Systemic Risk Arising from a Financial System that Requires Growth in a World with Limited Oil Supply
Posted by Gail the Actuary on September 21, 2010 - 10:45am
I received an e-mail from an actuarial group ( Joint Risk Management Section of the Society of Actuaries (SOA), the Casualty Actuarial Society (CAS), and the Canadian Institute of Actuaries (CIA) in collaboration with the SOA Investment Section, the International Network of Actuaries in Risk Management ("IN-ARM") and the Enterprise Risk Management Institute International ("ERM-II")) asking for essays relating to "Systemic Risk, Financial Reform, and Moving forward from the Financial Crisis."
Below the fold is the essay I submitted. It is called, "Systemic Risk Arising from a Financial System that Requires Growth in a World with Limited Oil Supply". Essays were limited to 1,500 words. The group calling for essays is made up of people who for the most part know very little about peak oil, or about oil in general. It is likely that actuaries who will eventually read the essays will be equally unknowledgeable. So the challenge was to describe the nature of the problem, starting from a knowledge level of close to zero, in as few words as possible.
The point I try to make in the essay is that the financial system requires economic growth, but oil supply seems to be flat, or even declining in the not too distant future. Because of the many benefits oil provides, this loss can be expected to constrain economic growth. If the economic system cannot grow, there are likely to be widespread debt defaults and other problems similar to the 2008 crisis. These problems can be expected to affect all types of financial institutions, including insurance companies.
Systemic Risk Arising from a Financial System that Requires Growth
in a World with Limited Oil Supply
In July of this year, Lloyds of London issued a white paper on the risks of peak oil, noting that we are headed toward a global supply crunch.1 In September, 2010, a paper was published in Energy Policy called “Global oil depletion: A review of the evidence.”2 It concludes, “A peak of conventional oil production before 2030 appears likely, and there is a significant risk of a peak in oil production before 2020.” In other words, the world’s conventional oil production may start declining in not too many years.
It seems to me that if we are in fact reaching limits with respect to oil supply, this should be of considerable concern. We have a financial system that demands economic growth, for reasons that will be discussed later in this paper. At the same time, as we approach limits with respect to oil production, the ability of the world’s economy to grow becomes constrained, because in order for economic growth to occur, we will need to do more and more, with less and less oil.
The conflict of these two forces – a need for economic growth in a world that can no longer provide growing oil supply – sets the financial system up for a systemic risk of collapse. Furthermore, there is significant evidence that the financial problems of 2008 were early signs of this systemic risk affecting the financial system. If oil supply should actually begin to decline in the future, we can expect financial problems of 2008 to return and worsen.
Oil’s Connection to the Economy
Oil is used for a huge number of purposes—transportation fuel, heating fuel, fuel for extracting minerals of all types, lubricant, and raw material for asphalt for road paving, plastics, synthetic cloth, medicines, fertilizer, pesticides, and herbicides, to name a few things. A declining oil supply, or even a level supply, should be a serious concern, with the world’s rising population.
In recent years, there have been many attempts to try to find substitutes for oil, but with very limited success. Ethanol from corn has probably been the biggest success, but in 2009, its use in the US amounted to only 660,000 barrels a day3, compared to total consumption of oil products of 18.8 million barrels a day4, or 3.5% of the total. Raising this percentage is proving difficult for several reasons: manufacturers’ warranties only permit the use of 10% ethanol in gasoline; ethanol tends to be more expensive than gasoline without subsides; and there are relatively few stations offering E-85 gasoline.
Other so-called replacements for oil are only very partial replacements, and are still very far away from being full-scale solutions. Biofuel from algae is being investigated, but it is still very expensive, and not yet scalable. Electric cars are being developed, but they still are many years from being ready to replace our huge fleet of cars with internal combustion engines.
It should noted that the problem with oil supply is really an economic one. There is a huge amount of oil theoretically available—in the oil sands in Canada, for example, and in the oil shale in the US west, and perhaps in the Middle East. But in order for this oil to be available now, huge investments would need to have been made starting at least 10 years ago. Also, in order to justify this investment, the cost of the finished oil products would need to be very high—high relative to the energy required to extract the oil, and high relative to people’s salaries. At some point, limits are reached in the amount people can afford to pay for oil, and we may already approaching those limits.5
Timing
Many observers would like us to believe that limits on oil and other resources are still a long way off, but this is not really true. World crude oil production has already stopped rising. Oil production has been essentially flat from 2005 to 2010,6 meaning that more and more cars and trucks must compete for the same fuel supply.
Impacts
While crude oil supply has not yet begun declining, it had been essentially flat since 2005, and this lack of growth is putting tremendous pressure on the world’s financial system, since we now must do more and more with essentially the same oil supply. Oil prices have risen, and this is one source of financial problems, because higher oil prices have a disruptive impact on balance of payments, and can also cause a reduction in profits of companies.
But higher oil prices can also lead to recession and debt defaults. High oil prices don’t give ordinary citizens more salary to spend, so they have to cut back on something else. One possibility is a cutback in discretionary spending, which will tend to lead to recession. If the cutback is in buying new homes, the price of new homes can be expected to drop. James Hamilton wrote a paper called, “Causes and Consequences of the Oil Shock of 2007-2008” showing that the run up in oil prices in the years prior to 2008 was sufficient to cause the major recession we have recently experienced.9
If oil prices rise, they may also cause debt defaults. This occurs because people’s salaries don’t rise correspondingly, so they need to cut back somewhere, and some will default on debts. Businesses may also be more at risk of debt defaults, if their cash flow is declining. The lower values of homes may also play a role in increasing defaults.
While one cannot prove that the aforementioned problems were the only causes of the financial crisis of 2008, there is certainly a strong similarity between the expected problems and the types of problems we have recently seen.
It should be noted, too, that a seeming over-supply of oil should not be surprising. As higher prices give rise to recession, this causes a cutback in demand. Reduction in credit availability also tends to reduce demand. So the oil available may be more expensive than what individuals and businesses can afford. If the oil available were cheaper, the oversupply would disappear.
Economic System’s Need for Growth
Our current economic system includes a huge amount of debt. Money is loaned into existence. Debt is used to finance many business expansions. Governments rely heavily on debt.
The US economy has been growing for many years, with only brief interruptions, so nearly all of our experience with borrowing money, and paying it back with interest, has been during periods of economic growth.
Borrowing from the future is relatively easy when the economy is growing, because when the time comes to pay back the debt, the debtor’s economic condition is likely to be as good as it was when the loan was taken out, and may even be better. So defaults are relatively uncommon, and the growth in the economy between the time the loan was taken out and the time it is repaid provides some contribution toward the interest payments.
But what if we start encountering a very different kind of world, one with a decline in oil supplies? If oil resources constrain economic growth, debt defaults can be expected to rise, and the whole debt system underlying our financial system is at risk. Insurance companies are very much at risk too, because many of their assets are bonds. In the past, these bonds would have been repaid with interest, but in a world with little economic growth, and perhaps economic decline, the risk of default becomes much higher.
Even if we should discover a way around our problems—say a new technology, which permits more oil extraction at lower cost, or a better substitute for oil, financial institutions--including insurance companies--are still likely to encounter substantial systemic risk related to debt defaults in the next few years.
Notes
1Lloyds of London, Sustainable Energy Security: Strategic risks and opportunities for business, Chatham House, London. http://www.chathamhouse.org.uk/files/16720_0610_froggatt_lahn.pdf
2S Sorrel, J Spiers, R Bentley, A Brandt, and R Miller, Global Oil Depletion: A review of the evidence, Energy Policy, Vol 38, Issue 9, 5209-5295.
3US Energy Information Administration, refiners inputs of ethanol, http://www.eia.gov/dnav/pet/pet_pnp_inpt_dc_nus_mbblpd_a.htm
4US Energy Information Administration, product supplied, http://www.eia.gov/dnav/pet/pet_cons_psup_dc_nus_mbblpd_a.htm
5David Murphy, “Further Evidence of the Influence of Energy on the US Economy”, The Oil Drum, April16, 2009. http://netenergy.theoildrum.com/node/5304
6US Energy Information Administration, International Petroleum Monthly, Crude and Condensate from Table 1.1d. http://www.eia.doe.gov/ipm/supply.html
7US Energy Information Administration, International Petroleum Monthly, Crude and Condensate from Tables 1.1d and 4.1d. http://www.eia.doe.gov/ipm/supply.html
8US Energy Information Administration, Cushing , OK WTI spot price FOB. http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=rwtc&f=a
9James Hamilton, Causes and Consequences of the Oil Shock of 2007-2008, Brookings Papers on Economic Activity, 2009. http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2...
Systemic Risk Arising from a Financial System that Requires Growth in a World with Limited Oil Supply
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Systemic Risk Arising from a Financial System that Requires Growth in a World with Limited Oil Supply
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Truly excellent essay Gail.
You present the situation in a way that newcomers can appreciate and invite them to consider the consequences rather than telling them exactly what they will be or how they will play out.
Here at TOD we don't always appreciate the effort you put in to communicating with professionals outside of science and engineering. And from the looks of it you are doing a fantastic job.
Regards,
Jon
There seem to be other actuaries following TOD, who send me e-mails alerting me to things I should respond to, and mentioning upcoming events. Someone sent me an e-mail about this, or I might have missed it.
I was asked by a TOD reader to submit a proposal for presentation at an actuarial conference next March in New Orleans. This was accepted, so I will be doing that as well.
Excellent essay, looks like Gail the Actuary was channeling M. King Hubbert himself.
Reaction of one of these unknowledgeable actuaries upon reading the essay...
Sheesh! What a doomer this Gail person must be, has she no faith in human ingenuity?! >;^)
That is a problem. I tried to bring in Lloyd's of London report, to give a little more credence that it wasn't just me. But it is a difficult view to overcome.
You could also reference the reports by the US Joint Forces Command and the German Ministry of Defense. I have also read references to a report by the US Army but I'm not sure that that isn't the report by Joint Forces Command.
I was running out of words.
Well, human ingenuity will have come into play in figuring out how to cope with a system designed for growth that has hit its limits.
You can't put a pint of beer in a 12 ounce glass.
Sure you can! Put 12 ounces in it, give it to me, I'll drink the 12 ounces hand you the empty glass, tell you put the remaining 4 ounces in my glass and to get few more pints because one pint ain't going to be enough >;^)
How ingenious!
American beer companies would simply define 12oz as a pint :(
NAOM
Actually, the redefinition is going to have to be in what kind of lifestyle is acceptable going on. The real problem is this pig-shit meme that "my children have to have a better life than I did", that was used to sell big houses, secondary education, and immigrant labor.
It's going to be a nasty job, but there are thousands of psychology manipulators studying cognitive science in the labs, studying how to tune and trim our opinion. There are peer-reviewed journals, costing $25/issue, about consumer psychology. I was reading one yesterday (the free, editorial section, asking for more and better papers.)
http://www.journals.uchicago.edu/toc/jcr/current
Human attitudes are mass attitudes and can be changed in a relative twinkling of Karl Rove's eye. Take the Tea Party, which is making Hitler look like an amateur.
Aren't consumer psychologist mostly trying to figure out how to convince people to consume even more so corps can make even more money from them?
Gail is a fear monger and has a very weak understanding of economics. She continues to attribute the last recession to rising oil prices and discounts the impact of the banking crisis. The banks made a lot of bad loans. No story about high oil prices is necessary to explain these loan writeoffs totalling over $2 trillion dollars. The real estate bubble and its subsequent collapse is why those loans will never be repaid.
There was no debt crisis in 1973 or 1980 despite a huge increase in oil prices.
Her case is very weak.
Moreover, the Apocalypse version of Peak Oil simply delays Peak Oil's acceptance by the mainstream.
Monolithic explanations of the business cycle (recessions are always caused by oil ...) are not convincing.
Gail is a fear monger and has a very weak understanding of economics
And who has a better "understanding" of economics? You?
Most economists have a weak understanding of economics. Why should Gail be any different? Most establishment economists are useless Pollyannas, spouting propaganda.
The current situation isn't 'either- or' it is 'this PLUS that'. Debt was a hedge against the effects of rising real energy costs on output. It also brought forward demand so as to continue inventory outflows: the ongoing challenge made by industrialization is the expansion of capacity relative to demand.
The effects of energy constraints on economies is well known and widely acknowledged. Efforts to mitigate these effects include conservation, increasing the efficiencies of both production and consumption and hedging. Hedges include currency unions, deregulation and wage suppression, lowering interest rates, creation of asset/debt 'bubbles' and unrestrained expansion of credit.
Countries that were unable to hedge against energy constraints such as the Soviet Union during the late 1980's ... collapsed as costs outran income.
Gail certainly understands that the finance economy has one foot in the real world that requires energy available at a price - that allows a profit. Not many economists acknowledge this which is why individuals outside the 'dismal science' such as the novelist James Howard Kunstler ascend in credibility while economists such as Ben Bernanke and Larry Summers fall on their faces.
Did I read that Summers is returning to the relative safety of academia?
Steve,
The point is that price of oil is not the sole factor driving the economy or causing business cycle fluctuations. People like yourself and Gail engage in monotheistic view of the world where 'God' has been relabeled 'Energy'.
The per capita economic growth of the 20th century was caused by multifactor productivity growth. It was Man's ability to improve the productivity of all inputs, including energy, labor, land, and capital, that was decisive.
Simply adding more energy input does make a country richer.
There are only two recessions where oil prices were the dominant factor: 73 and 80. The 82 recession was caused by the Fed pulling up the Feds Funds rate to historic level to kill inflationary expectations. The 2008 recession was triggered by the near collapse of the global banking system.
Monolithic explanations do not do justice to the facts. However, they do appeal to weak minds.
Roderick,
I asked you a simple question:
Is there a reason you have not answered the question?
No it wasn't. This statement is the perfect example as to why only those economists who are looking at the world through the prism of biophysical economics are the only ones who actually have any understanding of reality. The rest of the economists are no better than voodoo priests casting spells and studying goat entrails.
BTW, in physics, chemistry and biology 'Energy' is real, without it, nothing works, lives or grows... most certainly not any economy.
FMagyar, Thank you for pointing this out. A link to a video (in 8 parts) of Dr. Bartlett's teaching on exponential function, peak oil & coal, population growth, democracy and thinking. http://www.youtube.com/watch?v=F-QA2rkpBSY&p=6A1FD147A45EF50D&index=1
The basic math of compounding growth is all one needs to grasp... It was my bolt-of-lightning moment.
Cheers, Matt B
The per capita economic growth of the 20th century was caused by multifactor productivity growth. It was Man's ability to improve the productivity of all inputs, including energy, labor, land, and capital, that was decisive.
Think about human history.
What has supported technological development and increased wealth other the last few thousand years has been our ability to obtain and utilise new energy sources. We started off reliant on hunted and gathered food supplying the energy to our own muscles, then we developed agriculture, which gave us more food energy at a lesser cost (a higher EROI), then we utilised animal muscle, then wind to power ocean transport, then coal and in this century oil.
The foundation of developing civilisation has always been the ability to utilise ever richer sources of energy. The availability of that energy has enabled a diminishing fraction of the population to feed the rest of us. If farmers ability to fertiliser and harvest their crops was compromised by the removal their diesel supply, barring some alternative energy source (what alternative energy source??), the population could only be fed by replacing that energy with animal and human muscle, many more of us would have to become farmers again, that would have a flow on in reducing the brain power available to support other aspects of civilisation and without the energy from fossil fuels (or an alternative) people in those professions would also have their productivity greatly reduced.
Without high EROI energy supplies the whole lot unravels.
"they do appeal to weak minds"
Classic troll bait.
Acually, actuaries are a pretty smart bunch, so it must be the rest of us that you are referring to.
The growth in debt could be a substitution for real, productive growth which is now constrained by a lack of, wait for it, energy.
Back to square one, how to manage a growth challenged economy.
Which is what we're all trying to figure out how.
Somehow, my forecasts are holding up, but those of Larry Summers et al. are proving to be nonsense.
See Peak oil and the financial markets: A forecast for 2008 and Delusions of Finance: Where we are headed.
You got one forecast right (out of how many?) and now you claiming that constitutes evidence for your good judgement?
Have you ever heard of statistics? One observation does not carry a lot of weight.
Roubini also got one forecast right. And unfortunately, he's been wrong ever since ...
So you are completely unfazed in your confidence in economics by the fact that so very few economists saw the biggest downturn in economic activity since the Great Depression coming. Even "The Economist" magazine recognized this as a kind of crisis of confidence for the field. What rock have you been living under?
What rock have you been living under?
The rock that has him post about how Gail or Ugo sucks and keeps him deaf to others asking him straight forward questions.
You related to Glen?
Not to divert attention from Gail's astute topic . . .
. . . but I'm really tired of seeing this straw man dragged into discussions at every opportunity, no matter that the stuffing has been beaten out of it innumerable times:
* "Apocalypse" comes from the Greek apocalypsis. It means "unveiling" or "revelation." The term is reserved for biblical prophets who were (reputedly) vouchsafed a vision of the future from YHWH. There are no such prophets here. I, personally, have no truck whatsoever with persons who make glamorous and/or vivid predictions about future events. I prefer specific, scientific predictions--like about the approximate date oil extraction will max out globally.
* Apocalyptic visions are essentially messianic. All such biblical visions feature a "son of Man," or a "christos," coming on clouds of glory to restore Israel and usher in a new golden era. See Daniel and John the Revelator for details. That the current world will end is a mere signpost along the way. There are no such messianic visions here. In fact, the cornucopian economists and the technotopian visionaries are much, much more "apocalyptic" (i.e. messianic) than anyone on these boards.
* The world is not going to end. No mountain will be cast into the sea, no fire will rain from the skies. Even in the case of overshoot and die-back, the world will continue rotating merrily on.
Let me repeat that: the world is not going to end, no matter how hard you may wish for it.
@mikeB "Let me repeat that: the world is not going to end, no matter how hard you may wish for it."
You might consider this essay from a fairly knowledgeable source:
http://www.theamericanscholar.org/what-the-earth-knows/
Sorry if this has been discussed recently, no doubt it has. But I've been up in the hills for a while, cloud hidden, and just stumbled across it...
It does seem quite pertinent to this discussion.
Best to you all as always.
Panama, hope you can repost the link which didn't work for me.
This seems rather nitpicky. Context is everything. No one should be trotting out ideas of the end of the world in the style of some Biblical End of Days, but the idea that the Earth will keep turning and life will still exist on it is also entirely irrelevant to the situation at hand. The decimation of modern society and an ecological die-off of modern species (and mankind) most certainly would classify as a fairly important distinction here. To many, going from First World middle-class status to Third World ghetto status would fit the bill, and no amount of stating this isn't technically the end of reality will endear them to you either.
That's why I have the phrase, "no matter how hard you may wish for it."
This reply is rude and offensive. Several papers have been published linking the GFC to the 2008 spike in oil prices - at the very least as an important contributory factor. Mainstream economists, true to their faith based belief in the price mechanism, not only ignored the obvious links between oil production and the economy and the even more obvious problems in production since Q3, 2004, but failed to see the GFC until it hit them full in the face like a wet fish. I have zero respect for most economists that inhabit the corridors of government and corporate power. There are a few such as Herman Daly, Charles Hall, Jeff Rubin and Peter Schiff who I do respect; and I doubt they would criticise Gail in the way this offensive and shallow response did.
This is the standard economists response. Question the price mechanism and all of a sudden you don't understand. The faith based belief in the price mechanism is truly idiotic; and perhaps is even one of the foundations upon which this website is built. It ignores the countless cases of civilisational collapse that have occurred over the ages. Those peoples, as ingenious and clever as us; and most likely far more in tune with their environments, were not able to increase supply in the face of resource depletion, climate change, war, desease, counter productive cultural, religious and spiritual practices etc. Our knowledge and technology is obviously the greatest it has ever been, but so are our problems.
I have a lot of faith (to use your word) in the price mechanisms of the free market. I think where people go wrong is that, because it's the best system, they think it's the perfect system. In practice the market is only as good as the players in it, and those players, being human, can fall victim to ignorance - simply a lack of information - (and what are OPEC's true reserves anyway?) their own biases, rationalizing, blind greed and blind panic.
Governments typical response to problems that occur because of these human frailties is to regulate, to makes complex "safeguards" a subject Joseph Tainter likes to study.
So do I have faith in the price mechanism. But I also understand the concept of limits. Limits are not accepted by most mainstream economists. In other words there are goods that are vital where the supply of that good, or the utility it provides (substitution), cannot be increased because of price. In the case of energy a very broad understanding of energy is required to accept that. For oil the major components of that understanding include supply itself, the laws if thermodynamics, the concept of EROI and net energy among other things.
The price mechanism is hailed as a wonderful thing when it behaves as expected but as flawed when prices do something that is puzzling or not to your particular liking. The 2008 oil futures price was remarkable for its volatility and its inexplicable rise and fall. The mechanism was working fine, it was the information in the market that was not understood by all players that caused it to spike and then crash to $35. It didn't stay there long though, and has now recovered to an equilibrium point that appears reasonably stable for now. The price is a reflection of the available information which may not always be correct, but that is the judgement call that buyers and sellers have to make.
A peculiar vagueness once again entangles the discussion.
No one is ever precise about the subject that would seem to need it most in order to establish the veracity of the speakers.
I personally think that the economic world has been so long manipulated, in so many ways, that predicting price is like predicting the location of the ribbon in the center of a ten-way tug-of-war rope. Yeah, volume lowers price, unless there's price-fixing (32" LED TV's). Regulation increases cost, unless there's corporate regulatory capture (BP, anyone?).
The corporate golems, and their executives, have no concern for the conditions affecting the lower classes, now or then. Proof? Wars, to which their children rarely attend, diseases they don't get. Buddha's father tried to shield him. It won't work for them, either.
We're slaves, and they have overseers to buffer them from any empathyn they happened to have left. Until the pitchforks and torches come out.
/rant
+5
________________
But then again, remember this brother: In the land of the blind, the one-eyed man is a kook.
Saildog,
It's not rude at all. Fear mongering is what the Apocalypse Peak Oil movement is all about.
Gail has repeatedly treated oil as the primary cause of the business cycle when it is clear that business cycles are driven by many factors.
It strains credulity to ignore the $2 trillion hole punched in the global banking balance sheet. The debt defaults were guaranteed due to the lack of credit standards and the way the loans were structured.
No need to invoke gasoline prices to see why a crisis ensured.
By the way, you don't do your own credibility any good if you can't engage in a real argument and simply whine a like kid "I don't like economists'.
Roderick
Sorry, but I did find it rude. Energy is an enabling input - it is absolutely critical. Not just the availability of energy, but the availability of growing energy supply of the rights sorts and at the right price. The absence of growth in energy supplies will/does have impacts in our capital markets. I do not pretend to understand the linkages, they are very complex. The economy can get along fine without most commodities, there most likely is a substitute. The problem with energy is that there are no substitutes. My point on the faith based belief in the price mechanism is that in and of itself it will not necessarily lead to any more supply. Energy has to be constantly be procurable at a given (growing) rate in order for economic growth to occur under the current system.
The apocalyptic view is justified because we are reaching the limits of growth; and we have no idea about how to live in a steady state or declining economy. In addition our living arrangements, (particularly the US and Australia, where I live) have been built on the assumption that cheap energy will always be available. That is patently no longer true. We have huge investments to make in re-ordering our living arrangements just as our economies are faltering. In ecological terms we have exceeded the carrying capacity for humans on earth. I have no idea how the adjustment to the long term carrying capacity will play out, but I do have concerns for my kids lives.
It also strains credulity when Roderick fails to consider why all of that money went into real estate/housing investments leading up to 2008. The byzantine financial instruments known as derivatives helped to mask the fact that such investments were exceeding the value of underlying assets by unprecedented margins. But the root cause may have been the growing lack of attractive investment opportunities in traditional areas of the industrial economy. And the main problem with many such traditional investments has become their diminishing energy return on energy invested (ERoEI aka Net Energy) and manifestations thereof.
Saildog,
Show me where I invoked faith in market mechanisms. It's totally absent from my comments.
I believe like yourself in geological limits to natural resources like oil.
But I am sick and tired of monolithic explanations of the world, including the new energy paradigm advanced by the Apocalypse Crowd.
The massive economic growth of the last two centuries was due to productivity improvements. That includes improvements in the efficiency with which energy is used.
People on this board are making Energy into a False Idol.
If you look at household income, it has little with energy consumption. The highest paid people are not consuming or generating the most energy. Lawyers, doctors, accountants, investment bankers are valued for their human capital.
Lawyers, doctors, accountants, investment bankers are valued for their human capital.
Huh. And here I was thinking that every one of those are members of a government protected guild system. Some of the guilds are stronger and more protective than others - but with the membership of the guild, they then have the power to operate or operate with certain legal protections.
Say...when you gonna answer my direct question upthread? Or does naming names mean you'd have a harder time showing up to dis on Ugo/Gail?
This board (TOD) is about "oil", not about some nebulous notion of what "energy" is.
"Productivity" in our complex civilization is owed to the fact that your power lunch lawyer, doctor, accountant, investment banker, etc. has many barrels of oil working for him (or her); enabling the super-productive person (lawyer, banker, etc.) to utter magic words that cause fleets of diesel burning trucks to barrel at 70+ MPH down asphalt smoothed roadways and that cause fleets of kerosene burning planes to barrel at 300+ MPH across the skies so as to almost instantly bring to the power lunch personage the goods and services he/she has commanded by uttering the magic words ("oh, my charge card number is: 555-4444-321")
http://news.bbc.co.uk/2/hi/8410489.stm
Disclaimer: Since there are a couple of MDs in my extended family, my guess is that specialist doctors are probably a huge drain on the economy as well. We need more GPs and good nurses with an emphasis on preventive care.
Specialists in any field should be used as effectiveness multipliers for generalists working with them, so if they are working properly they should be a net positive.
I doubt they would criticise Gail in the way this offensive and shallow response did.
Look at Mr. Becks posting history. If Gail or Udo make a key post, he shows up and makes comments.
Answering a simple question about what economists display the understanding Beck claims Gail lacks - and nothing.
Perhaps Beck knows of some magical economist that *IS* better than others and is operating with no logical flaws. I understand there is an opening at the White House for an economist. I'm rather sure they can do worse than Gail. Lets see the names of these 'better' people Rodrick Beck thinks exist.
It appears to me that it is indeed Roderick Beck who has a very weak understanding of economics. Like many of the ignorati, he confounds economics with finance which is simply the scoreboard and does nothing to explain the course of, let alone the rules of, the game.
Whether the loans are repaid or not does not negate the fact that large amounts of oil were consumed to build this stuff in the first place and that once built, an even greater amount of oil is required to continue its habitation. The markers and bets that were then made on its subsequent value is a side issue. The economic analysis shows that building it was a gigantic waste of resources that could have been better employed and now that the energy to run it is no longer available at the price it was designed for, it's value declines - just as expected. Resetting the financial system will not change the underlying economics which Gail has so succinctly outlined.
The fact that oil was consumed in building these houses and apartments is essentially irrelevant. Labor, raw materials, and land were also consumed in large quantities.
And it is clearly wrong for you to claim that the operating cost of these homes were the key factor in the real estate collapse. The key factor was the buyers were not qualified to buy these properties in the first place and the reset interest rate triggers.
They were bad loans. The jump in oil prices did not turn good loans into bad loans.
Better luck next time ....
Good luck getting anything done without them and the roads that brung 'em.
The price of oil certainly contributed to the global contraction. It's not either/or it's both:
James Hamilton is not taken too seriously in the economics community.
First of all, in many business cycle models oil prices rise before recessions. Yet the increase in the oil price is not what triggers the recession. It is the Fed raising interest rates. Oil prices are the tail of the business cylce, not the head.
To illustrate further, imagine the economy is growing fast and inflation accelerates. Then the typical Federal Reserve is to raise the Fed funds rate, which in turn raises interests rates in general.
What do you see in such a world? Oil prices rises before recessions and then falling during them.
Sounds familiar?
In any conceivable business oil prices are procyclical. That suggests that oil prices are not driving the business cycle, but reflecting the economic growth.
The only recessions in which oil prices were an exogenous shock to the system were the 73 and 80 ones.
No one seriously believes that the 82 recession or the 92 or the 2001 were oil driven.
You can make a good argument that the the increase in oil prices in 2007/2008 was demand driven and hence not the primary cause.
No, the recession was not primarily due to oil prices. It was caused the banking crisis. It was the plunge in bank credit that sealed the economy's fate.
Thanks for trying ...
I too do not believe in single causes for events. Causality is mostly a trick of language, in my view, but that is a whole other topic.
In any case, it's unfortunate that you cannot see the link between energy and the economy. However many others can't either, so you are not alone. The mainstream economists are clearly part of that group. They may never see it in their lifetime. People thought the sun revolved around the Earth for many many decades (centuries?) even after it became clear that the reverse was true.
Energy is clearly a key component of any economy and this can be seen by a simple thought experiment.
Take away all the oil, instantly, and how much of the economy operates?
The answer is obviously "not much." Then we would see a cascading failure across all our systems until we reorganized at a lower level of activity.
To me, this is self-evident, which is why the Oil Shockwave simulations exists:
http://www.secureenergy.org/projects/oil-shockwave
It simulates the condition of a slight drop in oil availability and examines the consequences of that. The operating assumption is clearly that decreases in energy availability will impact the economy.
So, good luck with your worldview...I believe it is gravely incorrect but the world is a big place and people think all sorts of strange things. I once had a conversation with someone who believed that homo sapiens were on the cusp of turning into beings of light and this fellow — in his mind — had all the evidence for it.
Rod, you must also not see a link between oxygen and your ability to walk up a flight of stairs.
Yeah, interest rates made the price of oil go up. Look who is now making simplistic statements of cause and effect.
Of course it is all related. You should research Liebig's Law of the Minimum. Liebig's Law points out that the resource in shortest supply is the one that will cause problems first. We could have kept "extending and pretending" with our credit consumption, borrowing from future growth indefinitely, if only that continuous growth was possible. This growth was built into the system as a given. Once we hit some hard limits the system ceased to function correctly. There are many of these hard limits that we face, but oil is the "Minimum".
It is understandable that you are confused. The numbers in this matter are confusing. A lot of people have a lot of reasons to obscure them. The very nature of oil makes it hard to know exactly what is going on even without obstruction.
When the numbers are in doubt, don't look at the numbers, look at the behavior of the insiders.
We drill in deep water at high cost just because it is fun? We extract oil from Alberta sands at ~$40 per barrel and untold environmental damage because we like the challenge?
If your oxygen supply drops by 20% are you going to make it up that flight of stairs as quickly? What about 30%? 50%? 100%?
DD
Well, here's another little uninformed opinion for you.
Oil Price Feedback.
It's what will stop oil as a viable fuel source long before we ever get close to running out. Here's how it works.
At some point, oil prices start to increase due to an unchangeable factor (i.e. depletion combined with high demand).
Higher oil prices start working their way down the value chain, making all processes and products whose cost is dependent on oil to some degree, more expensive.
One of the processes that gets more expensive is the acquisition, extraction, and processing of oil and the distribution of petroleum products. This effectively starts to raise the price of oil, which makes oil more expensive, which raises the cost of getting oil, which makes oil more expensive, which raises the cost of getting oil, which...
You get the picture. By the way, since this is a recursive function, it's growth will be nonlinear. Expect a fast run up in prices.
Eventually, demand crashes, also suddenly. Oil prices decrease rapidly. We still have infrastructure and experts and so we start the process again until the next crash, and the next, and the next. The economic consequences are likely to be unpleasant.
Arguably, 2008 was the first part of this cycle, but I doubt it. Supply hadn't really started to get significantly out of kilter with demand yet, but inevitably, it will. The speculator driven pricing might have been the straw that broke the camel's back, however. We were, and are, in an economic system that is extremely sensitive to any kind of negative stress. High oil prices were undoubtedly one stressor.
This positive feedback loop sounds reminiscent of aangel's posts regarding the staircase collapse of the economy as a whole. I would expect that, as with the price spikes getting ever higher, but at a lower rate of increase, this same issue will affect this feedback, making such shocks occur more frequently and at lower price thresholds.
Perhaps 2008 wasn't the first true shock to the system, and maybe it was. Either way, we seem stuck in our own double helix with price of oil and demand circling up and bumping against one another until we all fall down back to some increasingly lower level of economic activity. The more obscure sources of oil or renewables, costing more to bring us less, won't help this I imagine.
That response suggests she should have explained the situation in such a manner that we can be comforted by some unknown answer to this dilemma by way of 'human ingenuity'. But because that answer isn't yet apparent, and might happen in time to avert the situation, yes, the prospect of declining oil in this economy is negative, or if you prefer doomerish. If you need everything sugar-coated then maybe you should watch Disney movies instead of reading the TOD.
Dearest sir,
It does no such thing and methinks you might really need to work on your reading comprehension a bit more.
ROFL! Have you ever read any of my comments? They are more often dipped in something slightly more corrosive than sugar.
I have written a list of 40 questions banks must answer before investing in toll-ways
21/9/2010
RTA fails to present business case for M2 widening (part 1)
http://www.crudeoilpeak.com/?p=1886
Gail is priceless.If I were able to delete the ill considered derogatory remarks concerning her posts put up by some members , I would do so.
Honest disagreement, respectfully or neutrally stated, is one thing and perfectly acceptable and needed of course; failure to show the respect due to anybody who does so much for us is something else altogether.
Fortunately we are afflicted with only a very few regulars who don't realize this simple fact.
Oldfamermac,
The level of sophistication on the message board is dismally low.
1. There was no debt crisis during the First Oil Crisis. Neither in 1973 nor 1980.
To claim as Gail does that the spike in oil prices caused the last recession (and yes, NBER ruled it ended in June 2009) and disregard the massive real estate bubble is simply not credible.
2. We have people conflating debt and capitalism whereas debt has existed as long as we have records and certainly proceeds the 19th century industrial revolution.
I give Gail credit for running an interesting and informative web site, but she has become a broken record. A broken clock is right twice a day.
I don't agree myself with all she has to say, but she says it well, and she sticks to her guns.My point is that without her (and Leanan's) hard work, the site would not be the best single blog around anywhere.
Incidentally , there are lots of capable people out there who agree with Gail that the oil shock precipitated or resulted in the bursting of the real estate bubble.
I am somewhat agnostic in respect to this question;I expect the real estate bubble would have popped anyway within a few more years, but I also believe that oil is a major root cause of our current economic problems, and that oil prices were intricately involved in the real estate crash..
It's not just the direct and obvious costs, either;it's also the cost of the MIC, deployed and fighting, the disruption and dislocation of the credit markets,the movement of money out of our country to our overseas suppliers as opposed to being spent domestically.......
And there is an additional argument to be made for the INDIRECT but primary reason for the oil crunch to have brought on the housing bust;the govt , in collusion with the FIRE cabal, deliberately overstimulated the housing market to offset and conceal the growing effects of rising oil prices on the economy.
I will give you a barely passing "d"in respect to civility to your referring to her work and posts as a broken record."Repetitious"would have served just as well.
Apparently you don't understand in a general way just how big an impact oil costs have on every good and service as they are passed on thru the economy, and the feedback loops involved; perhaps you should study her "broken record" comments more carefully, and with a more open mind.
You only have to move a very small amount of wieght from one side of a balance beam to the other to cause it to react suddenly and decisively in reversing its state of equilibrium.
Of course I work and live in an industry-agriculture- and a place-out in the country- where the effects of the rising costs of energy are painfully obvious, so perhaps I am more sympathetic to Gail's arguments than most people.
I myself make the occasional sarcastic comment, but I try to show respect where it is earned and due .
OFM Thank you, Gail is priceless. Her guidance on PO is awesome. This is another excellent post.
I do not understand how you can leave "Oil" & the Limits to Growth out of the current financial & jobs crisis.
Without the cheap oil subsidy we would not have suburbia, export of jobs due to globalisation & massive bubble economies due to cheap energy.
The link of PO to the actual GFC & the mortgage & housing crisis may not be primary. Yes it was caused by debt bubbles but the primary cause of massive economic and population and technological growth over the last 100 or so years is cheap liquid energy. Which is now running out. The party is ending.
Without cheap energy, economic regrowth will be almost impossible.
Gail Thank you
Good point. The slashing of the middle-class' purse includes this last effort.
And we're not going to get single payer either. And the boys aren't coming home.
Hope you weren't talking about me. I wouldn't want Gail to feel bad, but I do think she sometimes (perhaps from, as she says, lack of space) leaves out some elements in her disquisitions.
I give you a 'D' because you have a limited American view of the world. Yes, you Americans are addicted to oil and your system will come close to collapse. We living in Europe will not suffer as much and may actually benefit from our superior efficiency.
You guys are fundamentally cranks - you have taken a respectable point of view (Peak Oil) and it turned into a circus.
The world is not as energy dependent as Americans believe. Not everyone needs a car or travels ten minutes to the supermarket or 7 Eleven.
By the way, let me know when Gail gets her work published in Energy Economics ....
I won't be holding my breath ...
Really? Well, since you are, as you say in Europe, you obviously haven't got a care in the world...
http://scienceblogs.com/casaubonsbook/2010/09/leaked_german_military_rep...
Traveling by car to the supermarket isn't what you should be worrying about.
I'm working on a paper for an economics journal in Europe with colleagues from Uppsala University and Moscow University that will address exactly this topic. I'll be sure to post it when it is published (presuming that it is, which we do expect). We have some interesting statistical work we'll be presenting that demonstrates the link between energy and the economy.
In the meantime, you could look at all the papers that use Granger-causality tests that explore this topic. You seem to be very behind in the state of the art.
Why do you think the financial system is not in bed with the energy supply system? Bad loans are evidence that money is not being made on projecting growth. The financials lent the money to build homes. They had no other better options since growth has stymied. The reason we had the financial crisis in 2007 was the very high oil prices, which bankrupted individuals who are very overexposed to long driving distances. These homes are built in the 2nd collar suburbs. It makes sense to me that financial lending, housing and oil prices are connected.
Name a home building method that does not use a bunch of oil. I bet it involves slaves; hence our addiction to cheap chinese labor.
Believe what you like. LOL. Most Modern efficiency gains all trace back to oil.
The world is not as energy dependent as Americans believe. Not everyone needs a car or travels ten minutes to the supermarket or 7 Eleven.
Not that I expect Beck to nut up and defend his position - I'm posting this so others who may not have heard of the lack of food on the shelves in England during the truckers strike are made aware of what happens when the flow of energy stops.
http://www.thebadrash.com/2008/06/12/truckers-strike-causes-food-shortages/
http://english.aljazeera.net/news/europe/2008/06/20086150243821110.html
And the after analysis of the 2000 strike
http://www.iwar.org.uk/cip/resources/PSEPC/fuel-price-protests.htm
But didn't you get the memo? All Britons use the bus and train services and certainly never openly complain about fuel prices they have to pay. Why, I myself routinely use the bus to... oh wait, no I don't, because one can't bus to my workplace at all.
Beck could've saved us all the hassle and time of reading his posts by simply putting "I do not know anything about anything" in his profile rather than the roundabout way he went about giving us the same message in a tirade of postings readily debunked.
I'm calling it now: troll.
1974 was no picnic - a nasty recession with inflation left over, plenty of failure in the real estate business. 1980 was not terrible, but the oil price shock was very brief. All the leverage of the last decade amplified the effects of recent negative events, especially the general shortage of oil production growth after 2005.
I worked for two insurance companies during the 1974 time period. The smaller one went under. The larger one had its price per share drop to $2, and had to be bought out to prevent it failing.
It was my experience during the 1974 time period that alerted me to the likely impact of oil shortages on financial institutions now as well.
(I was pretty young at the time, but had gained standing by correctly identifying what was happening, before others saw it. I didn't make the connection with oil though--just with rising prices in general.)
Roderick,
That's a bit of an economist argument for the issue. They tend to look at history, find correlations, then expect the same thing to happen again and again (in their hubris they call them laws).
Reality is, this is a complex system. It doesn't repeat, but it does rhyme. Its the underlying connections that really inform things.
In previous oil run-ups the level of personal savings have been reasonable, and debt much lower. However the change in cultural outlook during the 80s and 90s (precipitated by the shift household control from those who had lived through bad times, to those that haven't) means that now households have much higher gearing. People have been living much more off 'tomorrow', meaning that slack in the system and ability to cope with the consequences of high oil prices is reduced.
Whereas in 1973 and 1980 higher prices depressed sales and raided savings, now individuals have no savings, are living hand to mouth, and thus have no slack to deal with price increases. At the same time, easy debt was curtailed; is it any wonder that debt repayments couldn't be serviced this time - we have clawed higher up the personal expenses chains of many more people this time.
It's generally wrong to say that large scale events can be attributed to individual causes. Each plays its part in straining the system and although one might break the donkey's back, it's the combination that does the damage. This time it was the rampant financial fraud in the system that was uncovered by oil prices straining repayment ability and bringing too many people into default. Next time it will probably be different; oil prices collapsing companies, bringing recession, then collapsing whole countries seems the most likely.
The whole point is that this wasn't the 'usual' boom'n'bust - since there was no real boom in western economies. It was more fundamental than that - a tremor in the foundations of our economies, a foreshock.
That whole post was great garyp and sizes up the situation very clearly.
Yes, very nice. Denying any role of oil prices and saying it is all because of debt and fraud is like saying a tiny pin can't possibly the cause of a balloon bursting--that was caused by too much air inside the balloon.
Hear. Hear. I am on the fence with respect to the degree to which oil caused the recession, but if people do not agree with that position, they should lay out their well considered arguments without claiming that the author is simply clueless or knows nothing about economics. No doubt most of the people here are thick skinned, but frankly I think it must hurt a little bit to put your heart and soul into a web site and then be subject to this mean spiritedness.
I have no great fondness for capitalism itself, and don't see any great need to preserve it further.
But I do wonder if debt (and so also growth), however important it is in our current arrangement, is absolutely necessary for capitalism to function.
It seems to me that private ownership is at the core of capitalism, and that even in a shrinking over-all economy, individuals and individual companies could make a profit in certain ventures, at least for a time.
(Of course, the most abstract levels of purely financial capitalism, investment banking, etc. have already taken a hit, and even Greenspan now sees that as the failure (and fraud) that it always was.)
But perhaps I'm missing something.
Capitalism has been very resilient, and has dove tailed with survival traits that brought fitness in our past (short term gain, discounting the future, thinking heuristically rather than critically, etc).
It's survival depends upon getting a greater exchange value over the user value, by owning the means of production, and getting surplus value from labor.
Capitalism is now bumping up against resource restraints, as Gail has pointed out, and will be very challenged to survive.
It had a good run.
Hightrekker,
No Marxist economist has successfully shown that the surplus value of labor theory can actually generate the prices in the markets.
It is dead end. Read Das Kapital.
Value is created all factors of production, not just labor or energy.
"Value is created all factors of production, not just labor or energy."
This sentance doesn't even make sense.
Obviously he inadvertently left out the word "by".
It should have said:
"Value is created by all factors of production, not just labor or energy."
(Whatever that means.)
But while we are on the subtopic of missing words, consider this statement:
The above is a good example for showing how framing in terms of "economics" speak warps our perceptions.
You are correct.
There is no noun such as "DeValues" in the econo-speak language.
(There is the verb form, to devalue, however.)
A "DeValue" in noun form would be the antithesis of a "value".
Economists conveniently leave out antithesis words such as "bads and disservices".
That's just the way they roll.
It's all very innocent. No one controls the econo-speak language and how it is used to frame the issues. It just "magically" happens all on its own.
Obviously he inadvertently left out the word "by".
Maybe his kids were jumping up and down on his head. Its a common problem for me. I've learned to double check everything I post when the kids are around now.
I have, at least Volume 1. We are talking where profit is extracted from the system, and it is always in the difference between the use and exchange value, the surplus value from labor.
This is not about prices. I suggest you take Harvey's course on Capital—
Your literacy would be increased.
The free market is the most efficient economic system for producing the goods and services that humans have ever come up with. It's that remarkable efficiency, the ability its given us to exploit otherwise inaccessible resources that's lead to the rapid economic and technological growth over the last couple of centuries which in turn has created the likelihood of a sudden onset of peak oil and its associated problems.
But if, or probably when, tshtf over the next decade, it's that economic and technological efficiency of the free market that's most likely to minimize the damage and lead us through, the only alternative I know of, the imposition of some form of central planning, would be a disaster on top of a disaster.
Your statement, while perhaps true, completely leaves out the fact that there are also human beings, other species, and the planet as a whole in the equation. You fear central planning, but China is kicking our ass. They have a free market, but only in the context of a command economy which has a direct influence over what will be produced, or not produced, and when. In China, the disaster may be that they are too good at producing "goods" and services. Many of these "goods" are, of course, producing bads in the form of pollution and resource depletion. Kind of like in the U.S. If we have a so called free market but,at the same time, are exporting most our good jobs, then efficiency isn't really worth much.
You can't eat efficiency. Ask those who got their jobs outsourced, jobs which will never return to the U.S. until our wages have been reduced to the level of the Chinese.
You fear central planning, but China is kicking our ass.
No, China has a faster growth rate than the US, I don't see how that is "kicking ass" you see it as inflicting pain on Americans? Perhaps with "are exporting most our good jobs," but it has actually been the less skilled jobs that have gone to China, and in return the types of goods produced by those that had those jobs in the US are now far, far cheaper, the average Americans spending power has actually increased through trade with China.
You can't eat efficiency.
People have starved to death though inefficiency in agriculture, usually as a result of central planning, so in practical terms I think you're wrong there.
Andrew - I suppose part of the answer depends on how you define "good jobs". If you're unskilled then any job you can get is a good job. Accepting your " less skilled jobs that have gone to China" then what are the 10's of low-skilled millions of workers in the US to do about supporting themselves. I work daily with one foot in a very high tech world and the other with folks near the bottom of the pyramide. I see more than a few who would have a difficult time doing some of those exported jobs. And the worst aspect IMHO is that many of the unskilled US workers are in the service industry that is very dependent upon folks spending their disposable income on $4 cups of coffee. As times get tougher folks will forego a lot of those perks. But they'll still buy their kids sneakers made in China.
Yeah, in talking about these lower paying jobs that we off-shored to free up people for "better jobs" we seem to forget that every population is made up of individuals with varying levels of important attributes such as "intelligence". The distribution of intelligence in a population is well-reflected in a bell curve. Half of the population is under the mean. Typically the less intelligent individuals get the lower paying jobs. These individuals in many cases are not even capable of filling the "better jobs." (I expect most of the folks commenting on this site are in at least the top 30% of the curve.)
This "better job" mantra is corporatist groupthink used to justify sending jobs to other countries without invoking protectionism. The corporations gutted our economy, and the government allowed it to happen.
So now that we don't have the lower paying jobs what do the lower intelligence individuals do for a living? For a while they could work in retail, but that is now shrinking as well. We could keep them on unemployment, but that is hard to sustain for long. Agriculture could be a good spot for them, but the "Green Revolution" closed that door, at least for now.
With all that free time they have I bet we could whip them up into a half-starving, fear-mongering horde! And they have guns!
Perhaps as the oil disappears we could send them to work in the coal mines.
DD
The law of comparative advantage, which means that it's profitable for countries to trade with each other, even when one country is, in absolute terms, better than the other at everything, means that a country is better off finding employment for the low skilled rather than leaving them unemployed.
Though I guess if the US has a huge surplus of really stupid people perhaps that could be a problem.
No, you're describing absolute advantage.
China is swallowing up every single job corporate america sends them. They even sell agricultural products like apple juice in our stores.
They don't care about 'profit', they care about providing employment to hundreds of millions of Chinese.
The really stupid people in the US are 'college educated'/brainwashed business school dopes who think they understand the system but instead don't understand their pockets are being picked.
No, you're describing absolute advantage.
No, comparative advantage means trade - within borders as well as across borders - is worth while for both parties even when one has an absolute advantage in all areas.
The two other parts of your comment sound like xenophobia against the Chinese, and hubris - a conviction that you know better than those who've studied the issue simply because of your relative ignorance.
In economics, principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input.
http://en.wikipedia.org/wiki/Absolute_advantage
Yep, that's what absolute advantage means, that's not what I was describing in my earlier comment.
Baloney,
China sells $300 billion dollars worth of junk and buys $70 billion of US goods.
China sells the same stuff(~50%) the US makes(as corporations ship whole factories to China) but in far greater quantities. The Chinese already corner the market in apparel, toys, footware, and furniture. The US has niche markets in aircraft, paper, oil seed and organic chemicals which are by-products of the worlds largest oil refining system, but its a drop in the trade bucket.
http://www.uschina.org/statistics/tradetable.html
Comparative advantage means both economies grow by trading different commodities.
China is a jobs vampire.
http://en.wikipedia.org/wiki/Comparative_advantage
Another unworldly business theology graduate.
I'm at a loss to understand what point it is that you think you're making.
China and the US trade, as you point out they each tend to specialize in exporting the goods to the other in which they have a comparative advantage, the trade is worth billions and both countries have seen substantial economic growth over the period of that increasing trade.
The trade imbalance between the two countries has been supported by the US borrowing to feed Americans sweet tooth in comparison to recent Chinese industriousness.
The recent increase in unemployment in the US is a result of the financial crises, though I agree the increase in oil price was a trigger to the sub-prime collapse, the risky lending practices of the US sub-prime market made that market the weakest link in the American economy, those lending practices were entirely the result of poor decision making by Americans.
From what I can tell our primary export to China is all of our intellectual property.
DD
America is about to find out that she would have been far, far better off keeping all those low wage , lesser skilled jobs within her borders.
The globalization chickens are fast coming home to roost.
We are now faced with supporting these people in thier tens of m illions on welfare of one sort or another;ALL OF THE REST OF US, COLLECTIVELY, would have been far better off to have paid the higher prices needed to keep those jobs at home.
The welfare check route requires creating and mauintaining another layer of nonproductive bueracrats, another layer of nonproductive jailers and cops, another layer of non performing retraining schools.....
The welfare check route has created the conditions necessary for the rise of the Tea Party.
The really amazing thing about all this is that the TEA PARTY is the bastard child of conservative businessmen making whoopee with the laft/ environmental types.The businessmen temporarily got richer, faster, by offshoring, and the left /enviro types temporarily got a cleaner LOCAL environment.They also got to pat themselves on the back about getting rid of low paying, demeaning jobs no American should have to do.
It never occurs to them that "the free market" would take good care of these low skilled Americans to a very great extent if only were were not blessed with so many similarly low skilled immigrants willing to do the jobs "Americans won't do".
Those jobs would pay a lot better ,without the extra immigrant labor supply, and Americans would do them if doing them were a better deal than collecting welfare state benefits.
Offshoring merely offshored the pollution and environmental problems TEMPORARILY.All the smoke is still in the air, world wide.
Of course we are now in such a state that even a good portion of the immigrants can't find a job adequate to pay for shelter and food and are so heading home again.
If so they've got a very strange way of going about it. I don't know of anybody who wants to trade in North American living conditions for living conditions in China - although I suppose there's always one, somewhere. The immigration flows are still overwhelmingly in quite the opposite direction (as is often also the case with a variety of other places, in some cases exceedingly unpleasant ones, Cuba comes to mind, that get held up as exemplars for some reason.)
This reply goes to the heart of the problem. Garret Hardins "Tragedy of the Commons" demands a collective response as it was individual decisions that led us here in the first place. It is clear that collective action will always be corrupted, so our challenge is to devise a mechanism that restricts our access to FF (coal because of carbon, oil because of scarcity), but still encourages individual effort.
I have yet to read a cogent argument as to why the replacement of income, labour and sales based taxes on a dollar for dollar basis with carbon and an oil scarcity tax would do anything other than encourage a rapid switch to greater efficiency (using less) and substitutes. As taxes drive usage down the tax rate can be increased to maintain revenue, thereby further reducing our use of FF. In time as revenue flattens other "bads" could be taxed or income and sales taxes be reintroduced.
I agree that the introduction of FF taxes will be politically difficult, but isn't that what leadership is for?
I have yet to read that argument either.
I think that this is an example of "possession being 90% of the law", i.e. that the income and payroll taxes have the advantage of already being on the books.
I see you prefer the Red Kool Aid.
There are very few examples of completely free markets. Regulation is necessary at almost every point in the modern market trading system, even if it is agreement on weights and measures, or voltages, or which side of the road to drive on. Most economies in the world are an example of mixed economies where governments produce many of the things that the market would not provide. Even China now could hardly be described as being fully committed to central planning.
All systems are bumping up against resource constraints, but the real question is this. Is there something fundamental to capitalism that it becomes especially susceptible to dysfunctionality when it comes to resource constraints. I don't even know whether it is entirely appropriate to call the system in the U.S., for example, as capitalism. Certainly there are sectors, like the financial one, where corporate socialism might be a more appropriate term. If we were really devoted to capitalism in its pure or near term form, we would not be bailing out billionaires.
If we are content to allow high unemployment to fester even in the face of overall economic growth as measured by GDP, and if we are content to the increasing level of inequality of income and wealth, then whatever we have in the U.S. will continue its ride for quite a bit longer.
If, on the other hand, we have lost faith in capitalism's ability to provide growth, jobs, and a prosperous middle class, then we may decide to revisit the whole system under which we labor.
At this point, this is not what the upcoming election is about so we are not ready for a fundmental challenge to our quasi capitalistic system. The argument is over what model of captialism will provide growth primarily and jobs secondarily as a result of growth. Both parties share the same paradigm that growth is paramount and essential for well being and jobs. Neither party dare challenges the basic paradigm.
And I have not even mentioned how growth itself has and will continue to be unacceptable if the planet's health is a consideration. Sadly, we may already be past the tipping point.
Oil is an overlay to this whole problem and just feeds the fact that growth becomes increasingly difficult and less beneficial for the people at large. I don't pretend to know, however, to what extent peak oil is causing the result of slow and ineffective growth.
Nicely put.
It's not so much about "isms" like capitalism or some other abstractionism as it is about the difference between being "clever" and being "wise and humanitarian".
A "clever" person figures out how to maximize his own short term profit no matter what the damage to others or to long term prospects.
A "wise and humanitarian" person figures out how to obtain a livable profit while minimizing the damage to others and to long term prospects.
We have become a nation (no, make that a world) of very "clever" people.
I think the work you were looking for is "selfish".
One can be quite clever in applying wisdom for the betterment of others. Just look at Pres. Carter.
I have no great fondness for capitalism itself, and don't see any great need to preserve it further.
Like with most 'isms - is it capitalism that is the issue or is it the system you are observing that is labeled as capitalism by others that you see no reason to preserve?
private ownership is at the core of capitalism
But does actual private ownership of 'things' exist?
If you can loose the item via the non payment of taxes on the item - do you own it or are you under a twisted rental plan?
If your item can be taken 'for the common good' - did you own it?
Greenspan now sees that as the failure
At one time Greenspan wrote about how Gold is money, everything else was fake. And yet - when given the chance to serve the 'fake' system and be 'paid' well, Mr. Greenspan had a change of heart.
I'm not sure Mr. Greenspan is a reliable compass for guiding a person.
1) So how would you propose that a society might assemble the land deemed required for a road or rail right-of-way? Should a single property owner who "by chance (ha ha)" lucks into ownership of a critical series of plots which completely block a right-of-way be able to extract whatever price they wish from their fellow citizens? No limits? Please explain.
2) Is it your opinion that there are absolutely no public services required to operate a society? Therefore no taxes? Please enlighten us ;<)
dohboi,
I am not an economist or expert, but my take is that debt and growth are essential parts of capitalism. We could have a system where there was a pay as you go, and future operations, R&D, etc were funded by current profit. This would certainly limit the speed of growth to something sustainable. However if you have a competitive market, your competition which could obtain credit/incur debt could grow their business more quickly, and potentially out-compete your business. Their use of leverage would provide the competitive edge against your business and drive you out of that market space. To maintain your competitiveness, you would possibly need to leverage your assets and incur debt similarly. In order to pay off this debt, your business would have to grow, so growth becomes a condition of the system. At some point though, real world limits may limit possible growth so that the system can not continue. We may be close to that point now.
ej
I understand and believe our Debt Based Monetary System is unsustainable and will crumble due to peak oil. What I don’t understand is what that has to do with Capitalism and why it will come to an end. Why does Capitalism itself, require growth?
What does growth have to do with private ownership and operation of the means of production for profit? Allot of companies start out with a growth phase but then at some point, that growth kind of levels off and the company then enters a steady state. When a company develops a new product everyone must have, it grows, but then as everyone who can afford or who wants this product already has one, then the company is left with making replacements for those lost or broken products. At this point, the company may choose to periodically update its product to increase sales.
I always assumed most of our problems arise from the scale of what we do.
I guess I need to dummy version of the problems with Capitalism.
I agree with Les. I understand how our monetary system works--the central bank creates money from nothing and lends it out at interest. This creates a problem in that sooner or later the debts owed to the central bank become so large as to be unpayable. The central bank is owed an amount of money greater than all the assets that exist. The thing that keeps the system going is that the amount of money, and the amount of assets, keep growing, and hopefully you stay ahead of the point of gridlock.
So what about this system is specific to Capitalism? Don't Communist countries have a central bank? Don't those central banks lend out money at interest and expect repayment? Perhaps if someone had some specific knowledge of how money is created in a Communist system, we could all be enlightened.
A business must grow to survive.
Rising populations and energy costs assures that growth is a requirement to survive.
Costs rise..........Rent, insurance, wages, energy, credit, resources, technology and taxes.
The business can become more efficient to survive but efficiency if relied upon to remain afloat is doomed to failure, if costs continue to rise.
For instance airlines and hotels now are battling decreased patronage and rising costs. They are investing in technology and efficiencies, takeovers and mergers and asset selling to stay viable. They are increasing debt and waiting for the next airline or hotel to slide into bankruptcy to increase patronage. With growth decreasing that theme will become more common across the board.
Steady state means you are growing enough (by whatever means) to stay in business. Like a human body depending on how many calories one burns and how much fat is available, there is a threshold of calories needed to stay alive. If more energy is expended staying alive then the body needs to take in more calories. For a business that is growth....Increased sales or price hikes.
Dohboi, you raise an interesting point. I don't think "capitalism" has ever been very clearly defined. As a system, it rose from industrialization, which has been predicated on endless growth and development. Certain aspects of finance are certainly critical to capitalism, such as the idea of corporations and stock, but fiat money is not necessary. As for ownership, well, consfiscation is probably more necessary - from the Highland clearances to NAFTA pushing farmers from their land to modern day third world land grabs, I think capitalism has depended on pushing people from a rural life to an urban one. Ownership is necessary, but not in terms of personal ownership by all members of society; ownership of the means of production in sizes necessary for economies of scale is more key. In that way it resembles feudalism.
At least that's my basic thoughts. For most people nowadays, capitalism comes down to being able to buy useless trinkets for cheap...
http://picturesforsadchildren.com/index.php?comicID=337
That pretty much is my feeling. I guess that sounds like a pretty Marxist analysis, but I don't intend it to be that way - Marx focused on labor, but I think exploitation of oil and coal created modern capitalism as much as anything.
Another thing we can be sure of: capitalism is not dependent on political freedom (in either sense - you can have both, or have no political freedom yet have capitalism). The biggest problem in politics today is that people conflate capitalism with political freedom, and that bias prevents us from talking about capitalism and economics in general in a useful manner.
People conflate capitalism (arms length market transactions) with freedom because it is counter to the idea of arms length market transactions to have a central planning agency dictating those transactions. The only central planning systems we are familiar with (Cuba for example) nationalize the sources of production and dictate the roles the people will play. How is this to be correlated with the freedom (to what ever degree it can be called freedom) in the United States? Are they more or less free in Cuba?
OK so everyone who espouses a non-capitalistic approach ends up saying that it could be done in another way. But the fact remains that it never has been done in a way that protects individual freedom, so the onus is on the central planners to show how their theory will work without compelling someone to do something against their will.
There is a lot of space between and outside of 'Capitalism' and 'Communism', free market and centralized planning.
For one there are thousands of ways of defining ownership, and the distribution of such. Just look at the wealth of anthropological data on how different societies and cultures have very different approaches to ownership. For example : !kung hunters show no interest nor any pride in their catches, they would be ostracized if they took a bite, or even showed pride at a nice catch they had made, whereas we first-worlders descend from a culture that used to treat human beings as property. The Potlatch was a feast where status was earned by how much you managed to give away and destroy. The Spartans considered proficiency at theft an essential part of the warriors education, so all the elite kids went out to steal what they could. The permutations are endless.
Several times through 'western' history, attempts have been made at egalitarian organization, trying to create autonomous communities from the bottom up. Don't forget, there was some of that going on during the creation of the USA. Some of these did not want central control, but rather distributed, local organizations and exchanges of skills and the products of these. The Amish, for example.
If the ball-park doesn't provide the right answers, it is time to go look outside.
You'll see, the more things become local, the more inventive we will become at inventing new and interesting ways to define property, and propriety. (interesting to note how close the words for ownership and manners are)
lukitas
Thanks for presenting the wider view of history and cultural anthropology. I get so tired of the US-centric blinders being presented as the only way to look at society. My understanding of potlatch is that it is redistribution, so that no one would think only their own efforts were primary in wealth of goods. I got that from the Makahs, at a potlatch. I still have the blanket.
From the blog Big Picture Agriculture a short presentation with a broader perspective:
Fred Kirschenmann Speaks on the 4 Major Threats to Industrialized Agriculture: Energy Constraints, Water, Climate Change, and Ecological Degradation
I don't like the quip about debt being borrowing from the future. For the entity accumulating net debt that is true, but for every dollar of debt, someone else holds a dollar of credit. So from the standpoint of the system as a whole, debt is a matter of internal promises only. In a physical sense, the only way to invest for the future, is to forgo current consumption and build something for the future. Debt, is just a way to trick the players in the system into doing more of that than would otherwise occur.
You didn't mention a big institutional problem that will come about with a cessation or decrease of growth. Most pension systems are funded based upon the assumption that the future rate of return on investment will be similar to the past. But the end (or decrease) of growth means that in aggregate return on investment must drop substantially. Then much of the pension plans, both public and private will be found to be severely underfunded. This puts additional severe strains on the financial system.
I'll never get economics but if a bank "creates" money by loaning more than it has in savings then who actually has the dollar of credit associated with the dollar of debt? I think that when a loan is paid off or defaulted on the money loaned, over what is in savings, just evaporates. I think that phenomena is what has the economists worried now about deflation.
The underfunding of pensions is already happening just because the return on pension fund assets is far below what has been expected. I don't seem to be able to connect that to a decrease in growth unless that exacerbates the low return on assets somehow.
The lack of growth is very much tied in with the low return on assets.
Over the long term, real growth and real returns on investment must be closely coupled. Over short time periods financial investments may exceed of be below the rate of growth, but they must revert towards the growth trend. If that trend goes from plus a few percent per year, to flat or negative, then ROI goes down.
I don't like it either - the future hasn't happened yet, so there's simply no possibility of borrowing from it. Nor do I like the meme about "loaning money into existence" - the bank does not have a printing press, not a real one and not a virtual one. What the bank does do is to increase the velocity of money (and reserve requirements are meant to prevent that from going quasi-infinite.) One trouble in both cases is that the language seems designed to make the process being described more scary and incomprehensible than it really is.
However, on another hand, there's an aspect of the huge aggregation of debt that maybe ought to be scary. Much of it has taken the form of "You and I and we all solemnly promise each other that generations not yet born will pay off what we just borrowed and squandered."
Probably if the debt had indeed been a matter of forgoing consumption to pay for future productive capacity, it would have been OK or at least much less bad. But for the most part that was hardly the case. The added velocity of money seemed to lead to yet more current consumption.
Not only was nothing forgone, but public policy itself was centered "come'n'get'em, free gigantic mcpalaces for all, get rich by hoarding real estate". But plenty of the "owners" lacked productive skills commensurate with such a huge level of consumption. Some had and still have no useful skills whatever. The supermarket clerk who can't figure out the change after clearing the jammed dispenser, and must call a supervisor (while everyone waits and waits.) The bus driver for whom the big hand and little hand are an impenetrable mystery, who never gets going on time (while everyone waits and waits.) The road "construction" manager who has laborers pushing piles of dirt back and forth across the road for endless months without much of anything ever getting done (while everyone waits and waits.) And the rest of the idiocracy, on and on without end.
And what's really amusing about all this is that if the oil price hadn't spiked about when the bubble was ready to burst no matter what, we'd be telling ourselves some other story about why it burst. After all, we must have a narrative. Anything at all to avoid the simple truth that consumption has to be matched with resources and productive skills; otherwise (and in keeping with Stein's rule), it can't continue and therefore won't continue.
Actually, it is relatively easy to see that banks do "loan money into existence", because banks operate on a fractional reserve system where their loans (and corresponding deposits) are many times the value of their reserves (the "real" money that they started with). If all the loans were to be paid off, then all the deposits would likewise have to be withdrawn in order to pay those loans and the bank would be left with only its reserves (in theory...)
Think about the situation where you want to buy a house. You go to the bank and arrange a loan of $200,000. The bank loans you the money which you then pay to the previous owner of the house. He almost certainly puts the money in the bank. Now the bank has a $200,000 loan and a $200,000 deposit, nicely balancing the books. Even if you say that the bank might have used SOMEONE ELSE'S $200,000 deposit to make the loan, it now has an extra $200,000 in its deposits which it can loan to someone else. So either way, there is now an additional $200,000 of money deposited in the bank, that has been "loaned into existence". The money didn't exist before you bought the house - the previous owner had a house but no money, you had no money and no house. Now you have a debt and a house, the previous owner has money and no house. And the bank has a loan and a deposit.
That thinking is exactly what is sending us straight to hell.
I hope you don't bank your money, loan or borrow, buy shares or insurance to be able to live up to your philosophy.
Oil is certainly vital to economic activity but minor in terms of economic growth all other factors being equal.
When you say growth you really mean ROI which is very low in the US. The capital markets see they can get a higher return by investing in China and the ROW which has been growing faster.
In the case of China, the communist government has been massively stimulating economic growth paid for by us consumers (Walmart).
"The Capitalists will sell us the rope with which we will hang them."--Lenin
I'm not suggesting that China wants to hang US bankers--only US workers.
US corporations would rather close US plants and set up in China where the government builds your plant and infrastructure and supplies you cheap labor. It's nigh impossible for the US to match that deal and US banks are not lending here.
In 2008 China had an inflation rate(too many dollars chasing too few goods) of 8%, now it is 3%.
The law of comparative advantage is against us; as long as China/India/Russia/etc. have such an advantage the capital markets will divert investments away from the US.
This suggests that laws requiring domestic content and a bank requirement to keep a portion of capital in the US will slow down
the draining of the US.(SOCIALISM!!)
The US government could directly stimulate investment but taxpayers fear that will not do anything except create future debt(they are mainly wrong but results are mixed).
As far as oil goes China(50% imports) is less dependent than the US(70%). Fortunately prices are stable and affordable.
Much of the problem is ideological--our blind faith in capitalism.
It is difficult for people to accept the idea that the market will hurt them in the long run(Proud Americans can outcompete anybody!). People irrationally believe in cycles, not extinction.
People also believe free trade will help them (it helps capitalists).
The US is financing world growth with US public and private debt but when we need money the banksters slam the door in our faces.
Unfortunately we love the idea of profit so much we can't bring ourselves to 'harm' our financial overlords.
Example--we cannot bring ourselves to tax the rich(who have the cash) to balance the budget which we balance by borrowing (debt).
In the monotheistic religions, the love of money is the root of all evil and usury was an existential threat to one's soul--even Jews couldn't charge interest to each other, only to goyim).
In capitalism, the love of money is the highest value.
Regarding the benefits of moving production overseas I think there are additional issues that encourage American business to "offshore":
1. Lax environmental controls. The US has done a pretty good job of enacting environmental controls on work done in country but has failed to exact a tariff against products made with lesser controls.
2. OSHA. It would be interesting to see what the cost of worker protection is, I've never seen any numbers but you can bet that the bean counters in manufacturing companies know. How much compensation do you suppose the average Chinese factory works gets for a ruined life?
3. Overseas markets. In the past decade economic growth outside of the US has, I think, been higher than in the US so it makes sense to build the factories closer to the growing markets.
Good points, well stated.
I can't help but notice the evidence of debt defaults becoming more and more of a problem.
John Mauldin's newsletter this week was a post called Sovereign Subjects: Ask Not Whether Governments will Defaults, but How by Arnuad Mares
In this article, Mares looks at some rough estimated of government net worth as a percent of GDP, taking into account "cost of aging", structural deficit, and initial debt level. It is not really the initial debt level that is the problem. It is the built in promises to pay under the "cost of aging" and the structural deficit (outgo more than income) that are a problem.
He uses the following definitions:
Pretty much all government promises like Social Security are very underfunded. If there is less in the future, it is hard to keep promising the same amount--this is a big part of the problem.
Another news article I noticed today was about Petrobas:
Petrobras Yields Climb as Share Sale Not Enough: Brazil Credit
It seems to me that we are going to see more and more oil companies having difficulty in financing huge future investments. US shale gas is another likely problem area, in the not too distant future.
Gail, shame on you.
Don't spread nonsense.
The system is fine until 2037 when payments will be reduced by 25% which should keep the system solvent until 2084
according to the government statisticians or are they all liars?
It's always been a pay-as-you-go system.
An actuary should know better.
http://www.socialsecurity.gov/OACT/TRSUM/index.html
"government promises like Social Security....."
"The system is fine until 2037 when payments will be reduced by 25% which should keep the system solvent until 2084"
This is based on a 2007 study that used data from years before the present debt crisus. IIRC in the current fiscal year 2010 social security receipts are trailing expenditures by $60 to $80 billion and this deficit is predicted to grow larger over the decade. The claim of soolvency until 2037 is wishful thinking if not propaganda by the paid off politicians that run our congress.
If the 2007 data is no longer credible could you inform us of the source of the new data that you quote?
this document www.ssa.gov/OACT/TRSUM/index.html by the SS Adminitration gives this sentence:
"..but the overall 75-year outlook is nevertheless somewhat improved primarily because a provision of ACA is expected to cause a higher share of labor compensation to be paid in the form of wages that are subjected to the social security payroll tax...."
In other words the SS taxes will increase because the tax is now imposed on higher levels of income and wages are expected to rise, putting more people in the position of paying higher annual SS taxes.
Yet most economists now agree that unemployment will stay close to 10% for the next two years. The economy will remain in the doldrums while the SS Administration expects the deficit (between $40 to $50 billion, corrected from my above comment) to disappear in two years (by fiscal year 2013 that begins in Oct. 2012) due to overall rising incomes. I am glad these guys that run our government bureaucracy are so optimistic.
The Social Security system is sound out to 2037-2042 except for one aspect - the trust fund has been raided by the other parts of government.
Since the rest of the government borrowed the Social Security trust fund money, they will have to pay it back - big time - beginning in 2015 or 2016 depending on who you talk to.
So in essence, since it is relying on repayment of those loans to the rest of the federal government, Social Security is just much as bankrupt as our government is bankrupt. I'll let each reader evaluate whether or not they think our economy and political system is capable of producing the necessary revenues and spending reductions for "the rest of the government" to stave off bankruptcy.
But as long as the federal government pays back what it owes, and with a few small adjustments in the maximum income taxed for social security, it could easily be solvent for a 75 year planning horizon.
Let's not forget, these intergovernmental loans are not marketable bonds.
"Since the rest of the government borrowed the Social Security trust fund money, they will have to pay it back - big time - beginning in 2015 or 2016 depending on who you talk to."
I think you got this wrong. It has to start being paid back now! See above post as this fiscal year the Social Security Trust Fund is running a dificit of $40 to $50 billion. Furthermore, the federal government is supposed to be paying interest on the money loaned (permanently borrowed more like) from the fund to cover annual federal budget deficits.
The repayment wasn't supposed to begin until 2016, but there have been enough people who chose retirement instead of trying to find a job in the current environment that a modest amount is being paid back due to the lowered income (SS taxes) to the trust fund.
It's when the baby boomers start to retire in 2016 that the crunch really begins.
Unless we are creating things of value, and putting them into a cave for future generations (or taking things that our ancestors put into caves), on a physical basis we are working on a pay-as-you-go system. On paper at least debt versus credit balances out. Although if enough debt goes bad, that could destroy the confidence people have in the system.
"Although if enough debt goes bad, that could destroy the confidence people have in the system."
My father explained to me in 1956 that it was a confidence game, this whole government money routine. I've seen no evidence in the mountain of undefined verbiage to convince me otherwise. It will work until we stop believing in it.
The Peter Pan World Economy.
"I can fly, I can fly, I can fly!"
This is the heart of the matter. This is why our cheerleaders only speak of 'recovery'.
Read my post Social Security and Medicare Funding Issues: Even Worse when One Considers Resource Constraints.
I always hear about debt to GDP. This concept of governmental net worth is so different. Is the argument a nation's ability to produce is negated by the 'impending' drop in available petroleum?
The Automaticearth site spent some time in the last two weeks on this topic. They think we are hosed.
http://theautomaticearth.blogspot.com/2010/09/september-16-2010-max-keis...
Keep working backwards if yo want to read more.
I wish to join the chorus of those who not believe that growth is required for capitalism or any other economic system to continue. In a city with a shrinking population such as Detroit, money and various items still change hands. West Texas towns similar to the one depicted in the 1971 movie The Last Picture Show continue to function as rural communities four decades later. Growth might be temporarily useful to a sole real estate agent in a small community but at points along the growth curve, additional real estate offices may be opened, potentially negating the gains resulting from growth.
I don't think it has been conclusively proven that growth is necessary for capitalism to survive, depending on exactly what one means by the term.To me capitalism means simply an economic system based on competition, private ownership of most productive assetts,and a reasonably free market kept that way by a govt that prevents the worst of possible abuses from being realized, such as a monopoly of transportation or energy.
But it seems that growth IS ESSENTIAL, given the real world checks and balances that control our behavior.
If we do have enough sustained growth,we can reasonably expect that basically unfunded promises made by our govts can be kept, at least theoritically.Such sustained steady growth however appears to be an economic impossibility in the medium term due to past excesses and certainly is an impossibility over the long term due to hard physical restraints imposed by the laws of biology and geology, etc.
In our real day to day world, there does not exist a mechanism that can prevent businessmen and politicians from making exuberant promises-and the public accepting these promises at par- that can be kept only if continued growth does in fact occur.
Hence capitalism as we know it may indeed be on pretty shaky ground.
OFM I think you either changed topics mid-sentence or left out some detail. Government unfunded promises are, I think, unrelated to capitalism. In fact the far right seems determined to get rid of Social Security specifically, and they consider themselves to be uber-capitalists.
I agree with your definition of capitalism, though. I think the only thing we can say is directly dependent on economic growth is the use of borrowed money loaned at interest. But even that is only true in the case of the borrower, who somehow must pay back more money than he borrowed.
Overall economic growth is only required if the amount of debt in the society exceeds the amount of money in the society at any given time. If I borrow some money and steal enough from you to pay the interest, who needs growth?
Jjhman,
I'm not sure whewre you think I switched topics , but it may be in basing my comment on the fact that since the system we now have is capitalist, then the system at risk is capitalism.
I suppose the basic argument applies just as well to other economic systems-the leaders and powers that be are always inventing ponzi schemes of one sort or another , and since such schemes work very well in the very early stages, and well enough for a while, the public, being greedy and dimwitted, always falls for them.
Of course any ponzi scheme, no matter how big, must ultimately fail.
Any pay as you go system passing out money to voters whose votes can thereby be bought must ultimately fail unless some mechanism exists to prevent the politicians and bankers/businessmen from running up unpayable debts;you can't "go" without "paying" for very long, regardless of the way the system is organized.
I wish to join the chorus of those who not believe that growth is required for capitalism or any other economic system to continue
The system will continue, true. But not like it has, and if there is not 'growth' you can end up with a chorus of people claiming the system is broken/dishonest/unfair.
A growth system can make everyone feel like a winner. A shrinking system - less so.
eric blair:
Your last statement summed it up nicely.
A world of increasing fossil fuel production is a world in which everybody can have a victory, no matter how small. It matters not to the middle class person whose real income has gone from $50,000 to $60,000 a year that the oligarchs are making billions.
The same effect is seen in investments in which you can make money on bonds and real estate and even more money on stocks.
Of course money is not the only way in which somebody "wins," but it is the most obvious and quantifiable.
We no longer have that world, and so from now on most people will be losers, with an ever smaller percentage of winners.
In fact even without net energy decline, there are pyramid dynamics inherent to infinite debt and population growth on a finite planet, and they have to collapse at some point. They would collapse even if every country on the planet had a nuclear fusion reactor.
The net energy decline will only make this worse.
The question for everyone is how to position themselves for a victory in such an environment.
Exactly. And the housing-driven bubble was far and away the juiciest something-for-nothing scheme in a very long time, so it was politically unstoppable.
Growth is necessary in order to pay back debt, because of the additional interest that increases the debt over time.
Yep--
Take a look around--
How are things?
In the past many countries have repudiated or inflated away their debts. I believe that such a solution will be forced on the US. This issue is addressed in today's post at Zero Hedge and in the current Grandich Letter.
http://www.zerohedge.com/article/us-has-no-chance-option-1…-so-leaves-options-2-or-3
You could still have a functioning debt system in a steady state or shrinking economy. Obviously the sustainable level of debt is smaller, but it is far from zero. The problem really is that we have baked a lot of optimistic expectations into our formal systems, and they aren't going to be able to deliver the goods.
What I have said is that the sustainable level of debt is smaller. Very short term debt will continue to work, and there will be some longer-term debt. I expect people will continue to use debt in ways that are exploitive, even when the default rate is high--for example to keep slaves in bondage, because of money they owe.
The world experienced a relatively flat economy for long periods in the past, and the world still had some debt--far less then today, and it was more looked down/less available on for individuals.
As oil depletes, we are entering a whole new period in world history--a world of long-term economic contraction rather than economic growth. In that atmosphere, debt will make even less financial sense than in a flat economy.
Hi Gail - thanks for the essay! It's a difficult task to distill a complex message into a short format.
Typo alert: 1st sentence, 4th ppg, in section after intro 'It should be noted'
This particular sentence also might be rethought or reworded. I think it may be understating the Peak Oil causality most of us agree is at the root of the economic troubles. Yes, the investment and credit factors will now pile onto the mix of variables affecting production - but without stagnant production and volatile prices, would they have been as important as they are now?
cheers!
Gail,
Fantastic use of your 1500 words! I'd been wondering about the issue of oil substitutes, and as you say:
From the EIA U.S. Oil Demand by End-Use Sector, 1950-2004, about 1/3 of oil consumption is in the industrial sector. Even if alternates could be scaled up, how well would they substitute? It seems that there might be problems with different chemical compositions of the substitutes that would make them unsuitable for industrial applications. Even as fuel, we know that the energy content of corn ethanol isn't as high as the equivalent volume of gasoline.
Why not use shale oil.
Injection of hot nuclear derived hydrogen into underground shale oil formations will free up the shale oil and fully utilize every bit of American shale oil reserves.
What is needed is a high temperature reactor that can produce hydrogen using 1000C process heat. In this way, nuclear power is converted to oil. It is just a nuclear engineering problem.
This bit of innovation will meet American oil needs for hundreds of years.
Yep, just like fusion, thorium, and breeder reactors on a scale that work.
Like the speed of light in special relativity, no matter where you view or enter the system, it will always be 20 years away.
If it is not a light water reactor, it gets short shrift from the nuclear regulators. This is a direct consequence of anti-nuke pressure. If you want progress in an area of technology, you must encourage it, not try to kill it.
We actually had a fully operational thorium breeder reactor in Pennsylvania 30 years ago. Just no follow-through because of government support for uranium/plutonium fuel instead of the thorium fuel cycle.
Peach Bottom, right?
I worked for General Atomic, the company that made that reactor a liitle more than 30 years ago. It was more than 30 years ago, maybe 40 that Peach Bottom was built. I was involved with the follow-up reactor; Ft. Saint Vrain. It was a technical disaster for a number of reasons but lack of government support was not one of them. All of the years I worked there, from 1971 to 1979, the company received something like $40 million a year from the govt for what was called "base programs". That was specifically to support the gas cooled, U-Th fuel cycle. It failed on its own, with the rest of the nuclear industry at the time, in spite of govt help.
Unlike Peach Bottom, Dragon, AVR, HTTR, and HTR-10, all of which represent successful tests proving the principle of the HTGR technology, Fort St. Vrain was arguably doomed by the engineering mistake to use a first of a kind engineered, high-complexity steam turbine helium circulator with multiple fluid bearings instead of a simple, commercial off the shelf, KISS principle, low-complexity electric motor-based helium circulator, such as the electrical coolant circulators successfully used for decades in the UK's AGCR, which have stood and do stand the test of time in a similar, yet far more chemically hostile environment than that of a helium-cooled reactor core.
Lessons learned at Fort St. Vrain have led more recent reactor designs of the HTGR type to adopt different strategies to confront issues that occurred there. For instance, more recent HTGR designs have tended to avoid large per-unit cores (in favor of more compact modular units), tended to avoid concrete reactor pressure vessels (in favor of proven carbon or alloy steel reactor pressure vessels), and tended to avoid steam cycles without an intermediate non-water based circuit between the core and the steam generators. Still others, such as the Adams Atomic Engine (using nitrogen), the Romawa Nereus (using helium), and General Atomics GT-MHR (using helium) have favored simplification of the high-temperature gas-cooled reactor concept as much as possible, down to practically a reactor and a gas turbine linked together with the reactor using a right-sized, inherently safe core with no water used in the plant design. The GT-MHR, however, is large enough that it has a system for residual heat removal using convected air.
The engineering mistakes made and lessons learned at Fort Saint Vrain delayed the HTGR - a very safe, affordable, highly adaptable, efficient, scalable, and perhaps immensely important nuclear technology - by decades due to the technology's buggy performance in this commercial test.
Short form:
It was an engineering failure because it didn't work to spec.
It wasn't a scientific failure because we learned from it.
Show me the beef.
Obviously, scale and feasibility did not meet the criteria.
20 years may be kind.
Money is a fiction. Yes, there is gold in central Banks, but we know from history that when this is promised in exchange for paper, there isn't enough. So money is trust, and faith. A religion in fact. Capitalism is as much a faith as Catholicism or Judaism or Islam: a set of beliefs demanding a regimented set of responses. Doubt the infallibility of the totemic ism of Capital and the resultant financial heresy results in chaos.
We have this periodically, just as the old religions have had their iconoclasts and reformations. The ism of Capital has been central to commercial exchange and manufacture since the invention of money.
Energy is what we are here to discuss though. The ancients relied on biomass - wood - plus wind and water to help it along. We drill, poke, scrape and turn over the planet in an ever more desperate search for the essentials necessary for the conversion of precious elements into crap. Our genius has allowed us to increase in number to a point where the crap we tell ourselves we need threatens to destroy us.
I believe that the recent economic collapse was in large part stimulated by the fear as well as the reality that oil was becoming shorter. We are learning to use it more sparingly, but we cannot do without increasing amounts of the stuff to even maintain our current comfort levels. Yes, if we learn to eat less - we would be healthier - but that's not my point, unless we can find a genuinely inexhaustible source of energy, and learn to exploit our finite resources carefully, we are condemned to disaster. A little conservation and innovation here and there will make not one jot of difference. I should add that carelessly celebrating the birth of all children, whatever the economic implications of burgeoning population, is one more measure of our intellectual inadequacy in facing this future nightmare.
Hi Ulpian:
Did you notice that the location of your post was in a discussion trend that was an offshoot from the main topic? Your comment made it difficult to maintain continuity within that offshoot.
Since your comments seem to have been in response to Gails' topic directly it would have been best to have replied to that and not tagged unto a sub-topic.
Best regards
I never agree with ausgang but I agree about oil shale as a source of oil.
Modified in-situ is the way to go, though the recovery rate is lower than with retorts.
Retorts were used in the 19th century to produce oil before the invention of oil wells.
But retorts require too much digging.
DOE estimates that you could get 2 mbpd from 1 billion tons of oil shale per year which approximately all the coal mined in the US per year.
Using hydrogen would burnt up the oil/kerogen.
You need steady heat for a couple years.
You could do it using a gas cooled peeble bed/ magnox nuke as a indirect fired furnace with CO2 as the heating medium.
Instead of transforming uranium to electricity at 30% efficiency just use it as a heating source at 90%? efficiency.
Using nukes to produce hydrogen at high temperature is science fiction, today.
The EROI of in-situ oil shale according to Shell is 3, so
a 1 GWe size reactor with 25 tons of fuel in it would produce
14 million barrels of oil in a year, 365 such reactors would replace all petroleum imports; 8Twh/300twh per quad x 3 x 178E6/q x 365 reactors = 14 mbpd.
US resource is ~400 Gb of oil or an 80 year supply requiring
9125 tons? of uranium fuel per year. Using uranium for electricity is a waste.
I agree that finding alternates is going to be a problem. Some could probably be obtained from coal, or as ausgang says, from shale oil. But whatever approach is used will take time, and will take energy. The shale oil will probably have an EROI less than 1.0 if it is used (when one counts in all of the indirect issues, like lack of water in the area, so that water will need to be pumped in from long distance), so it can be at most be used for limited purposes.
Good, we are back on solid ground!
Despite attempts to educate myself I have never understood economics and I get the impression that applies to most of us here. But we do understand thermodynamics. I don't see PO as an economic problem, I see it as a physics problem, and secondarily as a psychological one. Most of the people I come across are utterly oblivious to the embodied energy of their lifestyles and are set to come down to earth with a big bump when supply dips. Some are oblivious to the embodied energy of their midriffs, and the bump will be bigger still.
Couldn't agree more! +10
Game-theory economics is an orders of magnitude harder problem than predicting oil depletion. The former is understanding psychology and the latter should be just bean counting.
Then you look at the state of oil depletion analysis, which is all heuristics AFAIK, and you realize that economists are really way over their heads. If they can't do the peak oil, no way can they predict economic activity.
And if somebody claims they can do classical economics, ask them to do a peak oil analysis. It should be child's play for them :)
-100
Our economic system is built on two fundamental things: trust and promises.
Yes, yes, I know. The "economists" use many funny money alternate words for these things like, "credit worthiness" and "fiscal prudence" and what not --all for the purpose of fooling those people that Abe Lincoln said you couldn't fool all of the time even though it's done day in and day out.
Many of the "promises" made in our economic system are based a presumption that cheap transport energy and other kinds of energy will always be available in ever growing (exponentially expanding) quantities.
The MBA school projections don't even have a "what if" variable factor to account for Peak Oil. Of course a substitute will be found in time, they say. It always has been so and always will be so. (None of the "prudent" economists accept the notion of a Black Swan. The Market always provides, blessed be its name.)
Yes.
You are correct.
I mentioned two fundamentals.
As for the other one; in Julian Simon, Dan Yergin and CERA we trust (cough cough).
I still say economics theory is sound on Peak Oil, it is just a vanishingly rare economist that will actually plug the pessimistic numbers into their equations and admit to the outcome.
The market solution is scarcity rationing by price, which means that the solution to increasingly rare or expensive to produce commodities is that the rich take their fill, followed by everyone else in declining order of ability and willingness to pay.
Admitting to this is not the way to political success.
Water can come from the Howard Hanson Dam or from the water table. The water table must be lowered below the shale extraction zone anyway. There will be plenty of water.
The Eroi and CO2 emissions will be good if an "in situ" extraction method is used.
And how do you go about lowering the water table in these shale (actually marlstone) formations?
Shell has been working on extracting oil from shale for nearly ten years and their project uses heating rods surrounded by a "freeze" zone to get the oil to flow to well bores. Shell has yet to produce this oil from shale on a large scale and I understand the second phase of their project was put on hold more than a year ago.
Perhaps the above depicted method might work, but who or what company is willing to invest hundreds of millions $$ and take the risk?
IMHO, the current shale oil extraction techneques suffer from a lack of energy density. At the end of the day, the longer it takes to process the shale “in situ” the more total energy is required. This delay reduces the EROI of the extracted oil.
Another alternative, removing 1000 feet of overburden also consumes a great deal of energy and capital.
In addition, conventional mining followed by above ground retorting may be employed but is accompanied by various undesirable aspects well known in the art. This approach is also destructive to the EROI.
Furthermore, while retorting leaves behind in excess of 50% of the organic carbon on the spent shale, hydroprocessing successfully converts in excess of 80% of the carbon and at lower temperatures with a resulting higher selectivity for oil forming reactions.
In calculations that I have made, nuclear heat and hydrogen increase the productivity of coal to liquids by a factor of five. The same will be true for shale oil processing, since no shale gas will be needed for process heat or hydrogen production. All the shale oil will go toward shale oil feed stock and none will be wasted to produce process heat.
It is important to protect the water table from contamination and the land from moonscaping. The water table can be lowered by aggressive pumping around the process volume and the application of high volume heat to expel water from the process zone.
To enable this type of processing, a high power density very high temperature reactor with a heat capacity of a few gigawatts can deliver the required electric power, process heat(1000C) and hydrogen that can extract high quality shale oil quickly and with good EROI.
Such a reactor should be very small and relocatable to facilitate logistics. It should be deployed underground, be air cooled, and fully automated.
Development of such an “oil extraction reactor” is within the present state of the nuclear engineering arts as demonstrated by several space deployable nuclear powered propulsion reactors; one being a lithium moderated reactor using TRISO fuel. This reactor has an amazingly high energy density of 30 megawatts per liter of coolant.
It seems to me that this approach to the oil business will be much less risky and far more profitable than deep sea oil drilling once the appropriate reactor technology is in place.
As always, contrary opinion is welcome.
When ts begins to htf, and people begin to die and the stark reality begins to descend, you can bet that people (who are left) will move to the coasts and desperately convert the entire central US between the Rockies and the Appalachians into a mega pit/strip mine - the Mississippi will be the waste chute, and the gulf of Mexico the cesspit. There isn't going to be any need for wells, they'll just EXPOSE the shale and let UV do its work.
Hey Gail, the linked article below is on Google news right now.
"The Biggest Systemic Risk For The Financial System Is Limited Oil
Gail The Actuary, The Oil Drum | Sep. 21, 2010, 5:20 PM"
http://www.businessinsider.com/peak-oil-systemic-risk-financial-system-2...
Of course I've personallized Google news for topics of my interest, such as peak oil, but still its a feather in the cap.
Yeah.
+5 for what Gloomy Gus said:
Thanks! I noticed that too. I see that they made a little more readable title. That was probably a good idea.
I am glad the article is getting some additional exposure. Some of this is pretty familiar to regular Oil Drum readers.
While the implications of GAil's essay will be coming to kick us in the hind end over the next ten years, there is one aspect that I think Gail is ignoring - that non-productive uses of oil will disappear first as prices rise.
For example, when prices shot up in 2008, sales of SUV's went down, sales of small cars went up. In other words, sopme of the non-productive use of oil for hauling the fat ass of an SUV around went away.
The same could happen to our basic commute length - a fifty mile commute is non-productive. Once the housing bubble is fully collapsed and the housing market becomes more liquid, I expect more people to opt for shorter commutes as the price of gas rises.
But I do not think that the impending decline in oil production will necessarily lead to a drop in growth. We still have other forms of energy generation that are sustainable and generate a high enough EROEI to replace oil. Isn't oil's EROEI about 20 now? And isn't wind generated electricity in about the same ballpark? And isn't wind within the realm of economic feasibility? If so, then wind generated electricity can substitute for oil.
Yes, I am sort of ignoring some realities of substituting wind for oil - ie, the need for heavy batteries that we'll have to haul around, so that question should be approached from the 'total system' angle.
The US Senate held hearing today on the to-big-to-fail steam paddle boat operators and owners. Allowing the fleet to bankrupt would mean thousands of union dock workers, cotton producers, and associated industries would also fail. The Plains Wagon Company, joined the paddle boat companies as interruption in service would mean less buyers and raw materials.
President Amabo stated that in a proposed reorganization the United States would become a 60% owner in the fleet, and that a substitute for clear cutting timber along the river needs to be found. "The clear cutting has caused significant erosion along our rivers," stated the President and that redistributing tax would help pay for the plan. Some Senators have suggested the US sells its 60% to Chinese investors.
Mean while investors that have proposed a transcontinental railroad have found it difficult to fund the project due to the new 70% income tax. Henry Ford stated he was about to release a horseless carriage that would not require any firewood.
***
Markets change. There will be winners and loosers. Further, standards of living change based on wealth, the velocity of money, and economic/labor resources. No doubt that energy is power. Those with the most energy, capital resources, & labor resources have the greatest standard of living. Right now China is winning the fossil energy battle as they want to book any and all reserves possible world wide. Thus they will win the economic war and their standard of living will rise as ours fall. And their economic power will increase their influence on our future.
Yes, there are limits to growth ie bacteria in a dish. Once the culture media is gone the population dies. But bacteria lack the ability to adapt ourside their dish driven by the desire of the individual to get ahead and free market incentives that optimizes efficiency and creativity. Solution will be gradual with a multitude of factors changing, just it took time for the railroad & automobile to replaced the paddle boat.
Although it is possible for the transition to be punctuated by catastrophic events similar to the 30-50 million bison that were destroyed by Brucellosis, not Buffalo Bill that killed 1200 in his best month. Of course, perception will depend on the type glasses you wear.
Historical anecdotes are interesting, but don't change the current situation. It's late in the 4th quarter, oil production already started plateauing in 05 and is still to this day in a small range at that plateau. The descent from plateau will occur most likely from a variety of estimates within the next 5 years. So you're going back to punt, pass or play - which is it and what energy source keeps the ballgame, BAU in play?
Umm, hmm, ngggg - too late, delay of game penalty - partial economic collapse. Try again - what do you have to offer besides veiled ideas of some kind of last second cornucopian techno-whiz contraption? Whistle blows - False start - mass migration, famine, riots, rationing, long lines, etc. Last play from scrimmage. Ok this is it - hail mary pass for what type of energy to replace oil that is cheap enough to continue mass transport and economic growth? The QB is sacked - time runs out, nggggggggggggg, game over - total worldwide economic collapse. Population squeezes through bottleneck to 1/5 the previous population - farming at the local level. Alright everyone we all need to take turns helping to till the soil, feed the chickens, clean out the pig slop, etc. Come on, let's get to work.
''''''''''''The point I try to make in the essay is that the financial system requires economic growth, but oil supply seems to be flat, or even declining in the not too distant future. Because of the many benefits oil provides, this loss can be expected to constrain economic growth.'''''''''''' end quote.
We all know the financial system required economic growth... and insurance companies and banking companies and other large corporation are the problem... the Price System is the problem.
Because of the many benefits oil provides?
The only benefit I can think of besides running industrial civilization is that it provides a lot of money for big corporate groups... other wise it is killing the planet.
Constrain economic growth?
I love this about the Oil Drum.
It is totally bluff.
No content.
Only very vague nonsense about the economy... and no viable alternative ideas presented with a science perspective... just money nonsense.
Alternative it is not... maybe it is a place mostly to deliberate things like money.
No foucs on non market economics.. biophysical or thermoeconomics in a non market system.
But then special interest groups... insurance companies .. banks... arms manufacturers control our system don't they?
That was a rhetorical question. Please do not answer.
Maybe some people could explore viable alternative ideas here with the view that maybe just maybe something can be done about the situation we are in http://technatedesign-tnat.blogspot.com/
Whether or not oil is killing the planet, it is also what is maintaining our food system, and keeping us alive. We have tough choices. There is serious doubt that the current world population could be maintained without oil. This is a huge problem that those pushing the false promise of "renewables"--which are really fossil fuel extenders--are ignoring.
The catch with fossil fuel extenders like wind and solar PV is that they stop working in the same timeframe as oil and other fossil fuels. If natural gas becomes unavailable for balancing, we will have a very difficult time maintaining a steady electricity supply. Even solar panels on top of our homes become much less useful, if there is no electrical system to input it into, no battery manufacturer, and no manufacturer of electric light bulbs and small appliances. At some point, they just become another roofing material.
Even solar panels on top of our homes become much less useful, if there is no electrical system to input it into, no battery manufacturer, and no manufacturer of electric light bulbs and small appliances.
You only need one battery if you buy the right ones.
Nickel Iron based on Sodium Hydroxide.
http://www.zappworks.com/battery_specs.htm
The failure point over time becomes the inverters. (the step up/step down electronics is the failure point of the non existent EEStor EESU. Electrolytic caps don't last.)
Having a few electric motors will help make a difference. Buy things like Stauber washing machines (big pully/simple construction/uses stainless steel) which can be retrofitted and, so long as no one comes and takes what you have, you should be set for your life.
dupe
''''''''''''''Whether or not oil is killing the planet, it is also what is maintaining our food system, and keeping us alive. We have tough choices.'''''''''''''''''
Not really... only 'killing floor' choices in the Price System, debt control contract society we live in.
Assuming 'that' template is the ONLY method,... is really part of the problem in blogging sites like this.
And that is what this is... just a blogging, social networking site.
Unfortunately when the focus is on the current societal template of abstract concept of debt, price, value, etc.. which is working sort of, but not viable, in the future, the same buggy whip mentality rules.. here and other places - I Am The Price System https://docs.google.com/Doc?docid=dfx7rfr2_70cmz88f&hl=en
Computer traded debt tokens used to control and carrot and stick humans in a price system... and people that only think in terms of monetary profit and loss, destroy us now as they fight over whats left of the resource scraps.
''The supply of computer-savvy workers on Wall Street has never been greater, thanks in part to programs now being offered at top universities. In New York, students can earn a masters degree in Financial Engineering through a pro...gram affiliated with NYU.
That sound like a good future? Hello suckers.
You have said this a millions times. But you have never explained why there would be no battery manufacturer, electric bulb manufacturer, no electricity, etc. Even in the poorest of countries there is no shortage of batteries and bulbs. This shows that it takes very little energy to make these things. I agree that we will not have enough oil for everyone to drive a big car or fly to Hawaii on vacation. But we will have more than enough oil to maintain civilization.
Dude, been there, done that, repeat analysis confirms that collapse is the best answer. It all comes back to overshoot in population. You can't solve that problem without collapse.
DD
Gail, thanks for a very thought provoking brief. I am impressed with the quality of comments posted in reply. Even when they don't agree, they provide food for thought. It seems like no one addressed your primary point which is risk management. Regardless of what a person feels about how the economy works, or should work, or should be changed, given the economy we have the risks you highlight are very real and need to be addressed. I do disagree that oil supply is an economic issue. We must always think "stocks and flows". Sure the stocks of shale oil and tar sands are high, but the practically recoverable share (think EROEI) is much smaller, and the flow will never be ramped up to the level of conventional oil. These sources will slow the decline and provide a very long tail, but will not delay the decline.
I think everyone here is familiar with the Megaprojects Wiki. It sure looks like the decline starts late 2012 at the latest, and there is no way that surprising new projects can be brought on stream in 2 years to prevent that from happening, so the risks need to be addressed now. Your article is a very important heads up. Murray
gail, just saw your last comment, especially :those pushing the false promise of "renewables"--which are really fossil fuel extenders. I think you are way off with this one. Over a 30 year or so time horizon renewables become a very practical alternative for much of the oil, leaving the share used for industrial purposes still available for a very long time. We will have to make a lot of changes, but most of those are already known, and most of the solutions exist. Wind intermittancy is the most often cited issue, but does not have to be a killer. For example: Over a sufficiently large geographic area the wind is always blowing somewhere, and with a large enough and well balanced grid, can be harnessed to provide electricity most of the time. When wind generates more power than the grid needs the surplus can generate hydrogen from water, and the hydrogen can be stored to run turbines to help balance low wind periods. In the worst case rolling blackouts can be used (probably very sparingly)without excessive impact on the economy. There is plenty of class 4 wind in the USA to generate the full 100 quads of primary energy that we use today, but we don't need 100 quads. About 40 quads or so of primary energy from coal, NG, nuclear, and a bit of oil only provide ca 12 quads of electricity. So wind only has to replace those 12 quads. Similarly, oil for transportation only gets about 15% of useful work out of the primary energy in the oil. Wind electricity to hydrogen and/or batteries can surely get at least 50%. So most of the ca 25 quads of oil we use mainly for transportation can be replaced with less than 8 quads of primary electricity. And then we have efficiency and conservation, which could cut North American primary energy use, as we know it today, in half, without significant economic sacrifice. The net result can be that about 80 quads of non renewable, non nuclear energy in North America can be replaced with less than 30 quads of renewables, probably much less (I believe less than 20 quads).
As you know, oil supply doesn't collapse, it declines, and that gives us time to implement the alternatives, ie efficiency, conservation, renewables and nuclear. We won't do so without disruption, but we can and will do so over the next 30 to 50 years. People that believe renewables won't do it have not thought their way through all of the issues. We have all of the necessary technology today, and most of the necessary economics of production. We need the political and social impetus to make it happen, and that is where your risk factors come in.
You might recheck your quad numbers. In the midwest, the wind generators run 45% of the time and during times that are not peak. Best wind spring & fall. Most needed with no wind, very cold winter, and very hot summer. Electricity is limited by distance.
All of the following fuels are equivalent to 1,000,000 Btu's.
Electricity 293.083 kWh
Gasoline 8.0 gallons
@125,000 Btu/gallon
Fuel Oil #2 7.194 gallons
@ 139,000 Btu/gallon
***
Turbine GE = 1.5 megawatts
5 million BTU/hr ~ 1.5 megawatts
5 million BTU/hr ~ 1 bbl crude oil (24 bbls/day)
***
Vestas V90-3.0 MW turbines (48 bbls/day)
67 - V90-3.0 MW turbines ~ Electricity for 45,000 average American homes
***
World oil Consumption 6/08 = 85.22 million bbls/day
U.S. Petroleum Comsumption = 20,689,000 bbls/day
U.S. Crude Oil Production = 5,064,000 bbls/day
U.S. Crude Oil Imports from OPEC = 5,980,000 bbls/day
U.S. Crude Oil Imports from Persian Gulf = 2,163,000 bbls/day
U.S. Motor Gasoline Comsumption = 9,286,000 bbls/day (390 million gal/day)
U.S. Motor Gasoline Comsumption per person = 1.3 gal/day
Share of US Oil Consumption for Transportation = 70%
U.S. Strategic Petroleum Reserve = 697,000,000 bbls (34 days)
U.S. Population = 301,139,947
Need about 450,000 wind generators (2x due to wind availability) @ 3 million each? About 2.7 trillion investment with a limited life. Spaced on 14 acres, about 9,800 square miles as an example of wind generators equivalence to oil consumption.
Your numbers are similar to mine, but you miss the point that we only have to replace, at max, 1/3rd of the oil. Limited life?? Say 100 years for the towers and 30 years for the rotating equipment. Not so bad. Coal fired plants also have limited life. Even assuming 300k generators over 30 years we would have 10,000/yr, in an economy that can build 16 million cars per year. No big deal. $3m each? More like 0.9 dollars/watt or less. Have you checked global oil industry expenditures on E&D? Same ballpark. So what are you trying to say?
Leverage & Deleveraging
There are actually a number of aspects to Leverage & Deleveraging, but we should start with the more commonly known.
Financial Leverage & Deleveraging
Leverage is the process of using Debt, which is funded by future Earnings, to acquire Assets (Physical or Intellectual Property). These Assets may then be used to acquire or increase income or simply to improve a standard of living.
In good times, which were pretty much the last 60 years, being highly Geared or Levered, was usually an advantage, as income rolled in from everywhere, to pay off the Debt, in a Global Economy that was virtually guaranteed to grow, in a world blessed with a growing Population, Cheap & abundant Energy sources & apparently limitless Other Essential Resources!
In fact, the higher the Debt, the better.
If you owed the Bank a little and you had a problem, then YOU HAD THE PROBLEM!
Whereas, if you & your mates owed the Bank a ShipLoad and you had a problem, then THE BANK HAD THE PROBLEM!
However, nothing lasts forever and one day the inevitable happens, the Assets you acquired (by virtue of Debt) are now worth less than what you owe on the Debt or in some instances the assets really were “worthless” (subprime mortgages) OR your income declines, to the point where you can not make the required payments.
You may perceive the need to transfer surplus income into paying your Debt down or off, if you have any surplus income?
If you don’t have sufficient surplus income or not enough income or no income at all, then you may voluntarily decide to sell some or all of your assets, until the Debt is cleared? Of course, the Bank may make that decision, in-voluntary!
If there is only one of you or you are a small entity, then YOU HAVE A DELEVERAGING PROBLEM!
If there are many of you & you are large entities, with a particular Bank, THEN THAT BANK ALSO HAS A DELVERAGING PROBLEM!
If the whole nation has similar problems, then THERE IS A SYSTEMIC DELEVERAGING PROBLEM and the problem again becomes one for EVERY TAXPAYER!
In the current instance, pretty much every country in the world will be Deleveraging simultaneously!
There are two obvious ways to deleverage –
1) Pay down or off, the relevant Debt.
2) Increase income/earnings or Capital in the case of a business, possibly via more Borrowings.
Given the current Financial settings, where Banks are also deleveraging, many are finding & will continue to find, increased borrowings quite difficult.
And, given the Marco Global settings of reducing Demand, due to Baby Boomer retirements, a slowing Population growth rate & a decline in the Consumers disposable income, many will also find increasing their net income will also be quite difficult in future.
Is this correct? Well, yes and all we need to do, is look at the Japanese experience since 1990, to confirm it. Japanese businesses & Private individuals have been hunkering down since 1990, when their Aging Population started to impact their economy. Notwithstanding, that the Japanese had the rest of the world still going gangbusters until around 2005, the Japanese are still in the Deleveraging Doldrums Two decades later and the Japanese didn’t even have Peak Oil to contend with, until recently, when it bust forth onto the world.
So, paying down Private & Business Debt, that’s all there is, CORRECT?
Well, actually no! There’s more, quite a bit more!
For starters there is Government Debt, which in the case of Japan, the USA and many other countries, Government Debt has been rising quickly in the form of Economic Stimulus packages & Corporate Bailouts, as Private & Business Debt may or may not have been declining. The effect is, in the main, that net Debt or Total Debt to GDP ratio’s are still as high or even higher now, than was the case in 2007. You see, all Debt, whether it starts as Private, Business or Government, will finally revert back to the national consumer and in one way, shape or form, the Public will pay!
In the case of the USA, Private individuals and Business have started paying down Debt, but the two recent governments & the Federal Reserve Bank have gone on a Debt binge, with the net result being that the total US Debt has not yet started to De-lever.
In fact, many countries, including the USA, are going down the Japanese path, in the mistaken belief that things will eventually return to “normal” & the Politicians now in charge, won’t have “the collapse” on their watch?
The fact is, that due to Baby Boomer retirements, a slowing Population growth rate, Peak Energy, Climate Change & the massive existing Debt, things are not going to return to normal and at some point, we will have to voluntarily start the process of Deleveraging or others (China) may make the decision in-voluntary!
So, at last, that’s it, that’s all there is, CORRECT?
Well, actually no! There’s quite a bit more!
For starters, we have only talked about Real or Tangible Debt, where Private Individuals, Business & Government have acquired Assets of a Physical or Intellectual Property nature, which were funded by future Earnings.
But for many decades now, Politicians (in many countries), Economists & others, have also Borrowed from the future, in order to fund various issues of their day, thinking that the future would always grow and generate the funds needed, then.
THE POLITICIANS & ECONOMISTS WERE WRONG!
Tomorrow has now become today & just as the Baby Boomers are starting to retire, the promise of their pensions, their Self Funded Superannuation schemes, Share Markets, Real Estate prices & their Aging medical care, ARE ALL EVAPORATING, leaving a mountain of UNFUNDED OR UNDERFUNDED Government Liabilities, which do not show up as Debt, but these Liabilities will need to be paid in full, thus greatly increasing future Debt or paid in part or defaulted on and any of those actions will make an already bad situation, worse, in some way or another!
![]()
http://financialinsights.files.wordpress.com/2010/09/population-pyramid2.jpg![]()
Above is a snapshot of the Canadian situation, where the total Population is somewhat higher than Australia, but the Demographics situation is similar to OZ & for that matter much of the world. It is the Baby Boomer Bulge that is set to cause so many difficulties, with not only unfunded Pension & Medical Liabilities, but also the substantial decline in Demand that must come in all areas of Products & Services, as the following generations are relatively less in numbers, but they will also be less well endowed financially, as this GFC wears on, year after year!
In the case of the USA, the unfunded Liabilities are estimated at anything from US$50-$80 Trillion!
The above chart demonstrates how expenditure and investment changes during various periods of life. Whilst the chart suggests that Spending Peaks at 46.5 years and savings then start to take precedent, I usually prefer the range between 45-55 years old, with 50 being the Peak.
Whichever is the case, the boomer generation decline in spending & increase in savings, will now become increasingly noticeable and that will contribute towards Deleveraging & the slowing of the overall Global Economy!
So, paying down Private, Business & Government Debt, plus unfunded Government Liabilities, that’s all there is, CORRECT?
Well, actually no! There’s more, quite a bit more!
You see, the entire Global Monetary system is based on the proposition that the Economy will, in fact MUST, continue to grow forever, so the entire Economic system is leveraged to a claim that Future Earnings will always be exponentially larger than before, which contravenes at least 2 basic laws –
1) The laws of nature prescribe that exponential growth of anything, is not possible in a finite world!
2) Dr Albert Bartlett’s First law of Sustainability, is that Population growth (human) &/or growth in the rates of Consumption of Resources CAN NOT BE SUSTAINED!
But our Monetary system is not the only Macro Economic factor, which involves our Economic system Leveraging that Factor against Future Earnings and where the system assumes the exponential growth of that factor!
Also in that same boat, the Titanic, are –
1) The never ending Growth of Human Population, which delivers a claim of future human labour.
2) An ever improving pool of human Knowledge & Innovation, which delivers on the necessity for future claims on increased Productivity.
3) A Limitless Supply of Cheap & Abundant Energy, including Transport, which is necessary to enable all of the other claims on the future, to become reality!
Let me be abundantly clear, Exponential Growth of anything, in a finite world, IS NOT POSSIBLE, over time and we are now approaching a many of those limits!
All of the above will eventually come to an end, the only thing in doubt, IS THE MATTER OF TIMING.
That said, human Population growth & Energy Supply are now Peaking and within a relatively short span of time, both will start to Decline, without mitigation having started.
There is then, only one remaining possible bastion of hope for the Monetary, Economic system and a massive Global Deleveraging against future expectations and that is that the human condition of Intellect, will outweigh the other human conditions of Wrath, Greed, Sloth, Pride, Lust, Envy & Gluttony?
Now, that may be entirely possible and I hope it is!
But I just don’t believe that good Global Economic Policy, with so much riding on the outcomes, can be left to such a wing & a prayer?
Good luck & watch the Debt!
Btw, not sure why, but I can't post images???
Simple Keynesian model is enough to explain the effect of oil prices on the U.S. economy via Net Exports.
Here's my analysis: http://marylandenergyreport.org/2010/09/23/is-petroleum-a-barrier-to-u-s....
While it is obvious that peak oil will be a shock to the status quo, I am not convinced that it will have a significant impact on economic growth.
I reach this conclusion because two of the big uses of fossil fuels -transportation & heating fuel- don't really add any value. Both of these tasks - transportation & heating- can easily and cheaply be performed otherwise. Once it sinks in that cheap oil is over, societies move to passive solar heating and walkable urban living. Neither of these options imply negative economic growth. It is even feasible that the transition would result in increased economic growth.
Under such a scenario there would be -of course- a transition period with much gnashing of teeth. But one hopes that this too would be transitional, and societies would just deal with it.
Or am I being too naive? Societies will not make such a transition without a great deal of self flagellation?
I assume we don't do it now because we like doing it harder and dearer.
The transition is already happening. Look closely at what's happening in commercial real estate. Only the projects with the best prospects get financing these days and that means mixed use, walkable, transit-oriented, urban. The era of the strip mall is over.
Sprawl has reached its maximum and will now begin to contract. Unfortunately, politicians and voters are still addicted to highway ribbon cuttings.
Exactly right. Bravo.
If the natural world is to be given its due and the human world is not to go utterly mad, then we have a great deal of work ahead of us. What troubles me is the way ‘the brightest and best’; the smartest guys in the room; the ones who report they have not flown commercial since the 70s; the casino operatives who have added nothing to the human economy and marked themselves as thieves of the highest order; the relentless plunderers of Earth’s resources and reckless degraders of its environs; the greediest among us who have hoarded most of the world’s wealth but done nothing productive to obtain it; those who live long and large without regard to human limits and Earth’s limitations, engage so righteously in conscious deception as well as in willful denial of any effort to communicate about matters of concern that do not buttress their selfish interests. These self-proclaimed masters of the universe have much larger, more fashionable and ever important agendas than educating the human family, telling the truth and doing the right thing, I suppose.
Perhaps the time has come to sort out what is sacred from what is profane about the predominant culture. We need to do this one thing soon, I suppose, because what is profane about the culture is threatening to overwhelm the whatsoever else is sacred in the planetary home we inhabit. At least to me there is something perverse harbored within a culture that makes it ok for the most arrogant, clever and greedy among us to “obey the laws” and still destroy everything which is known to be sacred in the planetary home God blesses us to inhabit…and not desecrate as is plainly occurring in our time. Sad to say, the children will be justified to look back in anger and utter disbelief at the way their avaricious leading elders dishonestly and duplicitously destructed the natural world, even as they claimed so seductively, arrogantly and self-righteously not only to be protecting and preserving God’s Creation but also to be doing “God’s work”.
What a shame it is that a tiny minority of morally bankrupt, craven greedmongers are allowed to perpetrate a sham in the name of the human community and God which will likely turn our planetary home into a shambles!