More Peak Oil Stuff

I long to dead, and sleep with the fishes under the sea/ they can swin through my head, and stop all the traffic jams.

~Matthew Good

Money. The horn in your car empties its insides again and again. It's eight in the morning and the streets are clogged. Money. The dirt in the field becomes more fickle as we try to suck more out of it. Damnit that food tastes good. Money. Your muscles burn like wood rubbing against wood as those pipes are carried farther and farther. Oil keeps us warm. Money. You kiss your son and daughter goodnight and tuck them in. I will go anywhere I need to so they can sleep like this at night. Money. Those briefcases exchange hands without a sound. There are dead men to be found around here. Money. It drives most things. Not all, but most.

I have yet to figure out which is more important. Money or production. Neither could exist without the other, but the proposition has certainly been put out there that if we were to break out of our current mind frames the latter could be done without the former. Personally, I'm not so sure that's a great idea given our current mind frames and problems with resource depletion.

Why am I typing any of this? Because I think a lot of people are going to die if there isn't some kind of dramatic wake up call in the next very short little while. It's kind of happening, but to what degree I'm entirely sure. Scores of books have been coming out in the last few years explaining the link between energy supplies and the complexity of a civilization. Thus, it follows if we can't continue to harness energy at the rate we've been doing do, and we refuse to set a crash course, quite simply, we're fucked.

Right now, most the pessimists say because alternative energies can't equal the amount provided per unit of energy that fossil fuels provide society can't continue.

While there are certainly valid concerns about the reaching length of alternative energies, the basic premise is, in my opinion, over exerted. The pessimists have perverted the issue with quality rather than quantity. As demand and supply rise, the price will go down. Everything, and I mean everything, is dependant upon price. But that's an issue for later. Right now is about here and now.

I said I would post some thoughts I've had on the matter in the next little while so here they are.

Economics and Limits

If someone needs a product, they trade a certain amount of a good (obviously in our system that good being money) that is considered to be of equal value to the work someone else will do to produce the good or service needed. It has, and still does today, worked marvelously on a social level. People need to consume and people also need to be kept busy; through the process of work these needs are met. If we consider what would happen in the absence of financial capital in a capitalistic society, the only other alternative seems to be a Machiavellian vacuum where realism tends to rule. Money would seem to be one of variables in the equation of A+B=C. The “A” being us as individuals, the “B” being the financial good, and “C” the product. If you change the value for any variable from this equation, you will not get the same answer. Following from this, if you have a large society with large needs, you will need a large numerical value for both B and C to support those needs. Today’s world is in this situation. Our A value is always increasing which demands an increasing C and B value.

This brings us to how money is created.

As is noted in any Macroeconomics 101 text book, the creation of money, as a paper product considered to be worth something of value, first arose when gold was used as currency. People would give their gold to goldsmiths to keep safe and goldsmiths would issue receipts to the individuals reflecting the amount of gold the individual had stored with the goldsmiths. Basically, goldsmiths were the equivalent of today’s banks. Overtime these receipts issued out to gold holding individuals came to be considered just as good as real gold itself, which in turn led to the individuals who had the gold stored not bothering to redeem it. They simply used the receipts as capital instead. As this trend continued to spread goldsmiths began to realize they always had more gold in storage than people would ever come to redeem in a day or a month. Eventually they realized they could offer interest earning loans to merchants, producers, or consumers at a higher ratio than the actual reserves they had stored. (Today this is known today as a fractional reserve system). These interest accumulating loans allowed goldsmiths to make a profit and increase money supply in their respective economy. In other words, we figured out how to increase our B value, which increased the C value- we learned how to grow our economy. (see the industrial revolution)

The same is done today, but instead of gold being stored as a reserve, banks use a paper currency, and issue out what are called demand deposits. These are loans issued out in the form of cheques or chequing accounts. In order to stimulate the economy and increase growth, banks offer these loans for people and businesses so they can buy things they normally wouldn’t have enough money in one transaction to buy. These things include cars, houses, land, computers, tools, etc, all of which add to GDP levels. In order to control the boom and bust cycle all capitalist economies experience, central banks use increasing or decreasing interest rates on loans to encourage or discourage spending.

With large consumption or spending habits of some countries though, in order to keep GDP levels growing (AKA: continue economic growth by off setting overspending in certain areas) sometimes the central banks, or governments, have to ask other central banks in foreign countries for loans. However, instead of taking out loans, as is done domestically between banks and people, the government or bank pays that foreign central bank by selling them bonds. A bond is basically the reverse of a domestic loan. Domestically, instead of a consumer taking out a loan from the bank, the consumer lends out money, with interest, to the government, and the government issues a receipt back of how much it will owe. When this is done internationally, either with a bank or a government selling a bond, the foreign bank buys the bond and adds the amount the selling country owes to its reserves.

Enter the United States. Because of the Iraq war, and rising oil prices, the government is having to sell more and more bonds to foreign banks to finance economic activity. With the large amount of money sitting in foreign banks during unstable times, these banks are becoming less and less sure of stability in the U.S dollar. If this instability continues foreign banks could start to become more and more reluctant to continue lending to the U.S. If you consider this on a micro level of a chartered bank refusing to give a loan out to a past undependable borrower it makes sense. If the borrower already has a bad credit rating, and you don’t expect him or her to pay you back, you’re probably not going to lend them more money.

This problem is compounded because this leaves the door open for the potential dumping of U.S reserves (which means banks would sell off their investments in the U.S dollar to offset larger potential future losses expected). The great risk, as Clyde Prestowitz, former trade advisor to Ronald Regan notes, is since investors are so prone to even the most mundane signals, all it might take is one bank selling their extra U.S currency to create a domino effect. Clyde points out that this almost happened when “a mid level official at the central bank of Korea used the word diversification”(The Australian) and the market fell by 100 points in 15 minutes because people thought South Korea might be shifting out of U.S dollars. If a foreign central bank actually did sell a significant amount of U.S reserve currency it could create a panic in the stock market where all buyers would start selling because they wouldn’t want to risk losing more money than they potentially could.

So what does all this have to do with peak oil?

As we examined section one, the primary, secondary, and tertiary industries are each dependant on each other existence (These are all things that add to the value of C). However, each of them owes their existence our ability to harness vast amounts energy in the form of fossil fuels. The flow of this energy is dependant upon people consuming to help the economy function (consumption adds to our B value which is money). As was proved in the Great Depression of the 1930’s, the amount of resources you have at your disposal is inconsequential if you do not have the monetary funds to harness them. Energy, at least in its cheapest form of oil and gas, is not going to be available in large quantities due to future cost constraints created by a falling supply and a rising demand. It is estimated supply will fall globally between 2 to 4% per year once peak oil hits. If we consider a 5 percent drop in production caused prices to quadruple in the 70s, which led to high inflation and interest rates, it’s not out of the realm of possibility that a 2 percent decline in production each year would eventually lead to hyperinflation and then stagflation. In theory, the lending power of chartered banks (banks where most financial transactions take place like BMO, Royal bank, TB, ETC) should decrease because private consumption will decrease and then investment costs for businesses will also rise. Thus the overall amount of GDP made by oil consuming nations will decrease. Domestically people won’t want to take out loans because interest rates will be too high and they’ll be trying to conserve. Internationally, a country like the U.S will need to take out more loans to finance economic activity, but won’t be able to because no one will trust them to be a reliable investment. This is related to our loan based economy because as Richard Heinberg points out “if new loans are not being made, then somewhere in the network people are will be finding it impossible to pay the interest on their existing loans and bankruptcies will follow (Heinberg 188)”. As many researching this subject have noted before me, if this occurs, industrial economies can eventually say bye-bye to growth.

It brings us back to the equation showed at the top of this section. Like any number of variables that combine to give you a product, if any numerical value is decreasing, a smaller c value will result. Go back to the equation at the top and rearrange it with negative values for at least one variable.

A-B= lower C value
A-C= lower B value
B-C= lower A value ?

If you subtract B (capital) from A (persons), instead of adding them, you will get a smaller C value (productivity). Likewise, if you algebraically switch B with C, changing the equation to A – C= B, your B value (the amount of capital made) will also have decreased because productivity decreased. And, as pessimists/realists have already pointed out, if an increase in A and B values spurred on an increase in C (during the industrial revolution), a constant decrease in the value of both C and B would surely lead to a decreased A value.

Compressed, the conundrum is this: In order to slow the rate of depletion we need to start consuming less, but in order to put up the infrastructure to replace our fossil fuel based one, we need to have the capital available to do so which involves keeping the wheels of consumerism turning. High oil prices sired by declining productivity will not allow for consumption, thus negatively affecting all industries in the modern industrial economy. The laws governing our industrialized economies demand we grow at a certain rate which will be difficult if not impossible

For an image of the precipice we’re looking over consider another excerpt from Richard Heinberg’s book, The Party’s Over:

“Try the following though experiment. Go to the center of a city and find a comfortable place to sit. Look around and ask yourself: Where and how is energy being used. What forms of energy are being consumed, and what work is that energy doing? Notice some the details of building, cars, buses, streetlights, and so on; notice also the activities of the people around you. What kinds of occupations do these people have, and how do they use energy in their work? Try to follow some of the strands of the web of relationships between energy, jobs, water, food, heating, construction, goods distribution, transportation and maintenance together that keep the city striving. After you have spent at least 20 minutes appreciating energy’s role in the life of this city, imagine what the scene you are viewing would look like there was ten percent less energy available. What substitutes would be necessary? What choices would people make? What work would they not get done? Now imagine the scene with 25 percent less available; with 50 percent less, 75 percent less energy(Heinberg 186).”

One thing I should note. When it comes to the bold section at the bottom of the post here, about wanting to cut down consuption but being worried about a depression mellowing the effects of a transition to renewables, I am no longer so sure about such a concern. In the 1970's oil shocks, as is noted in Stephan Leeb's "The Coming Economic Collapse,H ow you Can Thrive When Oil Hits 200 dollars a barrels", despite a lessened demand globally for oil, renewable energy projects and spending were still able to increase. If anything, a depression before the peak is exactly what's needed to make leaders and industry take a good long hard look at alternative energies.