Friday, 30 March 2012

What does all this mean?

If you've read all of my posts so far, you may be wondering where I am going with all this. In this post, I will attempt to briefly answer that question. The details, of course, are material for many future posts.

When I first heard of Peak Oil, around the turn of the century, the people talking about it were either petroleum geologists or survivalists types. The declining side of the oil consumption curve was seen to be very steep and our trip down it would end with a crash at the bottom. Prudent people would be prepared, which meant having lots of canned food and ammunition stored in a hole in your backyard. If you've seen the movie "Mad Max" and it's sequels, you get the picture. And of course there were technophiles responding to these concerns, who were sure we could invent our way out of the situation, and end up living in a "Star Trek" like future, no problem.

In the decade or so since then, a lot of subtlety has been added to the Peak Oil discussion. And a good thing, too.

I was originally torn between the "technology will save us" and the "we'd better prepare for the worst" camps, but now I have realized there are a range of possibilities between the two extremes that are much more likely than the extremes themselves. The unlikelihood of the extremes is worthy of quite a bit of discussion in itself, but I'm going to leave that for another day. Today, let's consider what are now seen as some of the more likely developments that lie ahead of us. We are now entering the "age of scarcity" and the general shape of what lies ahead is not that hard to see.

Since most of us are still living in the "business as usual" world and our main interface with reality is the economy, let's consider that first. Energy, especially crude oil, is the key resource that drives our economy and one would expect the economy to follow a curve somewhat like the oil use curve, since the amount of oil being used is a strong predictor of the level of economic activity. Specifically, in order for the economy to grow, the amount of oil being used must grow and the price of that oil must not increase significantly. Remember that our economy must grow in order to function properly. That is, if growth decreases, the economy becomes less effective at providing the necessities of life to the people who are relying upon it, businesses become less profitable and unemployment increases.

The classic curve that Peak Oil enthusiasts draw is smooth going up and smooth going down, which makes it easy to sketch if drawing on a blackboard, but glosses over some of the realities of the situation. More accurate depictions of this curve are very rough on the left hand (growth) side, since that part of the curve is based on history, and the history of this had lots of ups and downs. In the years since the second world war, there have been numerous recessions and most of them have been preceded by a spike in the price of oil and accompanied by a temporary reduction in the rate at which oil was being used. We are now at the peak of the curve which, it turns out, is more like a bumpy plateau. There is no reason to believe that the declining side of the curve will be any different. We will move down in fits and starts, with level spots and even minor recoveries in between.

It is interesting to look at the last few years to see how this works. We can start in the summer of 2008. The economic recovery that followed the .com crash and housing bubble in the US were still going strong and oil use was on the upswing. But for the first time demand really was outstripping supply. Conventional oil had peaked in 2005 and the non-conventional oil that was being added to the mix to keep up with demand was more expensive. The price of oil increased, reaching a peak of $147 per barrel late in the summer of 2008. What followed was a financial meltdown and the bursting of the American housing bubble. Conventional economists, politicians and most everyone in the media were taken by surprise and have since blamed problems in the financial system and lenders who where giving mortgages to people who really couldn't afford them. No doubt all that is to some extent true, but it would not have come to a head without the oil connection. Energy is the pump that enables market bubbles to grow. When the pump falters, the bubble bursts.

Since then, despite what the politicians would have us believe, we have been in an economic depression. There have been periods of partial recovery, but as the economy starts to take off and the demand for energy goes up again, the price of oil goes up too, causing the economy to stall again. I am no rocket scientist, but it's not hard to imagine this pattern continuing and the depression deepening as the supply of oil continues to decline. Note that bringing more sources of expensive oil on line isn't going to help.

So, I am predicting a bumpy decline on the falling side of the oil supply curve. Economic activity and energy use will fall off until we are using somewhere between ten and twenty percent of the amount of energy we are using now, an amount that can be supplied by renewable sources. At which point we could, ideally, make a soft landing. But that's only if the fabric of our system can hold together under this continuing abuse and if nothing more unpleasant happens.

All this is a little abstract, perhaps, so lets talk in terms that area little more personal. When the price of energy increases, everyone's expenses go up. This makes businesses less profitable, even if demand for their products stays high. But it also means that individuals have less discretionary income (since we are paying more for energy too), so we spend less, especially on things that aren't necessities. And this means that demand goes down for most products. Business are faced with increased costs and falling sales. The weak ones close, the stronger ones downsize. People lose their jobs and spend even less money and demand goes down even more. Governments find themselves with lower tax revenues and increased demand on social support mechanisms. Government programs are cut back in response and government workers laid off. And so it goes in a downward spiral, with occasional pauses during temporary recoveries and bone jarring drops when those recoveries fail. As inevitable as all this may be, it is very difficult to predict when any specific event will happen, which makes it even more difficult to cope with the process.

Of course we have had deflationary spirals before, usually caused by overproduction and/or the bursting of speculative bubbles in the market. But for the past century or so oil was there as an enabling resource to get things going again, especially with a little help from governments who are willing to borrow/print money and spend it in ways that stimulate the economy. A whole lot of that is being done in an attempt to halt the current deflationary spiral, with disappointing results. Some economists are concerned that pouring all this money into the economy will result in inflation or perhaps even hyper inflation. But much of the money is being used to bail out banks who are suffering from all the loans that business and individuals are defaulting on. That government money never gets into the economy, since it is only used to bring the banks balance sheets back up to zero. I don't think we are going to have inflation in the classical sense of too much money (credit) chasing too few goods and causing prices and interest rates to go up. But inflation in the sense of price increases because of supply not being able to satisfy demand, will happen. And necessities like energy, and food and transportation which are largely based on energy, will definitely see price increases. While anything which is not a necessity will see falling demand and stagnant or falling prices.

We are also going to see a continued decline of other resources, particularly potable water, strategic metals, forests and fisheries. All with similar effects on the economy to those caused by the decline in energy supplies.

Our business as usually system uses "rationing by price" to cope with supply shortages. This works, but it is hard on those with less income. Since more people are experiencing falling incomes all the time, we'll see more protests along the line of the Occupy Wall Street movement. The 99% are going to get even more upset with the 1%, and no doubt there will be increased civil unrest, rioting and so forth as a result.

But perhaps that's enough about the economy. A few paragraphs back I used the phrase "if nothing more unpleasant happens". And there are a number of unpleasant things that fall in the "pretty darn likely" category.

As the economy goes downhill and tax revenues fall, we're going to we less and less spent on infrastructure. So we can expect to see problems with infrastructure and interruptions that are more frequent and longer. Electricity and water supply, sewers, communications system, roads and bridges, railways -- all will suffer.

War is another possibility. A great way to keep your munitions from going stale, it has little else to recommend it in my opinion. Many recent wars and some still ongoing, have to do with the US trying to maintain its empire and guarantee its access to resources, such as oil in the Middle East. As well, Middle Eastern countries have been having revolutions when their people get sick of corrupt governments and worsening conditions. The revolution in Libya (spring 2011) cut off that country's oil production, about 1.6 million barrels per day, which resulted in a big spike in the price of oil. This spring, concerns about conflict involving Iran have forced the price of oil up over $100 per barrel and kept it there. No doubt we'll see more of this.

Of course, as oil becomes more expensive and scarce, it's going to get harder to run a machine like the American military, especially when it doesn't seem to be achieving its goals. How long before there are serious cutbacks in the American military budget? Hopefully before they are forced shut down operations and leave personnel stranded overseas.

Then there are all the problems due to climate change: erratic and extreme weather, reductions of glaciers and ice sheets, rising sea level, ocean acidification, growing deserts. Present agricultural practices be they industrial or organic, rely to a frightening extent on just the right type of weather. Many areas rely on water stored in glaciers or winter snow cover at high altitudes for their water supply. And so many people live within a few feet of sea level and will become refugees as sea level rises. And it doesn't take several feet of rise, just a few inches in many cases when you add in storm surges, to render large areas near sea level uninhabitable.

In the few years still left while air travel is accessible to the majority of the population, epidemics are a significant concern. Especially with declining public health budgets and weakened health care systems.

And then there are solar flares, volcanoes, earthquakes and tsunamis. None of these things are in our control, but they can do a lot of damage to a civilization that is growing ever more fragile.

A growing awareness of all this can be pretty frightening. Once you get past the initial temptation to deny it all, what I hope remains is a desire to prepare for the trouble ahead. The only question you ever really have to answer is "what he heck do we do next?" I'll address that question in my next post.


Anonymous said...

Excellent balanced perspective on our current economic, energy and environmental challenges. The first rule is 'don't panic'. The second rule is 'be prepared for anything'. Third rule is 'help others to do the same'.


Irv Mills said...

Wow! Yours is the first comment on my blog, and a complimentary one too. Thank you!
Your three rules are excellent. Expect to see them incorporated in my next post.