Sunday, 26 November 2017

Collapse Step by Step, Part 8

Lake Huron Waves Breaking Along South Pier, Kincardine

The Bumpy Road Down, Part 1

The term “bumpy road down” refers to the cyclic pattern of crash and partial recovery that I believe will characterize the rest of the age of scarcity and make for a slow step by step collapse, rather than a single hard and fast crash. Indeed, that is where the "step-by-step" in the title of this series of posts comes from. And yes, many of the individual steps down will happen quite quickly and seem quite harsh. But it will likely take many steps and many decades before we can say collapse is essentially complete, and between those steps down there will (in many areas) be long periods when things are stable or even actually improving somewhat.

The fast collapse is a favourite trope of collapse fiction and makes for some exciting stories, in which stalwart heroes defend their group from hungry hordes and evil strong men. And if the story happens in the U.S. the characters get to do their best to stop a whole lot of ammunition from going stale. But it seems to me that in most parts of the world things will progress quite differently when disaster strikes. Indeed there is a branch of sociology which studies how people and societies respond to disaster, and it has identified a set of incorrect beliefs, known as "the disaster mythology" that much of the general public holds on the subject. In particular, the expectation of looting, mass panic and violence is not borne out in really. Here are some further links on the subject: 1, 2, 3, 4.

Dysfunctional as today's world may seem to many of us, it is working fairly well for those who are in power. They have a great deal invested in maintaining the "status quo", and in making sure that whatever changes do happen don't have any great effect on them. They also have a lot of resources to bring to bear on pursuing those ends, and a lot of avenues to go down before they run out of alternatives.

The other 80% of us, who are just along for the ride so to speak, still rely on industrial society for the necessities of life. We are hardly self sufficient at all, dependent on "the system" to a degree that is unprecedented in mankind's history and prehistory. As unhappy as we may be with the way things are at present, it's hard to imagine collapse without a certain amount of trepidation. Denial is a very common response to this situation.

Some of us, though, aren't very good at denial. Even if we only follow the news on North American TV, which largely ignores the rest of the world, we've seen lots of disturbing events in the last year or two and it is hard not to wonder if they are leading up to something serious. Many people in the "collapse sphere" are predicting a major disturbance in the next few years, and some think that this will be the one that us takes down—all the way.

I definitely agree that something is about to happen, but I don't think it is going be the last straw. Just one more step along the way.

As always, I am directing this mainly to those who are not highly "collapse aware", so a closer look at what's going on and what this next big bump might look like would seem to be a good idea. And of course I am making generalizations in what follows. As always, things will vary a good bit between different areas and at different times, and all of this will affect people of the various social classes differently. Also beware that I am not an economist, just a layman who has been watching the field with keen interest for some time. What follows is a summary of what I have learned, in a field where there is lots of disagreement and where the experts themselves have been wrong again and again.

Despite all the optimistic talk about renewable energy, we are still dependent on fossil fuels for around 82% of our energy needs, and those needs are largely ones that cannot be met by anything other than fossil duels, especially oil. While it is true that fossil fuels are far from running out, the amount of surplus energy they deliver (the EROEI—"energy returned on energy invested") has declined to the point where it no longer supports robust economic growth. Indeed, since the 1990s, real economic growth has largely stopped. What limited growth we are seeing is based on debt, rather than an abundance of surplus energy. And various adjustments to the way GDP is calculated have made the situation seem less serious that it really is.

Because of the growth situation, investors looking for good returns on their money have been hard pressed to find any and so have turned to riskier investments, which has resulted in speculative bubbles and subsequent crashes. The thing about bubbles is they are based on trust. Trust in some sort of investment that in saner times would be recognized for the risky proposition it really is. But always there comes a day when the risk becomes obvious, people rush to get out, and the bubble crashes.

The dot com bubble was the first to burst in this century, and the real estate bubble in the US was the next, leading to the crash of 2008.

After 2008 many governments borrowed money to bailout financial institutions (banks) which were in danger of failing, since that failure would have had a very negative effect on the rest of the economy. To control the cost of that borrowing and stimulate the economy, they lowered interest rates. These low interest rates have made it possible to use debt as a temporary replacement for surplus energy as the driver of the economy. Unfortunately this is pretty inefficient—it takes several dollars of debt to create a dollar's worth of growth, and the result has been debt increasing to totally unprecedented levels.

Meanwhile, much of the ill advised risk taking in the financial industry that led to the crash in 2008 has continued on unabated. You may wonder why responsible governments didn't enact regulations to stop that sort of thing. And indeed they did, to a limited extent. I suspect, though, that really effective regulations would have stopped growth cold, and no one was willing to accept the negative results of that. Better to let things to go on as they are, leaving future governments to worry about the consequences.

So, in 2017 we are deep into what might be called a "debt bubble." It relies on trust that interest rates will remain low and that any day now there will be a return to robust growth so that we can all make some money and pay off our debts. Those are risky propositions, to say the least.

On top of that, low interest rates have made it much more of a challenge for pension funds to raise enough money to meet their obligations, a vital concern for retired baby boomers like myself.

Those same low interest rates have made it possible for many non-viable or barely viable businesses to continuing operating on borrowed money, where under more normal circumstances they would have been forced out of business. This makes for a weaker economy, not a stronger one.

Here in Canada we still have a real estate bubble going on, especially in cities like Toronto, Calgary and Vancouver, and that despite recent government efforts to cool the real estate market by making it more difficult to get a mortgage, and by applying a tax on foreign real estate investors.

And over the last year that have been a long list of natural disasters which have increased the financial stress on governments, insurance companies and even re-insurance companies (who insure the insurance companies themselves).

The more conventional economists have come to think that all this is a normal situation and that it can just keep on keeping on. But there are others who think that this will lead to a crash of even greater magnitude that 2008. And many kollapsniks think this crash will mean the end of industrial civilization.

Some commentators expect this crash to take the form of a rash of debt defaults by governments who can no longer carry the debt loads they have built up. And a similar wave of bankruptcies of those shaky businesses I was just talking about, when they finally get to the point where they can no longer hold on. Tim Morgan, one of my favourite economists (who is certainly aware of the possibility of collapse), speculates that this bubble may burst in a different way than those of the past, with the collapse of one or more currencies. He points to the British pound as a prime candidate for the first to go and thinks that the U.S. dollar may follow it.

Other experts I've asked say that while the U.S government does have huge debts, they are not so large in comparison to the size of its economy—an economy that is strong enough that trust in it is unlikely to fail. I am not so sure. Much of the strength of the U.S. dollar comes from the fact that all trading of oil is done in it. If you want to buy oil then you need U.S. dollars, so the demand for them is always high. But a number of countries who are not allies of the US have proposed abandoning this system, suggesting that they are willing to accept other currencies for their oil. If this were to happen on a large scale it would significantly weaken the US dollar.

But it takes some sort of unusual event to start a crash like this, to initiate the loss of trust. And that brings us back to the fossil fuel industry.

While the falling EROEIs of fossil fuels have hurt economic growth, it is a mistake to think that those fuels are not still the life blood of our civilization. The success of modern industry is based on the productivity boost provided by cheap energy. The price of oil, for many years, was a fraction of its worth in terms of what could be made with the energy embodied in that oil. But when the price of energy goes up, it reduces the profitability of industry, often leading to a recession.

The oil prices I quote here are for Brent crude, just to keep things simple. In fact, oil trades at a dizzying variety of different prices, depending on where it comes from and its quality, among other things. If you look back over the history of recessions since the 1950s it is interesting to note almost all of them were preceded by a spike in the price of oil. In the summer of 2008 the price of oil, which had been going up for several years, topped out just before the crash at almost $140 per barrel.

After the crash, the economy slowed down significantly, and the price of oil dropped to around $30 per barrel due to falling demand. Starting in mid-2009 the economy began to recover and the price of oil increased to over $100. This appeared to be a straight forward case of supply and demand—an indication that the supply of oil was barely keeping up and suppliers were being forced to turn to more expensive sources of oil to meet the demand.

Then in mid 2014 something surprising happened— the price of oil and many other bulk commodities began to go down. By early 2016 the price of oil was under $40/barrel, and it stayed in the range between $40 and $60 until quite recently when it edged up over $60.

All kinds of ideas have been put forth as to why this drop in the price of oil happened, many of them contradictory. It is my thought that two things have been happening. First, demand destruction—a slowing down of the world economy caused by high energy prices. Second, a temporary increase in the supply of oil, mainly from fracking in the continental US and tapping of unconventional oil—tar sands in Canada, heavy oil in Venezuela, and deep offshore oil in various place around the world, that were suddenly profitable when the price was around $100 per barrel.

Whatever is the cause, it is clear that we have had a surplus of oil for the last few years, and this has kept the price down. OPEC discussed limiting supply to force the price back up, but very little came of it, even though the lower price was severely hurting the economies of the OPEC nations.

In the short run, lower oil prices have had a beneficial effect on economic growth. But unfortunately, the big oil companies were making so little profit that they couldn't afford to invest much in oil discovery.

Regardless of what you may think of the idea of "peak oil" on a global basis, it is a simple fact that the output of any individual oil field declines as it ages. Exploration for new oil aims to match that natural decline with new discoveries. For conventional oil, that has not happened since 1963 and by the start of this century this was becoming a problem. A problem that likely had something to do with the run up of oil prices prior to 2008.

Following 2008, higher prices and improved technology (like fracking and the syncrude process for getting oil out of the tar sands) made more oil accessible. But with the current lower prices, that is no longer the case. Furthermore the wells opened up by fracking are proving to have very high decline rates.

So it seems that sometime in the next year or two, the decline rate of the world's oil fields will have eaten up the surplus of oil. Discovery of new oil fields doesn't happen overnight, so there will be a crunch in oil supply. Not that there will be no oil available, but oil suppliers will be hard pressed to keep up with the demand and the price will spike upward. There may even be shortages of some petroleum products until those higher prices pull demand back to match the available supply.

It seems very likely that such a spike in the price of oil will touch off a loss of trust leading to a recession of such severity as to make 2008 look minor.

In my next post in this series I'll look at how that recession—might as well call it a crash—might proceed and what will likely be done to mitigate its effects.


Links to the rest of this series of posts:
Political Realities / Collapse Step by Step / The Bumpy Road Down

14 comments:

Balanosphere said...

"But unfortunately, the big oil companies were making so little profit that they couldn't afford to invest much in oil discovery."

Sorta true, sorta not.

In 2004 the top seven oil companies (Exxon, BP, Chevron, Petrobras, Statoil, Total and Shell) invested $67.7 billion in capital expenditures. In 2016, the same companies spent $117.5 billion in capital investment. So they spent more, not less, to get oil to market.

Did they make more money?

The Big Seven had a combined free cash flow (operating revenue minus capital expense) of $71.9 billion in 2004, when oil was around $38/barrel. That year they paid out $37.9 billion in dividends, leaving a nice profit of $34 billion. In 2016, with oil at about $44/barrel, those same seven companies - still the largest in the world - had a combined free cash flow of $1 billion. That's right: one billion. Yet they paid out even more in dividends: $40.1 billion. How did they do it? They borrowed the money. In other words, the big shareholders are cashing out and gutting the companies in the process.

Source: https://srsroccoreport.com/worlds-largest-oil-companies-deep-trouble-as-profits-vaporize-while-debts-skyrocket/

Balanosphere said...

Oh, one more thing: I'm not sure I'd describe the risk-taking in the financial sector prior to 2008 as "ill-advised." Given that they got away with it, are richer than ever, and are continuing to do the same thing, it seems like it worked out pretty well for the risk-takers.

Anonymous said...

"Also beware that I am not an economist"

I am. If you were, I would not be here. It's a quasi religious pseudo science.

Collapse could happen fast/Seneca or continue it's decline with crashes for a time.

Births minus deaths add's 80,000,000 a year and the consequences of AGW are going to increase and become more costly.

War is an ever present threat.

Poverty, unemployment & homelessness is rising in so called 1st world countries. These people are legion and growing. What if some of them get organized? How hard could it be to sabotage the system and it's essential infrastructure?

There are many other problems and predicament.

It's multiple complex systems interacting. Very hard to model. I've heard a number of system scientists say predictions of collapse dates are tough.

System scientist George Mobus has a bleak outlook.

http://questioneverything.typepad.com/

Irv Mills said...

@Balanosphere
Then capex numbers I am looking at (https://www.mckinseyenergyinsights.com/insights/oil-production-capex-is-a-rebound-in-sight/) are global rather than for just the top 7, but I don't think that's that source in the difference between what I am saying and what you're saying. It's more to do with the initial date you picked (2004). Quite a bit happened between 2004 and now.
But here are some interesting numbers for capex in the oil industry globally:
2014: $519 billion
2015: $387 billion
2016: $197 billion
and projected:
2017: $246 billion
2018: $299 billion
2019: $353 billion
2020: $387 billion
2021: $421 billion
Still not back up to the 2014 level.
And that is exactly what I was talking about.
I read somewhere else that in 2017-2021 we need to spend around $3 trillion on oil exploration to stay even with decline. Doesn't l0ook like that is going to happen.

I have no problem with the rest of your comments, pretty much agree with them, in fact. As for the financial sector being ill advised--for their own short term interests, certainly not. But for the long term and big picture, very much ill advised, and we all are suffering and will continue suffer for their short term gains.

Irv Mills said...

@ Anonymous
Good points, one and all, and none are anything new to me.
We don't really know what lies ahead. Lots of people are fixated these days on the idea of a fast collapse, so I choose to talk about a slow, stepwise collapse to give the idea some much needed exposure. Only time will tell who is right.
I agree that economics is "quasi religious pseudo science" and accordingly feel no qualms about stepping on the toes of its high priests.

J Michael Sullivan said...

The key thing for those who sing the praises of modern capitalism to accept that without cheap oil and the convenience of sweeping externalities such as pollution under the rug, the system we today call "capitalism" would crash and burn overnight. A new form of capitalism (call it version 2.0) is needed. One where externalities are the responsibility of the venture not the public. This responsibility could take the form of a bond or some sort of insurance policy. The price of the bond/insurance can be set by the market (think London bookies). At the conclusion of the venture (and given enough time to validate any lingering post-venture affects) if there are no hidden costs that the public must bear such as cleanup or re-training of employees, the cash value of the bond or the policy can revert to the venture's owners. Think of it as icing on the cake. This will prevent the situation we currently find ourselves in wherein the profits are privatized but the losses are socialized -- clearly the system we have today cannot in good conscious be called "capitalism": Adam Smith would be turning in his grave.

J Michael Sullivan said...

+1 = economics is "quasi religious pseudo science"

Irv Mills said...

@ J. Michael Sullivan
Good points. To that I would add that if the capitalists had to provide for themselves what they get free from the biosphere (air, water, soil, etc.) their enterprises would be far from viable. Yet they are doing their best to destroy that biosphere.
And thanks for your kind comments elsewhere on this blog.

Rebecca Zegstroo said...

The real meat in the tax bill is the bit about drilling ANWR. That will goose growth, but not for long. North Slope oil peaked in time to make Reagan look good. Maybe ANWR will work the magic for Trump.

Joe said...

I just came to your blog via peakoil.com and find that you are very clearly parsing the different aspects of our predicament. I personally lean toward the fast collapse end of the spectrum (but only for developed, industrialized countries). My reason for that leaning is the increasing interdependence of all the players in the global market economy. Of particular importance is the dependence of that market on the global financial system.

I think Korowicz made a very compelling case as to the brittleness of the global financial system. You have pointed out the extreme measures that central banks have used to support that system. I can easily see a time coming when cascading financial crises cause such a loss of confidence in major financial players that the whole international banking industry screeches to a halt. If that happens, trade stops. When trade stops, industrial civilization collapses.

Much of your discussion in this post and the links you included support the notion of asset bubbles and the real possibility of the bursting of the mother-of-all-financial-bubbles that is now expanding rapidly. Yet you don't really explain how the global market economy is going to survive the loss of the global financial system. Do you expect an ad hoc command economy to keep things together enough to keep cities and the people in them supplied with necessities?

While it is impossible to be certain whether collapse will be fast or slow, don't you think that a prudent approach would be to prepare for the worst outcome (fast collapse) and thereby be more able to deal with whichever kind of collapse happens? On the other hand, maybe slower collapse is actually the worst case scenario, what with the continued carbon emissions (albeit at a reduced rate) that would entail.

N

Irv Mills said...

@ Rebecca Zegstroo
Maybe so, but if ANWR is big enough to make a difference, it is still just a matter of kicking the can a little further down the road. And in the proce3ss, making the climate change situation that much worse.

Irv Mills said...

@ Joe
Keep an eye out for my next post or two, which will address many of the issues you raise. I have read Korowicz's "Financial system supply-chain cross contagion – a study in global systemic collapse" and pretty much agree with him. But I think a lot of people get the wrong idea from this. Korowicz is speaking to mainstream readers and trying very hard to convince them that something might happen. Sadly, I don't think it has had much success in shaking their denial and complacency. For kollapsniks, who already accept what he is saying, the result is to overstate the situation, and leave us with the impression that there is no hope of anything but a fast, hard collapse. But near the end, he talks about red, amber and green countries, according to the degree they will be effected, and in that I think he is onto something.
Yes, some areas will be hit very hard, but many others, not so much. And in some areas, if you are well off, fairly lucky, and following only carefully selected news sources, you might not be convinced that anything much has happened at all. And so, once the dust settles after the upcoming crash, part of humanity will pick itself up and continue on with business as usual (BAU), blowing more bubbles until there is yet another crash.
Every time this happens, though, more people will get left behind, until a few steps down the way, there is no one left to carry on with BAU. I would estimate that only about 1 in 10 of us will survive this process, and that by the end of it our per capita energy consumption will have decreased to somewhere between 10 and 20% of the current level, and be supplied by wind, falling water and firewood. I suspect that the whole process will take most of the rest of this century.
Would it be prudent to prepare for the bumps on this downward road? Damn right. And I am doing so. At some point in the next few months I'll work my way around to publishing a post in which I share my thoughts on how one might best prepare. Don't get your hopes up, though, I have no crystal ball, only a few general principles that I think may be of help.

Irv Mills said...

I am going to be away from my computer for a few days and won't be replying to comments here. But if you make a comment I will get back to you eventually. In the meantime, have a good holiday season, everyone!

01100001 001101110 said...

Hello Irv, in the last post you have suggested you'd publish a post about some general principles for preparedness. I was wondering if you have published it yet?

thanks,
Jay