might not be able to tell us that oil production will be (say) 33.4 million barrels/day in 2015, they can say it'll be less than it is now, and they can with facts build a reasonable case for whether it'll be a smooth or steep decline.
Gail's not presented a case for its being a steep decline, she's presented no evidence either way. She's just said, "what if?" Yes, it might happen. But anything might happen.
K.I.S.S.
There is nothing, absolutely nothing, that is a positive indicator as of now.
Who has their hand on the brake, and what *is* the break? Hell, I think you can make a fair argument for steep decline based on this point alone. If there's nothing to stop it, what possibly can?
Cheers
I find it hard to believe you've no knowledge of Taleb and Mandelbrot (Chaos).
Puzzling.
The reasonably expected is exactly what is absolutely NOT going to be the case this time around. There are too many parameters way off the beaten track. Heck, the reasonably expected would BE the Black Swan. Er... White Swan?
Cheers
Nice scenario, Gail. The good news here is that this scenario guarantees most countries will achieve their Kyoto targets, whether they intend to or not. It is my guess that the longer western governments continue to use Global Warming/Climate Change as a "red herring" proxy for dealing with Peak Oil, rather than simply being straight up with the public, the more likely your scenario will play out as described above. It's a gruesome possibility, but definity viable.
I guess you never heard of,
- coal
- natural gas
- deforestation
- livestock
- agriculture
It seems like it was Europe (and maybe Japan) that came up with Global Warming/ Climate Change as a proxy for peak oil.
That works in Europe, since they use a lot of oil and gas(from oil fields), but not coal. Whatever happens to coal is not much of an issue, since coal is relatively small and mostly imported.
In the US, coal is much more important, and the issue is different.
Favorite Yogi Berra Quote:
"It's tough to make predictions, especially about the future."
Yogi was right, especially because our predictions are based entirely upon our assumptions, which are notoriously flawed.
Just as an example, let's entertain the possibility that methane is not a "fossil fuel" in the same sense that oil is (please hold your fire). Many people posting on these websites speak of "peak natural gas" in the same context as peak oil. They are making the assumption that methane will be in limited supply within our lifetime in the same way oil is. And yet, where there are deep vents in the ocean floor there are large quantities of methane bubbling up from deep in the earth's crust or being deposited as methane clathrates. Biogenic methane is also produced in large quantities wherever a swamp or pond exists with organic matter decaying in an anoxic environment. Recovering it, of course, is the challenge. If "peak natural gas" is a true assumption, it is not because there will be no gas, but because it is not recoverable from the economic standpoint. Don't be surprised, though, because somebody will figure out how to do it. So, call me nuts, I believe many of our predictions are based on assumptions that are patently false. I believe, but cannot prove, that peak natural gas is a false assumption.
By the way, my pollyannish hopes are also pinned on nuclear power and space-based solar!
Just a little thing like that.
I recommend you read the letter to their grandchildren that Stewart and Lee Udall wrote. Here is an excerpt:
Note the bits about technological optimism.
A message to our grandchildren
http://www.mlui.org/landwater/fullarticle.asp?fileid=17122
Recovering it, of course, is the challenge.
aangel writes, "Just a little thing like that."
I certainly didn't mean to make the assumption that it was a "little thing" with easy answers, but you are working on the questionable assumption that it can't be done. But do you know that for sure? I certainly don't. BTW, thanks for the wonderful letter written by Mr. Udall.
I agree 100%. Especially with the need for our society to drastically change our use of energy and completely revamp our expectations regarding the american "standard of living". Clearly we need to be living a life that is much simpler and closer to the land. Clearly surburban life as we know it will soon be a thing of the past, with it's wasteful use of energy, water and land. My point really is, though, when our current way of life has completely crumbled, what next? We will still have sources of energy which we will need to use much more wisely and conservatively, we will still have communities of people living together. I suspect those communities will be smaller so that people will be able to live closer to the sources of their food and fuel, much of which will be grown locally. What will our society really look like? I don't know, can't predict it. But will it be a bad thing or a good thing? We may find ourselves in a violent Malthusian disaster with anarchy as the law of the land. Maybe we'll find ourselves living in small villages with modest means but a renewed sense of community, producing our food and fuel on a local level. And, yes, technology will still play a role. What sort of technology? I don't know, can't predict it. I personally won't mourn the demise of the suburban lifestyle, from the moral and spiritual perspective it went bankrupt long ago. I don't know what the future will look like and neither do any of us.
By the way, I'm curious to know if any of you are starting to stock up on weapons and canned goods, and build fall-out shelters like we did in the early 60's? Now, that was a great use of our limited resources! I suppose some of those shelters were recycled as root cellars, so it may not have been all for naught!
The question is risk management. Can you prove that your belief is true and how the future will unfold? If you can't then you have possibilities that must be evaluated. Failing first to even evaluate them means you would be irresponsible. Having evaluated and finding any of them to be even remotely possible and then not responding to potential risks would mark you as deranged and suicidal.
Of course, most of the species is suicidal and deranged at this point, something that cannot be avoided under the circumstances.
Remember...
(There's much more to this list but there's little point in extending it because most readers simply won't accept it.)
In short, humanity is living in a completely abnormal situation that most of humanity believes is "normal". Further, because of this delusion, most people expect "normal" to continue unabated, uninterrupted, without possibility of something other becoming the new "normal". In other words, most people are completely mad as a hatter. And yet they think that they can divine the future and that magic will somehow save them, if they believe hard enough, if they click their heels three times, if they wish upon a star.
People like that are why I remain a "doomer". No response that even begins to approach being described as "rational" is possible while insanity rules the day. People like that are exactly why people like Bush and now Obama are running the show, stuck in the same tired old vision because Bush, Obama, and other elected leaders can't even envision anything outside their definition of "normal".
Your oil production collapse chart is potentially a chart of hyperdeflation - the price of everything on the planet crashes against oil. Or, it could be seen as a chart of hyperinflation of oil (same price relationship to every asset on the planet.)
As I remarked upthread: normal recessions are disinflationary as the financial structure remains intact, and spare capacity remains available. But in a collapse, as such we're experiencing now, spare capacity is destroyed. Choose any spare capacity you like. All the labor, credit, and management required to run it is destroyed. It's destroyed behaviorally, as the future gets canceled and then economic activity positions itself for such a future.
The difference between this collapse and the 1930's is ratio of global population to resources. The population is very likely inflated beyond carrying capacity, and even as we severely downshift our demand, we can't downshift it enough to outrun the price/incentive levels that were already creating risk in supply.
"150 oil" probably understated the price high of 2008. That was a price, potentially, that still reflected an over-valuation of the USD's purchasing power to oil.
The petite deflation since July 2008 is very likely a short-run attempt of behavior in the economic system to "return home" to the post-war paradigm. We currently of course have deflation against the USD of all asset prices on the planet. It's important to remember this is behavioral. It's not structural, it's not inevitable, and it's not science.
Great post.