Will the government seize your IRA after the next financial crash?

Federal government may seize part of your IRA
passportira.com

[I don't think this is likely, but then again, when you look at the influence of money on politics, the corruption across all financial sectors, the largest bubble in human history combined and peak energy plus other, there's not telling what might happen.  Also, it has happened in other countries.  The FDIC won't be able to pay people, we depend on China for finished goods and need to pay for our oil habit, so it's really not impossible - the government would probably take over your IRA rather than have a sovereign default].

The national debt today is a staggering $14.25 trillion. In the past 3 years alone, our government added $5.5 trillion in new debt – nearly a 60% rise.

Federal spending increased a record 29% during President Obama’s first 3 years. The government budget deficit is estimated to be $1.2 trillion.

“Total monetary and financial collapse of the massive government debt bubble is upon us, with devastating real-world consequences for your savings property values, investments, and other assets,” says Robert Mundell, an economist at Columbia University. “We’ve never been in this unstable position in the entire currency history [of] 3,000 years.”

Where can the federal government turn to for cash that can help it dig out of this hole?

How about your IRA?

Americans have $4 trillion saved in 401K plans and another $8 trillion in IRAs and pension plans, 95% of which are invested in the equity markets, mainly stocks and mutual funds.

If the U.S. government forces investors to invest 50% of their IRAs in government bonds, that would raise $6 trillion.

In fact, Congress once passed, and later rescinded, a 15% “excess retirement accumulations excise tax” on large retirement plans. Reviving that tax could bring the government a lot of money.

Unthinkable that the U.S. government would seize control of a portion of your IRA in this manner? Think again. It is happening all over the world, and the U.S. may soon follow suit.

Eight countries have raided retirement plans since 2008, including France, Poland, Ireland, and Hungary.

Teresa Ghilarducci has proposed her plan to Congress, a ‘Guaranteed Retirement Account’, or GRA.

In her words “…a GRA will accumulate 5% of their paychecks in a GRA over their lifetime. The government would credit their accounts with 3% plus inflation… GRAs would provide a safe and secure retirement to 63 million people.”

Of course, this is only coming up because the now ‘in the red’ Social Security system will no longer meet its purpose. So why not double down?

And more bad news: whenever a government has seized a portion of its citizens’ money from retirement accounts, the stock market has plunged … which would further drain wealth from your IRA.

When Argentina moved $29 billion in public pensions into government accounts in 2008, their stock market lost 13% of its value.

And when Hungary required that private pensions invest in public debt in 2010, their market fell 14%.

Posted in Sovereign Default | Leave a comment

Are Brokerage Accounts Safe?

James Stewart. December 9, 2011 A Risk Once Unthinkable. New York Times.

Are customer accounts at brokerage firms safe?

SIPC will replace up to $500,000 of securities and cash (but not futures contracts) missing from customer accounts at member firms. A measure of the magnitude of the problem is that since its creation in 1970, SIPC has advanced $1.6 billion to make possible the recovery of $109.3 billion in assets for an estimated 739,000 investors (through the end of 2010).

Until the collapse of MF Global, that’s a question I thought I’d never have to ask.

Brokerage firms are required by law to maintain segregated accounts holding all client assets, including stocks, bonds, mutual funds, money market funds and cash. The law was passed after the 1929 crash, in the depths of the Depression, to make sure that customer assets were there at all times, ready to be disbursed even if everyone asked for their money at once.

This obligation to protect customer assets “is considered sacrosanct,” Robert Cook, director of the division of trading and markets at the Securities and Exchange Commission, told me this week. “It’s considered a sacred obligation.”

Lehman Brothers may have engaged in many foolhardy practices, but even in the firm’s last days, when officials were desperate for cash, no one dared touch customer assets, which remained safely segregated despite the firm’s collapse.

And then came the revelation that an estimated $1.2 billion in customer assets had vanished at MF Global, the large brokerage and futures trading firm headed by Jon S. Corzine, the former Goldman Sachs executive and Democratic politician, that collapsed in late October after a catastrophic bet on European sovereign debt.

How could such a thing happen? I had always assumed it was impossible and that strict internal controls existed at all brokerage firms so that firm officials couldn’t tap segregated customer funds even if they were willing to break the law. Thanks to MF Global, it’s now apparent that isn’t necessarily true. “If people are determined to misuse customer funds, they will misuse them,” said Ananda Radhakrishnan, the director of the division of clearing and risk at the Commodities Futures Trading Commission.

That’s because the commodities and securities industry is mostly self-regulating, and self-regulation ultimately depends on the integrity of the regulated. Broker-dealers — securities firms that execute trades of stocks, bonds and other assets for customers — are overseen by the S.E.C., while futures commission merchants, which trade commodities, derivativesand futures, are regulated by the C.F.T.C. Like most large brokerage firms, MF Global was both a broker-dealer and a futures commission merchant, though its primary business was commodities futures trading.

The federal regulators issue and enforce the rules, but day-to-day oversight for securities firms is delegated to the Chicago Board Options Exchange, a for-profit company, and the Financial Industry Regulatory Authority, or Finra, a nonprofit organization financed by the brokerage industry. For commodity dealers, it’s the National Futures Association and the Chicago Mercantile Exchange. They conduct periodic examinations and audits and, in addition, member firms are required to have internal controls and compliance mechanisms to make sure that customer assets remain safely segregated at all times.

Typically, this requires transfers from segregated accounts (other than at the customer’s request) to be approved by multiple officials, including in many cases, the firm’s chief financial officer and chief compliance officer.

“It’s not a low-level functionary,” a regulator said. “It’s someone who has real standing. Most customer assets are held at the biggest firms and they have scores of people involved in this process.”

Susan Thomson, a spokeswoman for Merrill Lynch, the nation’s largest brokerage firm, said that any transfer from segregated accounts there required “at least three checks and possibly more.” Officials from operations, regulatory reporting and collateral are usually involved and sometimes compliance officials, as well. “There are multiple streams of responsibility. You have management accountability in each of those streams on a daily basis,” she said.

MF Global also had internal controls and a chief compliance officer, which raises the question: How did the customer assets ever leave the segregated accounts to begin with? In testimony on Capitol Hill on Thursday, Mr. Corzine only added to the mystery. He said that transferring customer funds was “a complex process” and, asked who could execute such a transfer, said “I wouldn’t know probably who that person is.”

While Mr. Corzine said he had “no intention” of authorizing any transfer of segregated funds and “didn’t intend to break any rules,” he left open the possibility that someone might have thought he did. Others at MF Global surely know. A spokeswoman for MF Global Holdings, the holding company for the broker-dealer, said “there was an approval process” for moving segregated funds, but said she was unable to provide more details.

There are legitimate reasons to move assets from segregated accounts, the most common being that they are overfunded. Commodities firms are required to reconcile customer assets with the amounts in segregated accounts every day, and must report any shortfall to the C.F.T.C.

For securities firms, the requirement is only once a week, but many firms do it every day. They are required to report shortfalls to Finra. If there’s an excess (many firms deliberately overfund the segregated accounts to make sure there is never an inadvertent shortfall), they can transfer the excess funds. But that usually requires high-level approval from someone like the chief financial officer, and then the transfer can’t exceed the amount of the excess. So that wouldn’t explain the missing $1.2 billion at MF Global.

The law also allows commodities firms like MF Global to use segregated customer funds as a source of low-cost financing for their own operations, but they are required to replace any customer assets taken from segregated accounts with supposedly ultra-safe collateral of the same value, typically United States Treasuries, municipal obligations and obligations whose payments of principal and interest are guaranteed by the government.

This week, the C.F.T.C. issued new rules restricting how client assets can be invested, which had grown under C.F.T.C. interpretations to include sovereign debt and transactions known as “in-house repos,” or repurchase agreements, in which a firm contracts with itself to use customer assets as, in effect, interest-free loans to finance its inventory of Treasury bonds. MF Global was apparently a heavy user of in-house repos, and before his firm collapsed, Mr. Corzine had argued strenuously against the C.F.T.C.’s proposal to ban them.

Making bad bets on European sovereign debt — like making bad bets on United States mortgage-backed securities — isn’t a crime, but improperly transferring segregated customer assets is a potential criminal violation of the securities laws and a relatively straightforward one at that. (The United States attorney’s office in Manhattan is in the early stages of investigating the removal of customer assets from MF Global.

I spoke this week to several people involved in the MF Global investigation. No one has reached any firm conclusions about how the assets were transferred, but possible innocent explanations have dwindled to almost none. And James B. Kobak Jr., a lawyer for the MF Global trustee, said in court on Friday that there were “suspicious” trades made from customer accounts. If that’s the case, there may have been a deliberate and concerted effort to override MF Global’s internal controls to gain access to segregated customer assets, and if that can be proved, those responsible should be prosecuted and, if convicted, go to jail.

Unfortunately for MF Global’s customers — and future victims of similar crimes, if that’s what it turns out to be — there’s no easy remedy and it will most likely be months or even years before they recover their money. The Securities and Investor Protection Corporation explicitly warns that it’s “not uncommon for delays to take place when the troubled brokerage firm or its principals were involved in fraud.”

Meanwhile, the C.F.T.C.’s enforcement capabilities, like the S.E.C.’s, have been starved for lack of funding. “Our funding has declined to such an extent that three to four years ago, just as the industry was taking off, we had less than 500 employees,” Mr. Radhakrishnan said. But even with more resources, “We can’t be at every firm overseeing every activity. We have to expect people to understand the rules and adhere to them.”

Posted in FDIC & SIPC Insolvent | Leave a comment

Who is to Blame? How will the violence play out in the USA?

There will surely be violence as America’s population descends from 350 million to 100 million or less as energy production declines.

Leaders will emerge who blame some particular group for our suffering.  So far it’s been those terrorist Middle Easterners sitting on top of “our” oil, but at some point our military won’t be able to venture abroad due to lack of oil and/or China, Russia, and Europe being so much closer to the Middle East than we are preventing us.  The violence will be local.

Many people have written about how the in/out groups are likely to play out:

  • Ethnic (i.e. recent immigrants versus longer term residents, or whites vs blacks vs hispanics, etc).
  • The Young vs the Old
  • Mafias, gangs, drug lords prey on citizens
  • Crazed leaders as in North Korea, Pol Pot, the Taliban, Hitler, Stalin, etc maintain law and order with massive concentration camps, executing people for even trivial crimes, preventing mass migrations, attacking Mexico and Canada, etc.
  • Bible Belt: along religious lines

But I think that no one is to blame, overshoot and die-off is the nature of all species:

Ilargi at theautomaticearth: We have done exactly the same that any primitive life form would do when faced with a surplus, of food, energy, and in our case credit, cheap money. We spent it all as fast as we can. Lest less abundant times arrive. It’s an instinct, it comes from our more primitive brain segments, not our more “rational” frontal cortex. We’re …not more devious or malicious than more primitive life forms. It’s that we use our more advanced brains to help us execute the same devastation our primitive brain drives us to, but much much worse. That’s what makes us the most tragic species imaginable. We’ll fight each other, even our children, over the last few scraps falling off the table, and kill off everything in our path to get there. And when we’re done, we’ll find a way to rationalize to ourselves why we were right to do so. We can be aware of watching ourselves do what we do, but we can’t help ourselves from doing it. Most. Tragic. Species. Ever.

We are ready and willing to destroy our societies, and eventually our planet, over a few scraps falling off the big table, like a Mac Mansion, an iPod, an SUV, because that is who we really are. Because we can make ourselves believe those are not scraps, that we are indeed kings now, seated at the table, and heaven knows we have lived better than ancient kings of any age over the past decades.  And most of all because we are no good at all at planning long-term. We can pay into a pension plan, that seems long-term, but at the very same time we can’t figure out that if at some point there’s less new contributors than older ones, that plan must and will implode. We all will swear we love our children above anything in the world, and most would give their lives for their kids. And we honestly mean it when we say it. The reality, however, is that we leave our children with a world that is polluted beyond recognition, in which species disappear at a rate 1000 times faster than before, and in which everything we’ve trained our kids for is vanishing right before their eyes. Our “leaders” are psychopath lackeys of a long bankrupt financial system that uses its servants to gobble up the yet to be earned wealth of our progeny, and we just sit by and watch it happen.

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Energy return on investment, peak oil, and the end of economic growth

David J. Murphy and Charles A. S. Hall. 2011.

Energy return on investment, peak oil, and the end of economic growth

in “Ecological Economics Reviews.” Robert Costanza, Karin Limburg & Ida Kubiszewski, Eds. Annals of the New York Academy of Sciences 1219: 52–72.

[I've rearranged, cut out large chunks, left out most of the charts and graphs, and sometimes paraphrased this very important paper, read the original if you have time for a complete understanding of the model presented. Notice how closely GDP (dashed line) matches energy production below in Figure 1. Energy production and GDP for the world from 1830 to 2000. Data from Kremmer and Smil. 5,6]

Energy vs GDP 1800-2008

Economic growth over the past 40 years has used increasing quantities of fossil energy, and most importantly oil. Yet, our ability to increase the global supply of conventional crude oil much beyond current levels is doubtful, which may pose a problem for continued economic growth. Our research indicates that, due to the depletion of conventional, and hence cheap, crude oil supplies (i.e., peak oil), increasing the supply of oil in the future would require exploiting lower quality resources (i.e., expensive), and thus could occur only at high prices.

This creates feedbacks that can be described as an economic growth paradox: increasing the oil supply to support economic growth will require high oil prices that will undermine that economic growth.

From this we conclude that the economic growth of the past 40 years is unlikely to continue in the long term unless there is some remarkable change in how we manage our economy.

Historically, economic growth has been highly correlated with increases in oil consumption, and, aside from a few short supply interruptions, oil supplies have kept pace with growing demand. As a result, real gross domestic product (GDP) tripled in value while oil consumption grew by 40% from 1970 through 2008. Unfortunately, the oil world of today is much different from the oil world over the past 40 years. Numerous analyses offer evidence that we consider quite convincing that global society is entering the era of peak oil,a that is, the era in which conventional oil supply is unable to increase significantly and will eventually begin to decline.1–3

Oil, more than any other energy source, is vital to economies because of its ubiquitous application as fuels and feedstocks in manufacturing and industrial production, as well as in transportation.

The main conclusions of this paper are:

  1. over the past 40 years, economic growth has required increasing oil production
  2. the supply of high EROI oil cannot increase much beyond current levels for a prolonged period of time
  3. the average global EROI of oil production will almost certainly continue to decline as we search for new sources of oil in the only places we have left—deep water, arctic, and other hostile environments
  4. we have globally roughly 20–30 years of conventional oil remaining at current rates of consumption and current EROIs, and even less if oil consumption increases and/or EROI decreases
  5. increasing oil supply in the future will require a higher oil price because mostly only high-cost resources remain to be discovered
  6. using oil-based economic growth as a solution to recessions is untenable in the long term, as both the gross and net supplies of oil has or will begin, at some point, an irreversible decline

Other points made in this paper:

For the economy of the United States and almost every other nation, the prospects for future, oil-based economic growth are bleak. Maintaining the status quo of growth economics based on an oil energy base is simply not possible for more than a decade or two at most, presuming that trade lines and international politics remain amenable. For the United States, which is currently in the deepest recession since the Great Depression, it seems highly unlikely that oil production can increase enough, for a long enough period of time, to grow the economy from this recession, let alone any future recessions. Furthermore, even if oil production can increase in the near term, the price of oil needed to maintain that production will be high enough on its own to incite a recession. Taken together, it seems clear that the economic growth of the past 40 years will not continue for the next 40 years.

The model also ignores the increasingly important and intricate role that debt accumulation has in the greater energy economy [my comment: which I assume means that a financial system crash would make credit dry up and new energy production projects impossible].

Figure 17 shows a range of dates before exponential decline begins until 2020, after that, and perhaps before, decline will begin.

Energy and Business cycles

Since 1970, spikes in the price of oil have been a root cause of most recessions. For example, in 1973, precipitated by the Arab Oil Embargo, the price of oil jumped from $3 to $12 a barrel (bbl) in a matter of months, creating the largest recession thereto since the Great Depression. The price spike had at least four immediate effects within the economy: (1) oil consumption declined, (2) a large proportion of capital stocks and existing technology became too expensive to use, (3) the marginal cost of production increased for nearly every manufactured good, and (4) the cost of transportation fuels increased.4 On the other hand, expansionary periods tend to be associated with the opposite oil signature: prolonged periods of relatively low oil prices that increase aggregate demand and lower marginal production costs, all leading to, or at least associated with, economic growth.

Numerous theories attempting to explain business cycles have been posited over the past century, each offering a unique explanation for the causes of—and solutions to—recessions, including Keynesian theory, the Monetarist model, the Rational Expectations model, Real Business Cycle models, New (Neo-) Keynesian models, etc.4 Yet, for all the differences among these theories, they all share one implicit assumption: a return to a growing economy, that is, growing GDP, is in fact possible.Historically, there has been no reason to question this assumption, as GDP, incomes, and most other measures of economic growth have in fact grown steadily over the past century. But ifwe are entering an era of peak oil, then for the first time in history wemay be asked to grow the economy while simultaneously decreasing oil consumption, something that has yet to occur within the United States since the discovery of oil.

The objectives of this review are to

  1. examine the degree to which abundant and inexpensive oil is integral to economic growth, and how the future supply of that oil is in jeopardy;
  2. the discourse on peak oil and provide what we believe is both novel and compelling evidence indicating that society is indeed in the era of peak oil;
  3. the discourse on net energy and discuss how searching for new sources of oil may decrease the amount of net energy provided to society and also exacerbate the effects of oil depletion on the economy;
  4. how peak oil and net energy indicate that increasing oil supply will require high oil prices in the future.

Economic growth and business cycles from an energy perspective

Economic growth, from an energy perspective, has many of the same characteristics as the fundamental growth process that every living creature, species, and population on earth undertakes during their lifetime. Energy is captured by a system (the economy or a creature) and allocated first to the maintenance (metabolism) of the system and then, if there is energy remaining, to growth and/or reproduction. For example, each of us must ingest enough food during the growth phases of life to pay not only for our metabolism but also to convert some of the additional food into bone, connective tissue, etc., which is used to grow the body or create offspring. Likewise, the economy must acquire enough energy to pay not only for its metabolism, for example, fighting depreciation of existing capital, but also to pay for the construction of replacement or, sometimes, new capital. The important point here is that the construction of new capital, that is, economic growth, requires the input of “net” energy, which is the energy beyond that required for metabolic purposes.

By extension, for the economy to grow over time there must be an increase in the flow of net energy and materials through the economy. Quite simply, economic production is a work process, and work requires energy. This logic is an extension of the laws of thermodynamics,which state that (1) energy cannot be created nor destroyed, and (2) energy is degraded during any work process so that the initial inventory can do less work.As Daly and Farley describe, the first law places a theoretical limit on the supply of goods and services that the economy can provide, and the second law sets a limit on the practical availability of matter and energy.5 In other words, the laws of thermodynamics state that to produce goods and services, energy must be used, and once this energy is used it is degraded to a point where it can no longer be reused to power the same process again. Thus to increase production over time, that is, to grow the economy, we must either increase the energy supply or increase the efficiency with which we use our source energy.

This energy-based theory of economic growth is supported by data: the consumption of every major energy source has increased with GDP since the mid-1800s (Fig. 1). Throughout this growth period, however, there have been numerous oscillations between periods of growth and recessions. Recessions are defined by the Bureau of Economic Research as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”10 From 1970 until 2007, there have been five recessions within the United States, and examining these recessions from an energy perspective elucidates a common mechanism underlying recent business cycles: oil consumption tends to be higher during expansions and lower during recessions, and prices tend to be lower during expansions and higher during recessions.

There are a myriad of publications on the topic of whether or not energy consumption causes economic growth.11 Unfortunately, the literature is confounding, due mainly to two issues: energy quality and substitution effects. Energy quality refers to many things, but in the economic sense energy quality pertains mainly to the utility of a fuel, which is a combination of its transportability, storability, energy density, etc. Consequently, the utility of a fuel is reflected in its price, which is why the price per energy unit of coal is much lower than the price per energy unit of electricity, that is, electricity is deemed to have a higher quality. Yet despite this difference in quality, most energy-economic analyses assume that a BTU of coal has the same economic utility as a BTU of electricity. Consequently, the substitution of high-quality energy sources, such as electricity, for low-quality energy sources, such as coal, is often missed.12

Our analysis indicates that about 50% of the changes in economic growth over the past 40 years are explained by the changes in oil consumption alone. In addition, the work by Cleveland et al.12 indicates that changes in oil consumption cause changes in economic growth, or that economic growth is bound by the energy available. These two points support the idea that energy consumption, and oil consumption in particular, is of the utmost importance for economic growth.

Yet, oil consumption is rarely used by neoclassical economists as a means of explaining economic growth.

Thus, we present the hypothesis that higher oil prices and lower oil consumption are indicative of recessions. Likewise, economic growth requires maintaining lower oil prices while simultaneously increasing oil supply. The data support these hypotheses: the inflation-adjusted price of oil averaged across all expansionary years from 1970 to 2008 was $37/bbl compared to $58/bbl averaged across recessionary years, whereas oil consumption grew by 2% on average per year during expansionary years compared to decreasing by 3% per year during recessionary years.

Although this analysis of recessions and expansions may seem like simple economics, that is, high prices lead to low demand and low prices lead to high demand, the exact mechanism connecting energy, economic growth, and business cycles is a bit more complicated. Hall et al. and Murphy and Hall state that when energy prices increase, expenditures are reallocated from areas that had previously added to GDP, mainly discretionary consumption, toward paying for more expensive energy.15,16 In this way, higher energy prices lead to recessions by diverting money from the economy toward energy only. The data show that major recessions seem to occur when energy expenditures as a percentage of GDP climb above a threshold of roughly 5.5% (Fig. 5). It is worth noting, however, that this relation did not hold for the smaller recessions of the early 1990s and 2000s. This is probably a result of the fact that the cost of oil is only one of the many possible causes of—and solutions to—recessions.

What are the implications for economic growth if (1) oil supplies are unable to increase with demand, or (2) oil supplies increase but at an increased price?

Oil is a nonrenewable resource and its supply will, at some point, decline. “Peak oil” refers to the time period when global oil production reaches a maximum rate and then begins to decline–the point at which the world will transition from an expansionist industrial era, characterized by indefinitely expanding oil consumption, to an era defined by declining supplies of oil and all those things we do with oil. Peak oil represents a major problem for the U.S. (and most) economies, as it indicates that oil supplies cannot increase with economic expansion in the long term.

It is not only the quantity of oil that is important, but the cost of that oil. It is our ability to find, develop, and produce that oil for a reasonable energy and hence monetary cost that makes it so useful. Net energy is defined as the amount of energy remaining after the energy costs of getting and concentrating that energy are subtracted.19 The economy gains zero net energy if we have to use just as much energy to develop a resource as we will garner from producing that resource.

Clearly, energy resources that produce a high level of net energy are considered to be of higher value than those that produce a small amount of net energy.

[Large snip of explanation of Hubbert's peak and evidence of declining oil production]. Most of the easy-to-find and easy-to-produce oil has already been found and produced.3 Global oil discoveries peaked during the 1960s and have declined steadily since. In addition to finding less oil, new discoveries are located increasingly in areas that are geologically harder to produce, such as deep offshore areas. Discoveries in deepwater areas increased from under 10% of total discoveries in 1990 to nearly 60% by 2005. These three lines of evidence suggest that society is entering the era of peak oil. Note, we are simply stating that the evidence indicates that oil supplies were constrained from 2004 to 2008, and that the most likely explanation is that the supply of conventional crude oil is nearing (or possibly past) its peak. Other explanations for the constraint in oil supply from 2004 to 2008 is a lack of investment in infrastructure from the oil industry, but we could not find much evidence to support his claim, especially considering the large investments made into the oil sands and deepwater exploration during this period.

Peak Oil Deniers — a Rebuttal

Technology only delays the inevitable

Even if technology enables us to extract more oil than expected, this would only delay the issue of peak oil, not change it.  Bartlett calculates that for every additional billion barrels of oil we find beyond two trillion barrels delays the peak in global oil production by only 5.5 days. 24

Discovery of new oil fields has declined since 1948

But we can’t get enhanced recovery or produce more oil from fields we can’t find.  Global discoveries have been in a steady decline since the peak in 1948 despite advances in technology. Others argue that as the price of oil increases, known sources of oil that were previously too expensive to develop will become economical. To some extent this is true: oil sand development in Canada, for example, is expensive and economically feasible at high oil prices only. However, the oil sands are not conventional oil sources and are not new discoveries, and are already incorporated into many models of future oil supply. 3

There is no alternative energy that can replace oil

There is no substitute for conventional oil that is of the same quantity, quality, and available for the same price.

The closest substitutes for conventional oil currently in large-scale production are the oil sands of Canada and biofuels, produced mainly from corn and sugarcane. The oil sands present a vast amount of potential energy, but it is in a less accessible form than conventional oil. The oil sands must be heated and refined just to form crude oil and then refined further to form the various crude oil derivatives. Estimates from Cambridge Energy Research Associates show that the cost of production for the oil sands is roughly $85/bbl,which is more than double the average price of oil during expansionary periods ($37/bbl).38 The usual assumption is that the oil sands will be rate limited, not resource limited, because of their large demands for water and natural gas and their large environmental impacts.3 So, even though there are large amounts of potential energy, production of oil sands cannot be increased enough to offset a large decline in conventional oil production.

Biofuels have zero net energy: as much energy to produce as they deliver

Biofuels are recent plant material that has been converted through some combination of chemical and/or thermal processes into a liquid fuel. The main fuel products from these processes are biodiesel, or more commonly ethanol. There are many reasons why alcohols do not produce as good fuel as gasoline, and we present here two. (1) the energy density of ethanol is only about two-thirds that of gasoline. (2) the energy contained within the biofuel product is nearly the same as the energy used to produce the biofuel–roughly zero net energy to society.39–43 Oil produces roughly 18 units of energy per unit invested, and gasoline roughly 10 units per unit invested.44,45 Therefore gasoline and biofuels are imperfect substitutes and place doubt on their ability to replace oil.

It takes a very long time to construct the infrastructure to move from one source of primary energy to another

Marchetti analyzed the time it took global society to transition from wood to coal and subsequently from coal to oil and found that it takes about a century for society to increase its adoption of a primary energy substitute from 1% to 50% of market capacity.46 Thus, even if society adopts alternative energy quickly, it will still take decades to substitute for just half of the oil use in the world.

Hirsch et al. came to a similar conclusion when examining the specific strategies that the United States might take to mitigate its oil dependence.47 They examined numerous, large-scale methods by which the United States could substitute for conventional oil, including: (1) conservation—implementing higher efficiency energy equipment, that is, high mileage automobiles; (2) gas-to-liquids; (3) fuel switching to electricity; and (4) coal liquefaction. Their main conclusion is that “waiting until world oil production peaks before taking crash program action leaves the world with a significant liquid fuel deficit for more than two decades”(p. 59).47

The True Value of Energy to Society is the Net Energy

[snip of explanation of EROI vs net energy]

A shift from easy-to-access oil to hard-to-access oil is changing the net energy delivered to society and how this may exacerbate the effects of peak oil on economic growth.

Gagnon et al. report that the EROI for global oil extraction declined from 36:1 in the 1990s to 18:1 in 2008.44 This downward trend results from at least two factors: First, increasingly supplies of oil originate from sources that are inherently more energy intensive to produce, simply because firms develop cheaper resources before expensive ones. For example, in 1990 only 2% but by 2005 60% of discoveries were located in ultra-deepwater locations (Fig. 10).

Enhanced oil recovery techniques increase production short term, but significantly increase the energy used in production, offsetting much of the energy gain for society

Enhanced oil recovery techniques are being implemented increasingly in the world’s largest conventional oil fields. For example, nitrogen injection was initiated in the once super giant Cantarell field in Mexico in 2000, which boosted production for 4 years, but since 2004, production from the field has declined precipitously.

Summary of net energy. The EROI for global oil production is declining, so maintaining the flow of net energy to society given declining EROIs will require an increase in the extraction of gross energy, accelerating the depletion of oil. This means that it will be very difficult to offset peak oil by finding and developing new, low EROI fields because new fields must produce enough oil to not only match the depletion of the existing field stock but also to overcome the decline in EROI.

We have anywhere between 20 and 30 years of conventional oil remaining at current levels of consumption

Or less if China, India, or the 200,000 new people born every day increases consumption.

Peak oil, net energy, and oil price

Low EROI oil indicates that there will be high oil prices in the future. Forecasting the price of oil, however, is a much more difficult endeavor as oil price depends, in theory, on the supply and demand for oil at a given moment in time. What we can examine with some accuracy is the cost of production of various sources of oil, in order to calculate the price at which different types of oil resources become economical. In theory, if the price of oil is below the cost of production, then most producers will cease operation. If we examine the cost of production in the areas in which we are currently discovering oil, hence the areas that will provide the future supply of oil, we can calculate a theoretical floor price below which an increase in oil supply is unlikely.

Roughly 60% of the oil discoveries in 2005 were in deepwater locations. Based on estimates from CERA,38 and the cost of developing that oil is between $60 and $85/bbl, so oil prices must be over $60/bbl to support the development of even the best deepwater resources. The average price of oil during recessionary periods has been $57/bbl, so it seems that increasing oil production in the future will occur only at recessionary prices. All of this indicates that an expensive oil future is necessary if we are to produce the remaining oil resources, and, as a consequence, the economic growth witnessed by the United States and globe over the past 40 years will be difficult to realize in the future.

Since EROI is a measure of the efficiency with which we use energy to extract energy resources from the environment, it can be used as a rough proxy to estimate whether the cost of production of a particular resource will be high or low. For example, the oil sands have an EROI of roughly 3:1, whereas the production of conventional crude oil has an average EROI of 18:1. The production costs for oil sands are roughly $85/bbl compared to $20/bbl for Saudi Arabian conventional crude.38  Therefore, as oil production continues, we can expect the cost of oil extraction to increase.

Read the full article here:

Energy return on investment, peak oil, and the end of economic growth

 

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37. Solow, R.M. 1974. The economics of resources or the resources of economics. Am. Econ. Rev. 64: 1–14.
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39. Murphy, D.J., C.A.S. Hall & B. Powers. 2011. New perspectives on the energy return on (energy) investment (EROI) of corn ethanol. Environment, Development and Sustainability 12: 179–202.
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a survey of the literature 1990—present. Environ. Sci. Technol. 40: 1744–1750.
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49. Giampietro,M.&K.Mayumi. 2008.Complex systemsthinking and renewable energy systems. In Biofuels, Solar and Wind as Renewable Energy Systems: Benefits and Risks. D. Pimentel, Ed.: 173–214. Springer. New York.
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The Fallacy Behind Large-Scale Agro-Biofuels Production. Earthscan Research. London, UK.
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Posted in Charles A. S. Hall, Charles Hall, EROEI Energy Returned on Energy Invested, EROEI remaining oil too low, How Much Left, Peak Oil, Scientists | Leave a comment

The case for Gold

Gold, Infinite Debt, and the Problem of Capital Storage: Has The Hotelling Moment Arrived?

March 9, 2011 Gregor Macdonald

One of the reasons that gold retains its competitiveness as a capital-storage unit is the rather slow and plodding rate at which supply is brought to market. Since 1900, compound annual growth of world gold production comes in at 1.163%. That particular rate is below the growth rate for a number of other natural resources. But in particular: it’s well below the rate of credit production–the “resource” which now plagues the developed world. Indeed, the over-production of credit the past twenty-five years has once again driven capital back into hard assets such as gold. This brings up an intriguing subject: the conversion of resources into financial capital, and the conversion of financial capital back into resources. First, let’s take a look at a century of gold production. | see: World Gold Production in Metric Tons 1900 – 2009.

 

From 1980-2000 global gold production grew at a strong, compound annual growth rate (CAGR) of 3.836%. But that was after a very slow production rate for forty years, between 1940 and 1980. In the past decade global production of gold has not only slowed again but fallen steadily, with a notable uptick in 2009 as the decline temporarily reversed. Indeed, since the new millennium, the story of gold will be familiar to those who have watched oil: as prices steadily rose, supply growth fell.

The migration of capital, between the world of natural resources and the world of finance, has been addressed by any number of thinkers, one of the more compelling being Harold Hotelling. Writing in the Journal of Political Economy in 1931, Hotelling proposed that a rational producer of resources would only be inclined to extract and sell that resource if the investment opportunities available with the capital proceeds were greater than simply leaving that resource to appreciate in the ground. So, given Hotelling’s theory of resource extraction, what has happened to gold production since the year 2000? Does the chart reflect geological and cost limits to increasing gold production, even as the price rose from $250.00 to $1000.00 per ounce? Or, has there been some moderate yet gathering decision on the part of global gold producers to extract gold more slowly? After all, why extract gold to merely convert gold into paper currency, beyond the need to pay for the cost of production and provide, say, a dividend to shareholders? In other words, at the rate at which the price has been rising, why hurry to extract the gold?

These same questions have long been asked in the world of energy extraction as well. Why did global oil production advance so quickly into late 2003 as the oil price was rising towards the high 30′s, only to peak out for the past six years as price skyrocketed? We must assume that oil producers in the West, governed mostly by for-profit enterprises, were doing everything possible to lift production. The conclusion is rather easy: they couldn’t lift production, even with a doubling of price. But in contrast to BP, Shell, Exxon, Total, Chevron, and Conoco, what about the NOCs–the National Oil Companies? Is it possible they were inclined to apply some form of scarcity rent, holding back production slightly? Echoing statements made at least twice last decade, King Abdullah of Saudi Arabia repeated himself last Summer when he remarked about future Saudi oil production: “I told them that I have ordered a halt to all oil explorations so part of this wealth is left for our sons and successors God willing.” | see: Global Crude Oil Supply 2002 – 2010 in mbpd (updated through November 2010)

As lovely and reasonable a view offered by Hotelling in his The Economics of Exhaustible Resources, there is little evidence that oil producers are any more rational than individuals. The history of global oil production would appear to be governed more by geology, than any future projections of how to best invest oil revenues. North Sea oil was largely extracted in the cheap oil era, and peaked as oil prices began to take off earlier last decade. This was also true for Indonesia, and of course several decades before with the United States. Indeed, the bulk of world oil production was sold too cheaply. I discussed this phenomenon in my 2009 piece, The Fate of An Oil Exporter. By contrast, one of the few modern states that has spoken openly about husbanding scarce energy resources is Brazil. President Lula declared in 2009, as Brazil changed its resources policy that year, that the country’s new offshore discoveries were a “passport to the future.” Misunderstood by right-leaning commentary at the time as a form of resource-nationalism, Lula’s remarks were instead very much in the Hotelling vein. “We don’t have the right to take the money we’re going to get with this oil and waste it,” Lula remarked. But Brazil has been an exception.

Given that both gold and oil production are now either flat or falling, what should a producer of these two commodities do with the proceeds of their sales? Let’s again consider the insurmountable problem at hand. Western economies and especially the United States have been on a credit binge for decades. When that bubble burst in 2008, punctured in large part by rising energy prices, the response from OECD governments was to create more credit. In Eric Zencey’s terrific New York Time’s essay on Frederick Soddy, which captured the views of the 1921 Nobel Laureate, the connection between debt limits and energy supply was made plain for a general readership:

Problems arise when wealth and debt are not kept in proper relation. The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment — and by the amount of high-entropy effluent from an economy that the environment can sustainably absorb. Debt, being imaginary, has no such natural limit. It can grow infinitely, compounding at any rate we decide.

Whenever an economy allows debt to grow faster than wealth can be created, that economy has a need for debt repudiation. Inflation can do the job, decreasing debt gradually by eroding the purchasing power, the claim on future wealth, that each of your saved dollars represents. But when there is no inflation, an economy with overgrown claims on future wealth will experience regular crises of debt repudiation — stock market crashes, bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets.

To Soddy’s point on the problem of infinitely created debt, let’s take a look at 60 years of debt growth in the United States. | see: Total Credit Market Debt Owed 1940 – 2010 (updated through December 2010).

As the United States has now (long) embarked on a massive dollar devaluation program, in part to bust the CNY-USD peg, but mostly to mitigate the next leg down in real-estate and debt deflation, we should consider how resource extractors might behave in such an environment. Two obvious possibilities are as follows. First, oil producers rather than chasing higher prices in dollar-terms might start to demand full or partial payment in gold. Meanwhile, gold producers might consider banking some of their capital not in cash, but also in gold. And yes, both oil and gold producers could simply leave more of the stuff in the ground. What may become more clear is that, beyond the need for operational cash, turning excess production of resources into paper currency will increasingly become, per Hotelling, a losing proposition.

Data Sources:

USGS Historical Statistics for Mineral and Material Commodities in the United States (includes global data).

Economic Research: Federal Reserve Bank of St Louis.

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Predictions by scientists and engineers

Charles A. Hall and David J. Murphy.  Predictions for 2011

We predict (with relatively little certainty assigned to it) that there will continue to be (for a while) a mild economic recovery, which will increase the demand for oil, and thus require the increased use of higher-priced oil. This will eventually require that 10 percent or so of the US GDP will go to the price of energy, which, as in the past, will lead to an economic downturn which will lead, in time, into the same cycle again. While we are not sure of the details of timing or prices we think that Jean Laherrere’s and Colin Campbell’s concept of the “undulating plateau” will continue to describe the US (and European) economies for the forseeable future — at least until serious peak oil and declining EROI kicks in.

Mid-East unrest could increase global phosphorus threat

Feb 2 2011 Terry Clinton University of Technology Sydney

Two Australian experts, Professor Stuart White and Dr Dana Cordell, in global phosphorus have warned instability in the Middle East and North Africa could threaten world food security, due to the high proportion of global phosphate rock reserves in the region.

Phosphorus is required to produce fertilizer and is not able to be substituted in food production.

Morocco alone controls the vast majority of the world’s remaining high quality phosphate rock,” Professor White said. “Even a temporary disruption to the supply of phosphate on the world market can have serious ramifications for nations’ food security.”

Professor White and Dr Cordell, from the Institute for Sustainable Futures at the University of Technology, Sydney, are leading an international research initiative on the likely peak in phosphate rock production before the end of the century.

“Demand for phosphorus is increasing globally due to changing diets in developing countries, biofuel production and population growth,” Professor White said.

“Peak phosphorus is often highly misunderstood as the ‘year we will run out of phosphorus’. The peak actually refers to the point in time when production will no longer be able to keep up with demand due to economic and energy constraints. Whilst the exact timeline is uncertain, it will be much sooner than the time when all the reserves have been depleted. Even before the peak in production occurs, there is the prospect of significant price spikes and impact on farmers and global crop yields.”

“The solutions rest in improving the efficiency of use, as much of the phosphate resource is wasted between the mine and the dinner plate,” Dr Cordell said. “No governments have a plan for securing sufficient access to phosphorus for producing food in the long-term. Whatever the exact year of peak phosphorus, it is clear we need to start taking action now. This means investing in renewable phosphorus fertilizers (by recovering and reusing phosphorus from our excreta, manure and food waste) and increasing the efficiency of phosphorus use from mining to fertilizer application to food processing.

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Why the USA can’t inflate its way out of debt.

Mar 11, 2010. Why the U.S. can’t inflate its way out of debt. Financial Times.

It’s dawning on people that getting a handle on burgeoning U.S. debt will be a long and hard process. So if lawmakers can’t agree on a credible plan, some have suggested that the country could just “inflate its way” out of its fiscal ditch by boosting prices and wages and eroding the value of the currency. The United States would owe the same amount of actual dollars to its creditors — but the debt becomes easier to pay off because the dollar becomes cheaper.

It’s true that inflation could reduce a small portion of U.S. debt. The International Monetary Fund (IMF) estimates that in advanced economies less than a quarter of the anticipated growth in the debt-to-GDP ratio would be reduced by inflation. But the mother lode of the country’s looming debt burden would remain and the negative effects of inflation could create a whole new set of problems.

  1. A lot of government spending is tied to inflation. If inflation rises, so do government obligations, like Social Security, Medicare, and other are indexed.
  2. Inflation would also make future U.S. debt more expensive, because inflation tends to push up interest rates. And the Treasury will have to refinance $5 trillion worth of short-term debt between now and 2015. [The debt’s value could go down for a couple of years because of surprise inflation. But then … the market’s going to charge you a premium interest rate and say ‘you fooled us once but this time we’re going to charge you a much higher rate on your three-year bonds’.
  3. Another potential concern: Treasury inflation-protected securities (TIPS), which have maturities of 5, 10 and 20 years. They make up less than 10% of U.S. debt outstanding currently, but the Government Accountability Office has recommended Treasury offer more TIPS as part of its strategy to lengthen the average maturity on U.S. debt. The higher inflation goes, of course, the more the Treasury will owe on its TIPS.
  4. What’s more, the knock-on effects of inflation are not pretty. A recent report from the IMF outlined some of them: reduced economic growth, increased social and political stress and added strain on the poor — whose incomes aren’t likely to keep pace with the increase in food prices and other basics. That, in turn, could increase pressure on the government to provide aid — aid which would need to keep pace with inflation.

So where does that leave lawmakers? Facing tough choices. Deficit hawks and market experts have been calling on lawmakers to come up with a strategy to stabilize the growth in U.S. debt, which would be implemented only after the economy recovers more fully. The idea is to signal to the markets that the country is serious about getting its longer term debt under control so that the burden of paying it back doesn’t consume an ever-increasing share of the federal budget.

The recommended exit strategies are pretty basic, if unpopular: tax increases and spending cuts. Economic growth will play a key role as well — since a strong economy produces more tax revenue. But the country cannot grow its way out of its problems. To do that, the economy would have to expand at Herculean rates annually from here on out. And even the most optimistic economist doesn’t see that on the horizon.

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Richard Heinberg – collapse in a few years to decades

China or the U.S.: Which Will Be the Last Nation Standing?

Feb 3, 2010 by Richard Heinberg

Silly me. Here I had thought that world leaders would want to keep their nations from collapsing. They must be working hard to prevent currency collapse, financial system collapse, food system collapse, social collapse, environmental collapse, and the onset of general, overwhelming misery—right? But no, that’s not what the evidence suggests. Increasingly I am forced to conclude that the object of the game that world leaders are actually playing is not to avoid collapse; it’s simply to postpone it a while so as to be the last nation to go down, so yours can have the chance to pick the others’ carcasses before it meets the same fate.

I know, that sounds unbearably cynical. And in fact it may not accurately describe the conscious attitudes of leaders of some smaller nations. But for the U.S. and China, arguably the countries most likely to lead the way for the rest of the world, actions speak louder than words.

For these two nations, avoiding collapse would require solving a range of enormous problems, of which at least four are non-negotiable: climate change; peak fossil fuels (in effect, stagnating and, soon, declining energy supplies); the inherent instability of growth-based financial systems; and the vulnerability of food systems to factors like fresh water scarcity and soil erosion (in addition to global warming and fuel scarcity). If they fail to address any one of these, societal collapse is inevitable—in a few decades certainly, but perhaps in just the next few years.

So how are our contestants doing? There’s not much to report on the climate score—just vague promises for future action. So their apparent strategy in this case is to delay (not to delay the impacts, mind you, but to delay efforts to address the problem).

Likewise, there is little positive action occurring regarding food systems: the assumption appears to be that conventional industrial agriculture—which is responsible for most of the global food system’s enormous and growing vulnerabilities—will somehow shoulder the task of feeding seven to nine billion humans. We just need to continue with what we are already doing, but on a larger scale and using more gene-engineered crop varieties.

Officially, peak energy is not even a concern, so evidently the strategy being adopted here is denial. We’ll see how that works out.

How about the financial mess? Here the U.S. and China are in situations so different that a more extended discussion seems justified.

China Surges to the Lead!

The U.S. is in debt up to its eyeballs and has mortgaged the paychecks of every generation approximately until hell freezes over in order to bail out its “too-big-to-fail” banks. In contrast, China has piles of cash (resulting from its enormous trade surpluses) and has bought a mountain of U.S. debt in order to keep its main customer’s currency from losing value. It would seem that, in this department, one nation is set to flag while the other is poised to leap into first place as world economic superpower.

And that happens to be the conventional wisdom on the subject. It’s not hard to find commentators who say the United States is a has-been for a variety of reasons. In addition to its huge debt burden, the U.S. also suffers from a shrinking manufacturing base, a big trade deficit, eroding quality of education, and a foreign policy that serves the interests of arms manufacturers while undermining the long-term interests of the nation. Regarding the last of these items, a 2006 World Public Opinion poll showed large majorities in four leading ally nations (Egypt, Morocco, Pakistan, and Indonesia), together accounting for a third of the Muslim world’s population, believe the U.S. is determined to destroy or undermine Islam. Within those countries, most people surveyed support attacks on American targets. And it just so happens that most of the world’s future oil supplies will be coming from Muslim nations. Brilliant.

By contrast, China is enjoying springtime on amphetamines. It now has the biggest car market in the world. And, according to Stuart Staniford, “if present trends continue, the Chinese expressway system will grow larger than the U.S. interstate highway system within the next couple of years, and Chinese car ownership will exceed U.S. car ownership in 2017.” As of 2010 China is the leading producer of hydroelectric and solar power and by 2011 will be the top producer of wind power. China’s smart grid investments dwarf those of the U.S. by 200 to one. The Chinese are also investing heavily in nuclear energy. Staniford goes on: “Oversimplifying greatly, it’s as though the U.S. borrowed a pile of money from China in order to fight a war to free up oil supply in Iraq in order that China could become the greatest industrial power the world has ever seen.”

China’s foreign policy consists largely of buying friends by purchasing rights to oil, gas, coal, and other resources (in Canada, Australia, Venezuela, Iraq, Kazakhstan, and throughout Africa), while the U.S. spends money it doesn’t have rooting out bad guys and making more enemies in the process.

In an October, 2009 lecture, George Soros showed refreshing candor about the seriousness of the continuing global financial crisis: “What differentiated [the recent economic crisis] from the Great Depression is that this time the financial system was not allowed to collapse, but was put on artificial life support.  The magnitude of the credit and leverage problem we have today is even greater than the 1930s.” Soros then went on to discuss the relative positions of the U.S. and China:

In the short term, all countries were negatively affected. But in the long term, there will be winners and losers. . . . To put it bluntly, the U.S. stands to lose the most, and China is poised to emerge as the greatest winner. . . . China has been the primary beneficiary of globalization, and it has been largely insulated from the financial crisis. For the West, and the U.S. in particular, the crisis was an internally-generated event [that] led to the collapse of the financial system. For China, it was an external shock [that] has hurt exports, but left the financial, political, and economic system unscathed.

China Stumbles!

But remember: without solutions to climate change, peak energy, and the looming food crisis, winning the financial contest is only temporary solace. Consider just the energy conundrum: China may be building nukes and windmills, but there’s no way it can maintain 8% annual growth for long with flat or declining energy from coal. China and India, between them, are currently planning to build 800 new coal-fired power plants by 2020. Where will the coal come from? Both countries are already experiencing domestic production shortfalls and are starting to import the fuel. But coal-exporting countries will be unable to keep up with their growing combined demand.

Moreover, there is a school of thought that says China’s apparently unstoppable economic miracle is a bubble waiting to burst. Beijing’s housing market is overheated, like that of Las Vegas circa 2006. Last year, the Chinese economy enjoyed 9% GDP growth—on paper. But in order to achieve that goal, the government and banks had to loan out 30% of China’s GDP (the rate of growth in loans accelerated during the latter part of the year; at year-end rates, banks were on track to loan out an amount equal to the nation’s entire GDP in 2010). In any case, much of that growth probably occurred through speculation on real estate and questionable stocks.

Generally, China is at a Wild West stage of economic development: it is a collection of powerful local capitalist power bases unaccountable to anyone, all jockeying to create and inflate assets and credit. While the central government has recently exerted control over the banks, its ability to halt regional Ponzi schemes is still limited.

In January the Chinese banking regulatory commission attempted to rein in lending in order to slow the rapid increase in real estate and stock market values. (On the other hand, during the same month, China’s cabinet agreed to permit margin trading and short selling of stocks and to launch a stock futures index.) Significantly, there is evidence that China’s central bank’s attempts to harmlessly deflate the housing and stock market bubbles may be going badly. The sudden suspension in lending has, according to Joe Weisenthal in Business Insider, “caught importers, along with many other companies, by surprise and could cause turbulence in China’s import orders. Letters of credit (LoC) suddenly became unavailable, despite previous agreements. We believe that this will inevitably lead to delays or cancellations in China’s imports. Import orders for commodities and machineries could be affected most.” Translation: the government was faced with the options of letting a rapidly growing bubble burst, taking the economy down; or deliberately deflating the bubble, risking taking the economy down by another route. The central bank chose the latter, and the risked takedown may be unfolding.

In a recent op-ed, New York Times columnist Tom Friedman countered worries about a bursting of the China bubble with a robust display of confidence in Beijing’s unstoppable expansionary momentum. Given Friedman’s record (remember his columns in 2003 extolling the benefits that would flow to America from an invasion of Iraq?), this alone should be cause to doubt whether the Chinese locomotive can stay on its tracks much longer.

What Does It Mean to “Win”?

In his book Reinventing Collapse: The Soviet Example and American Prospects, Dmitry Orlov discusses the “collapse gap” between the United States and the old Soviet Union: the latter, he argues, was in effect much better prepared for economic crisis and the fall of its central government; when the U.S. eventually goes the way of the U.S.S.R., the pain and suffering of its citizens will be much greater. (I can’t adequately summarize Orlov’s evidence and reasoning here, but they are persuasive; if you haven’t read the book, do yourself a favor.)

So: How is the U.S. doing today in terms of collapse preparedness as compared to China?

After six decades of nearly uninterrupted economic growth, Americans have developed unrealistic expectations about the future. They are urbanized consumers whose manufacturing capability has shriveled and whose practical survival skills are in most cases vestigial. The Chinese, in contrast, have less of a steep fall ahead of them. Most still dwell in the countryside, and many who live in the cities are only one generation removed from subsistence agriculture and can still draw on their own, or their parents’, practical skills learned during decades of poverty and immersion in a traditional farming culture.

Both nations face fierce political challenges. In the U.S., the central government has reached nearly complete paralysis: it is evidently incapable of solving even relatively minor problems, and confidence in it among the citizenry has largely evaporated. Political leaders have succeeded in polarizing the people geographically with “hot-button” issues, few of which have anything to do with the factors currently undermining the nation’s ability to survive. The Chinese central government appears far more capable of acting decisively and strategically, but it is confronted with nasty facts of geography and history: there is an extreme and growing economic and social division between the wealthy coastal cities and the poor, rural interior; and a demographic schism between those 40 years old or younger who have high economic expectations, and the older generation who grew up under Mao, with an ethic of collectivism and self-sacrifice. The young, especially, have accepted a trade-off between civil freedoms and economic prosperity. If the latter is not delivered, there will be shrill demands for the former. These divisions are so deep and profound that they could tear society apart if expectations are dashed—and the leaders know this.

Thus, in the event of collapse, both nations face the possibility of a breakdown in their political systems, entailing widespread violence (uprisings and crackdowns).

China still maintains a crucial advantage in one key area: its food system. Far more of its citizens still grow food, even taking into account recent trends toward rapid urbanization (in the U.S., full-time farmers make up only about 2% of the population and the average farmer is approaching retirement age). This is not to say that China will have the capacity to feed all its people. The key difference has to do with the resiliency of the two nations’ respective food systems: that of the United States is more centralized, more highly fuel dependent, and therefore probably more vulnerable.

The Geopolitics of Collapse

It’s easy to see the advantage of collapse preparedness for the citizenry—with better preparation, more will survive. But does a higher survival rate during and after collapse translate to some sort of geopolitical advantage?

The process of collapse will be determined by many factors, some hard to predict, and so it is difficult to know the size or scope of the political power structure that might re-emerge in either country. It’s possible that one nation, or both, could devolve into smaller political units squabbling among themselves and unable to engage much in global jockeying for resources. All new political units emerging within the present territories of China or the U.S. would be immediately beset with enormous practical problems, including poverty, hunger, environmental disasters, and mass migrations.

Presumably some potent weaponry from the age of global warfare would remain intact and usable, so it is possible in principle that one or another of these smaller political entities could assert itself on the world stage as a short-lived, bargain-basement empire of limited geographic scope. But even in that case “winning” the collapse race would be small comfort.

The possibility of armed conflict between the two powers prior to mutual collapse is not to be entirely excluded if, for example, U.S. efforts to contain Iran’s nuclear ambitions were to set off a deadly chain reaction of attacks and counter-attacks possibly involving Israel, with world powers being forced to choose sides; or if the U.S. were to persist in arming Taiwan. But neither the U.S. nor China wants a direct mutual military confrontation, and both nations are highly motivated to avoid one. Thus all-out nuclear war—still the worst-case imaginable scenario for homo sapiens and planet Earth—seems thankfully unlikely, though in the few decades ahead the use of some of these weapons, on some occasions, by one nation or another, is probable.

Trade wars are another matter, and we might even see one this year, according to Michael Pettis at Financial Times, who notes that

. . . trade imbalances are more necessary than ever to justify increased investment in surplus countries [i.e., China], but rising unemployment makes them politically and economically unacceptable in deficit countries [i.e., the U.S.]. Rising savings in the U.S. will collide with stubbornly high savings in China. Unless a long-term solution is jointly worked out immediately, trade conflict will worsen and it will become increasingly hard to reverse offensive policies. Most importantly, if deficit countries demand structural change faster than surplus countries can manage, we will almost certainly finish with a nasty trade dispute that will . . . poison relationships for years.

How likely is the prospect for the last nation standing to be able to, as I put it in the first paragraph above, “pick the carcasses” of its competitors? Such a scenario presupposes that one nation will be able to stay on its feet for at least a few years after others fall. But this may not be possible. Recall the prophetic words of Joseph Tainter in The Collapse of Complex Societies (1988):

“A nation today can no longer unilaterally collapse, for if any national government disintegrates, its population and territory will be absorbed by some other [or bailed out by international agencies]. . . . Collapse, if and when it comes again, will this time be global. No longer can any individual nation collapse.”

When the U.S.S.R. crashed, the U.S. and various multinational corporations were able to sweep in and gobble up some of the treasure left lying around. One example: U.S. nuclear power plants have for many years been using uranium fuel cannibalized from old Soviet missile warheads. Soon, international institutions such as the World Bank and IMF helped organize new financial structures for Russia, Ukraine, Belarus, Lithuania, Estonia, and the other nations born from Soviet political and economic disintegration, so as to limit and reverse the process of social disintegration that had already passed beyond its early stages.

But now the game has changed. A collapse of the U.S. would leave China devastated. Not only would Beijing lose its main customer, but the hundreds of billions of dollars’ worth of treasury notes it has accumulated would be rendered worthless. If China were internally stable, such impacts could be absorbed with difficulty. But in light of China’s own simmering social and financial predicaments, a U.S. collapse would almost certainly be enough to tip Beijing’s economy into a tailspin, resulting in both social and political crises.

A collapse of China would similarly devastate the U.S.

In neither instance would international institutions be capable of preventing substantial social and political fall-out. The last nation standing would not stand for long. We have reached the stage where, as Tainter says, “World civilization will disintegrate as a whole.”

 

The Transition Marathon

Okay, so there is no serious effort on the part of U.S. or Chinese leaders to avoid collapse in the long run (over the next 10 to 20 years). Perhaps this is because they have concluded that it is impossible to do so—there are just too many trends leading in the same direction, and actually dealing with any of those trends head-on would entail huge, immediate political risks. In reality, however, it is much more likely that they simply refuse seriously to think about these trends and their implications, because they do have another option—to postpone collapse through deficit spending, bailouts, and more financial bubbles, while enacting their parts in a climate-policy kabuki play and engaging in resource geopolitics. This way blame will at least fall on the next set of leaders. Postponing collapse is itself a big job, enough so as to take all of one’s attention away from having to contemplate the awfulness and inevitability of what is being postponed.

Do these short-term efforts in any way reduce the risk of dissolution? Hardly. In fact, the longer the reckoning is delayed, the worse it will be.

What would make more sense than just trying to put off the inevitable is quite simply to build resilience throughout society, re-localizing basic social systems involving food, manufacture, and finance. There is no need to rehearse the existing discourse about this strategy: readers who are not familiar with it can find plenty of useful pointers at www.transitiontowns.org, or in the books and articles of authors such as Rob Hopkins, Albert Bates, David Holmgren, Pat Murphy, and Sharon Astyk (and in some of my own writings, including Museletter #192).

It is understandably hard for national politicians to think along those lines. Building societal resilience means disregarding the dictates of economic efficiency; it means systematically reducing the power of the central government and national/global commercial institutions (banks and corporations). It also means questioning the central dogma of our modern world: the efficacy and possibility of unending economic growth.

So if the best outcome lies in a strategy of resilience and re-localization, and our national leaders can’t even contemplate such a strategy, that means those leaders are, in one sense at least, irrelevant to our future.

Some blog readers are so in tune with this line of thinking that they no longer see any point in paying attention to the global scene. They may even think this article is a waste of time (and I expect to get an email or two to that effect). But following world events is more than a matter of infotainment: when and how China and the U.S. come apart at the seams is a question of far greater consequence than that of whether the New Orleans Saints or the Indianapolis Colts will win the Superbowl. The reality is that no nation, and no community will be able to completely protect itself from the sudden, harsh winds that will rush to fill the vacuum left by an implosion of either superpower.

By the way, my apologies to the other 190 or so nations of the world, large and small: my singling out of the U.S. and China for discussion does not signify that other countries are unimportant, or that their destinies will not be as unique as their cultures and geographies; merely that those destinies will probably unfold in the context of a global collapse spreading from the two nations we have been discussing. For any nation—India, Bolivia, Russia, Brazil, South Africa—and for any community or family, survival will require some comprehension of the direction of large events, so as to get out of the way when debris is flying and to anticipate opportunities to regroup.

So: Pay attention to the weather reports from Washington and Beijing, but meanwhile build local resilience wherever you are. If the roof needs mending, don’t dawdle.

Just because the sky is falling, that doesn’t mean it’s time to stop thinking.

Posted in By People, Richard Heinberg | Leave a comment

How much longer will there be a Petrodollar?

Fueling The New World Order: Where Does China Import Its Crude Oil From?

Tyler Durden's picture

 by Tyler Durden on 04/20/2014 


It was roughly half a year ago that China officially surpassed the US as the world’s largest importer of oil. Since then, there have been some rather dramatic changes in the global geopolitical landscape, perhaps the most important of which are the ever louder and bolder attacks on the US petrodollar and the reserve currency status of the US dollar which funds the global crude trade. As reported recently, Russia and China, not to mention India and Iran and the other BRICs, are increasingly pushing for a trade system in which the USD is isolated – a key precondition to the loss of reserve status.

However, as China’s ravenous appetite for oil surpasses that of the US which is enjoying an unexpected, if transitory, boom of shale oil production, which according to some experts may have already peaked, it means suddenly China is far more are the mercy of its core suppliers – the same way that for decades the US had no choice but to be best friends with Saudi Arabia, at least until Canada became the biggest supplier of crude to the US by a huge margin.

So which are the countries that China relies most on for its daily energy importing needs? The map below has the answer.

Or, in ranked format (for 2011):

  1. Saudi Arabia
  2. Angola
  3. Iran
  4. Russia
  5. Oman
  6. Iraq
  7. Sudan
  8. Venezuela
  9. Kazakhstan
  10. Kuwait

Saudi Arabia on top makes sense, but #2 for… Angola? Well, at least that explains this: “Guess The World’s Most Expensive City“…

Also looking at the map above, it is quite clear that if one were so inclined, halting seaborne trade routes at the Strait of Malacca would hobble the entire Chinese economy overnight, something the Chinese leadership is surely aware of, and is certainly considering alternatives to, such as land pipelines into Iran (via India), as well as Kazakhstan and Russia.

So how do these compare with the outside sources of US crude?

Quite clearly, the primary external provider of US energy needs is no longer Saudi Arabia, but Canada, which is now exporting more than double the bpd amount as the second largest oil exporter, one time US bff in the middle east, Saudi Arabia.

Curiously, as Canada’s dominance has soared, the influence of all the other traditional petrodollar countries has waned. But only for the US – as the first chart shows, their influence is far greater now when it comes to China.

So isn’t it only logical that it is only a matter of time before the New (Oil) World Order decides to eliminate the USD – an anachronism from when the US relied first and foremost on just these oil exporting countries – entirely from the oil trade, and moves on to the Chinese Renminbi. Of course, that would require the Chinese currency to be flexible and convertible, something it certainly isn’t now… but what about 1 year from now, or 2 years or 3? And how long before the PBOC also reveals just what its true and updated gold holdings are? What is the probability the two events would coincide?

For some more curious observations and thoughts on fueling the New World Order, we recommend the following recently released research paper by the Brookings Institute (link)

Posted in PetroDollars | Leave a comment

China: 20% of soils contaminated, air pollution nearing toxic levels

[Here in California over a third of our air pollution is from China, and in Asia it's even worse than that]

Peak Oil Review. 21 APR 2014. ASPO-USA newsletter.

As the weeks roll by, it is becoming clearer that major changes are underway in China which is apt to have an impact on its energy consumption and economic growth in the years ahead.  After 40 years of unprecedented growth and increase in fossil fuel consumption at the expense of the environment, the good times came to an end last year when it became obvious that much of China was so polluted that human life was endangered.

Much of China’s boom was supported by a phenomenal growth in coal consumption which rose from 300 million tons annually in 1970 to 4.3 billion tons last year. Until recently, annual growth in coal consumption in has mostly ranged in the vicinity of 10 to 20 percent a year, dwarfing efforts in the rest of the world to cut back on carbon emissions and discouraging those countries that were making carbon control efforts.

In the wake of China’s 2013 “Airpocalypse,” however, in which pollution reached near-lethal levels in several major cities, there have been major changes in policies. Last fall the Chinese government released a new plan recognizing that significant reductions in coal consumption will have to take place if the country is to avoid an environmental disaster.  The government is now committed to reducing coal consumption within the next four years. If these plans are implemented there will be significant changes in the way China gets its energy. Beijing for example is to cut coal consumption by 50 percent in the four years.

While spectacular growth in coal consumption is likely over, at 4.3 billion tons annual consumption even relatively small growth rates of 2 or 3 percent a year still amounts to a lot of carbon going into the atmosphere. China is still projected to be consuming some 5 billion tons annually by 2020. To offset the loss of growing coal consumption, Beijing is making major strides in developing renewables, solar, wind, hydro, and building more nuclear power stations. It also plans major increases in natural gas consumption.  Thus the key issue for the remainder of the decade is whether China can maintain economic growth rates on the order of 7.5 percent a year while cutting back on coal.

It is important to note that while Beijing seems to have a lingering concern about carbon emissions and climate change, the proximate cause of the new policies is unbreathable air and ever increasing soil contamination, which already has left some 20 percent of China’s agricultural land too polluted for growing crops safely.

The word from Beijing is that a new environmental protection law will be published later this year, which will for the first time prioritize the environment over economic growth. This law will be a major change in the way the Peoples’ Republic does business.

Last week, Beijing revealed that its economic growth slowed to an 18-month low in the first quarter. While some of this is clearly due to lower exports, a reduction in the rate at which new power plants are being brought on line is obviously contributing to the slowdown in growth.

Where China’s oil consumption goes in the effort to clean up the environment remains to be seen. While there has been an effort to cut car use in the major cities, new cars are still being sold at prodigious rates as increasing wealthy Chinese motorized their society as the US and later Europe did after World War II.  Even a modest growth rate anywhere near 7 percent is going to require increasing oil and natural gas imports to keep the society functioning.

Posted in Pollution | Leave a comment