Energy price increases and the 2008 financial crash: a practice run for what’s to come?

Posted on May 25, 2014 by

Hall, C.A.S., Groat, A. 2010. Losing Faith in Economics. Energy price increases and the 2008 financial crash: a practice run for what’s to come? The Corporate Examiner. 37: No. 4-5: 19-26.

The summer of 2008 saw the third year in a row in which oil production did not rise, leading some to say that the long predicted “peak oil,” the time of maximum global oil production, had indeed arrived. Partly as a result, that summer also saw the highest oil prices ever, as well as historically high prices for other energy and most raw materials. Wall Street was down from its historic high of the preceding fall but by the end of the first week of August, the Dow Jones Industrial average closed at 11,734. Then, a series of disasters struck the financial markets, with many of the largest, most prestigious and seemingly impervious companies declaring bankruptcy. Each week the stock market lost 5 or 10 % of its value until, by the end of November, the Dow Jones had dropped to as low as 8,000. Many investors lost from one-third to one-half of the value of their stocks.

Although the media and American lawmakers focused on many issues as the culprits of the crash — the sub-prime mortgage crisis, high foreclosure rates and Wall Street’s sale of opaque financial products known as derivatives — we believe that the root cause of the current downturn is the same one that sparked the last four out of five world recessions:
the high price of oil. Why did most economists and financial analysts not see this coming? One hypothesis, advanced by Nobel laureate in economics Paul Krugman (2009) is that the economics profession “went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” But, as the market debacle has shown, mathematical elegance in economics is not a substitute for scientific rigor, something that we have discussed in many previous papers (e.g. Hall et al. 1986, Hall et al. 2001).

As of this writing global oil production had been flat since 2004 and then declining for several years so that peak oil appears to have occurred – with the remaining debate only about whether there may be a subsequent peak. If indeed we have passed the global oil peak – or at least have reached the point at which an increase in annual production is no longer possible – then indeed the end of cheap oil might be soon upon us, especially if global economies return to growth. Because of the critical importance of liquid and gaseous petroleum for essentially everything we do economically, there are major concerns as to what the financial implications might be. Some (ourselves included) ask whether conventional economics and conventional economic models and tools work only when it was possible to readily expand the petroleum supply. Will our conventional economic approaches, derived during periods of expanding energy supplies, have less relevance during times of contracting supplies? In other words, are finances beholden to the laws of physics? We think yes. Thus the question becomes: can we supplement or improve upon our ability to do economics and financial analysis by using procedures that focus more on the energy available (or not) to undertake the activity in question?

The Predictors

What is the relation, if any, between the run up in oil prices and the market crash? Resource scientists have predicted such a financial crash for a long time. Any good physical or biological scientist knows that all activity in nature is associated with energy use. Consequently, many in the scientific community were not the slightest bit surprised by the financial crash or its timing. For example, Colin Campbell, a former oil geologist and co-founder of ASPO, the Association for the Study of Peak Oil, predicted serious financial responses to peak oil in his (and Jean Lahererre’s) classic Scientific American article “The End of Cheap Oil” (Campbell and Lahererre 1998). He was more explicit in the ASPO meeting in Pisa, Italy, in 2006 when he said that we are likely to see an end of year after year economic growth and a movement to an “undulating plateau” in oil production, prices and economic activity, with periodic high prices in oil generating financial stress. These financial strains would, in turn, cause a decrease in oil use and hence a price decline, with low prices then leading to new financial growth and new increases in use followed, eventually, by increases again in oil prices. In other words he foresaw very large impacts of restrictions in oil availability, and consequent price increases, on the market: “Every single company on the stock market is overvalued from the perspective of what the cost of running that company will be after peak. Value is determined by performance which has been based on cheap oil.”

Many other analysts have remarked upon, and even predicted, the probable impact of peak oil, or at least oil price increases, on the financial status of the United States and the world (e.g. Huang et al. 1996; Sauter and Auerbach 2003). A thoughtful, chilling and ultimately correct view of the implications of peak oil on the American economy was presented by Gail Tverberg in January 2008 on the energy log site “The Oil Drum”. Her predictions, which we thought impossibly pessimistic at the time, have been vindicated in great detail. Many analysts foresaw these issues as early as the 1970s, including the authors of the famous but subsequently dismissed “Limits to Growth” studies of 1972, ecologists Garrett Hardin and Howard Odum, economists Kenneth Boulding and others. The first author of this piece made his retirement decisions in 1970 based on the assumption that peak oil and a crash of stocks would occur in about 2008 (Hall 2004). The reason is that all of these people understood that — of necessity — real growth is based on growth in real resources, and that there are limits to those resources. The case for peak oil was clearly laid out 40 years ago by Hubbert (e.g. 1968; 1974) who had correctly predicted the U.S. peak in 1970, 15 years before the fact. While many economists place a great deal of faith in increasing technology, in fact technology does not operate on a static playing field but continually competes with declining resource quality. There is little or no evidence that technology is winning this game (e.g. Hall and Ko 2004, Hall et al. 2008, Gagnon and Hall 2009), and it is important to understand that at least so far, the Limits to Growth model is an almost perfect predictor (Hall and Day 2009).

Resource-based analysts understand and appreciate that the recent turmoil in much of our financial structure has many plausible causes, among them greed, the relaxation of financial controls, sub-prime mortgages, the decrease in risk premiums, excessive leverage, and overrated bundles of toxic securities. But, in the minds of resource-based analysts, energy underlies even these issues. The fundamental dilemma is this: if oil, the most important energy source to fuel the economy, goes through the inevitable path of growth, plateau, and eventual decline (i.e. peak oil) while the financial market is built on the assumption of unfettered growth, then something has to give. Eventually the aspirations and assumptions of indefinite growth in assets, production and consumption must collide with the reality of an ever-constricted source of the energy that fuels real growth. There are related, but more subtle, arguments as well.

Starting in the early 1990s until 2007, the financial system, with various forms of new financial engineering, had seen an unprecedented increase in the use of leverage. Relatively inexpensive oil, declining interest rates, and globalization all contributed to declines in risk premiums for virtually all asset classes. Capital went further out on the risk curve to make up for reduced returns and increased leverage became the new norm. As volatility seemed to disappear, even more leverage was piled on to the system. Along with the changing landscape in global credit markets came cheap financing for U.S. home buyers. The low price of energy greatly increased discretionary income which further encouraged people to take advantage of this cheap financing, all of which added to massive residential development.

This created a self-reinforcing “reflexive” system (Soros 1987), where increasing home values increased collateral, which encouraged further borrowing in the household sector and lines of credit for consumption and so on. But the U.S. reached a “tipping point” (Gladwell 2000) in 2006-2007. As the price of gasoline rose, the assumption that the suburban lifestyle would be sustainable became a question in every driver’s mind. The most audacious growth in real-estate had been in the ex-urban areas, most vulnerable to gas price spikes. The system had been built on the premise that large amounts of discretionary spending would always be available and the notion that everyone was entitled to a McMansion, a “lawyer-foyer,” and a home theater. To get it, we had to build out from the cities. However, discretionary wealth — that which is available for non-essential investments and purchases — is extremely sensitive to volatile energy prices (Hall, Powers and Schoenberg 2008).

Discretionary income dropped substantially when gasoline and other energy prices, which had been creeping up from a very low level in 1998, increased sharply in 2007-2008. This became a domino that toppled aggregate demand, particularly for ex-urban real estate. It may have been that this was the first domino that triggered the massive de-leveraging we are now experiencing globally. (A good summary of the various analyses by Rubin, Hamilton and others who argue that oil price increases were behind this, and past, recessions is given at http://netenergy.theoildrum.com/node/5304.) Massive household debt could not be supported when the value of the underlying collateral declined: a decline triggered, at least in part, by the spike in energy prices. As the collateral disappeared, huge derivative positions that had been built in the previous decade had margin-calls. The spiral down of forced selling pressured all asset classes further, and forced the banking sector to essentially freeze in September of 2008. Will this questioning of the suburban model be a preview to our ultimate response to peak-oil? Perhaps. The general pattern of oil price changes can help us understand these things better in the longer term.

At the start of 1973, oil was cheap at $3.50 a barrel. The U.S. was still the world’s largest producer. Peak oil had just occurred in the United States in 1970, but no one noticed. Oil imports and the economy kept growing. As domestic oil production in the U.S. declined from 1970 to 1973, foreign suppliers gained leverage. Political events and a bulldozer accident that severed an export oil pipe in the Middle East triggered massive price increases in oil. By 1979 the price of oil had increased by a factor of ten, to $35 a barrel. The proportion of Gross Domestic Product that went to buying energy increased from about 8% to 14%, restricting discretionary spending for all while causing stagflation. The prices of other energy and commodities more generally increased at nearly the same rate, driven in part by the price increase of the oil that was behind all economic activities.

 

 

But then, in the 1980s, all around the world oil that had been found but not developed (as it had not been worth much) suddenly became profitable to develop, and it was developed. By the 1990s the world was awash in oil and the real price fell to nearly what it was in 1973. The energy portion of GDP fell to about 5%, essentially giving everyone a sudden free extra 8 to 10% of their incomes to play with. The impact on discretionary income, perhaps a quarter of the total, was enormous. Many invested in the stock market, but the burst tech bubble of 2000 cured them of that. Real estate was considered a “safe” bet, so many invested in what was really surplus square footage. Speculation became rampant as real estate was valued for its financial returns rather than as a place to live. For a while it seemed as if investment in real estate was the best thing for everyone but, as we now recognize, most of the increase in wealth was illusory.

With energy price increases over the past 6 years (until the summer of 2008), an extra 5 to 10% “tax” from increased energy prices was added to our economy as it had been in the 1970s, and much of the surplus wealth disappeared. Speculation was no longer desirable or possible as consumers tightened their belts because of higher energy costs. While this perspective is not a sufficient explanation for all that has happened, the similar economic patterns in response to the energy price increases of both the 1970s and of the last decade give it credibility. In systems theory language, the endogenous aspects of the economy that the economists focus on (Fed rates, money supply, etc.) became beholden to the exogenous forcing functions of oil supply and pricing that are not part of economists’ usual framework.

The Relation of Oil and Energy more generally, to our economy

While economics is overwhelmingly taught as a social science, in fact, our economy is completely dependant upon the physical supply and flow of resources, including materials and energy, for the production, transport and use of goods and services. Specifically, our economy is overwhelmingly dependent upon oil, which supplied about 40% of U.S. energy use in 2007, and natural gas, which supplied about another 25%. Coal provides about 20% and nuclear a little less than 5%. Hydropower and firewood supply no more than 4% each. Wind turbines, photovoltaics and other new solar technologies together account for less than 1%. Global percentages are similar. Our economy has been and continues to be based on increased use of fossil fuels for most of its growth, so that we have in recent years added much more new capacity with fossil fuels than we have with new solar, which has only added a bit to total growth in the use of all energies rather than replaced fossil fuels.

Although we have been trained from birth to think about the economy as something run by money, from our perspective money is just our means of keeping track of the energy flows and investments. The fossil fuel-based economy has given each of us the equivalent of 60 to 80 “energy servants” and the more money you earn, the more energy servants you have. Each time you spend a dollar, roughly a coffee cup’s worth of oil (or some other energy) has to be pulled out of the ground, refined, transported and burned to provide the energy for that economic activity. For example, if you buy a bagel for a dollar, natural gas is used to make fertilizer, diesel is used to drive a tractor to plant and harvest the wheat, electricity is used to grind the wheat and more diesel is used to ship the flour from Kansas to wherever the bagel will be made, using, of course, more energy during baking. Food eaten in the United States, on average, requires about 10 times more calories of fossil fuel for its production than is found in the food itself (Hall et al. 1986).

Because of the enormous interdependency of our economy, there is not a huge difference in the energy requirements for the various goods and services that we produce. Thus a dollar spent for most final demand goods and services uses roughly the same amount of energy no matter what the good or service is. An exception is money spent for energy itself, which includes the chemical energy plus another 10 or so percent which is the energy needed to get it. For 2005 an average dollar spent in the economy required about 8 or 9 megajoules (1 MJ equals 240 Kilocalories) for that activity. For heavy construction the estimate is about 14 MJs per dollar and for very heavy industry such as obtaining oil and gas about 20 MJs per dollar; Gagnon et al. 2009). As time and inflation proceed you have less and less energy to do work in the economy per dollar spent. There continues to be decreasing energy return on energy invested (EROI) for our major fuels as we must go after ever more difficult resources (e.g. Hall and Cleveland 1981, Gagnon et al. 2009).

Making Investment Decisions

There is an implicit assumption, probably believed by most market analysts, that if they (collectively) make good financial decisions, based on market information, market projections and good hunches, then we collectively (i.e., society) will make the best investments possible. Although there are certainly good rationales that such financial analyses make considerable sense, in many cases it is not so clear that they are an effective guide to the future of energy supplies. This is because: 1) current prices of energy in the U.S. are greatly influenced by various subsidies; 2) few understand the degree to which most technologies today are principally a means of subsidizing whatever it is we do with still-cheap petroleum; 3) today’s price signals are unlikely to be influenced by the future conditions when today’s most abundant and cheapest fuels may be scarcer, for either geological (depletion) or political reasons; and 4) there is painfully little transfer of information from the (rather limited) scientific community that has examined the large picture of energy to the financial communities.

We include here some preliminary analyses that we think show the importance of energy to Wall Street and the economy more generally. First, Wall Street prices reflect not only a portion of the real operation of the economy but also a large psychological factor often called “confidence”. Our hypothesis is that the energy used by the economy is in some sense a proxy for the amount of real work done, and that over time the Dow Jones should “snake” around the real amount of work done, reflecting issues of speculation, confidence and so on, but that over sufficient time it must return approximately to the real energy use line. To test this hypothesis we have plotted the prices of the Dow Jones index (corrected for inflation) from 1915 until 2008 along with the actual use of energy by the United States economy.

In fact the inflation-corrected Dow Jones Index has snaked around the use of energy (Figure 2). We think it will be interesting to plot this relation in the future. We hypothesize that the Dow Jones will over the long run continue to snake about the total energy use in response to periods of irrational exuberance and the converse. If U.S. total energy use continues to decrease, as it has for the last 18 months, this hypothesis implies no sustained real growth for the Dow Jones. We also hypothesize that in a general sense the amount of wealth generated by the U.S. economy should be closely related to fuel energy use. Cleveland et al. (1983) found that the Gross National Product of the United States was highly correlated with quality-corrected energy use from 1904 to 1984 (R2 = 0.94). This high correlation appeared to be much poorer for the period 1984 until 2008. It is possible that the divergence is due not to increasing efficiency but rather an increasing proclivity of governments to “cook the books” on inflation (see the online group shadowstatistics.com). Correcting for this, if indeed that is needed, would make the relation of energy use and GDP growth much tighter through the 1990s and 2000s.

A Financial Analyst Concurs

Jeff Rubin, Chief Economist at CIBC World Markets, wrote in a recent report that defaulting mortgages are only a symptom of the high oil prices. Higher oil prices caused Japan and the European Nations to enter into a recession even before the most recent financial problems hit. According to Rubin:

Oil shocks create global recessions by transferring billions of dollars of income from economies where consumers spend every cent they have, and then some, to economies that sport the highest savings rates in the world. While those petro-dollars may get recycled back to Wall Street by sovereign wealth fund investments, they don’t all get recycled back into world demand. The leakage, as income is transferred to countries with savings rates as high as 50%, is what makes this income transfer far from demand neutral. […] By any benchmark the economic cost of the recent rise in oil prices is nothing short of staggering. A lot more staggering than the impact of plunging housing prices on housing starts and construction jobs, which has been the most obvious brake on economic growth from the housing market crash. And those energy costs, unlike the massive asset writedowns associated with the housing market crash, were borne largely by Main Street, not Wall Street, in both America and throughout the world.

This big increase in oil prices has caused the annual fuel bill of OECD countries to increase by more than $700 billion a year, with $400 billion of this going to OPEC countries. Rubin asks: “Transfers a fraction of today’s size caused world recessions in the past. Why shouldn’t they today?”

We and others believe that there is ample evidence that our economy is beholden to energy supplies and prices, and that good investors and good economists need to learn a great deal more about energy. We are attempting to tackle this problem head on through the development of a new approach to economics called biophysical economics (e.g. Hall et al. 2001, Hall and Klitgaard 2006, Hall et al. 2008, Hall and Klitgaard in preparation). It is based on the simple premise that since economics is about the production and transfer of physical things or services that require energy, why should it be considered a uniquely social, rather than equally a biophysical science? Probably most readers of this article understand in their day-to-day work that the economy doesn’t work the way economics textbooks say, if indeed it ever did. But getting the economists to re-think their training will be a tough job, no matter how much that is needed.

References

Colin Campbell: http://www.youtube.com/watch?v=lDNMjV6sumQ&feature=related

Cleveland, C., Costanza, R., Hall, C., and Kaufmann R. (1984). Energy and the US Economy: A Biophysical Perspective. Science, 225: 890 897.

Gagnon, N., Hall, C., and Brinker, L. (2009). A Preliminary Investigation of the Energy Return on Energy Invested for Global Oil and Gas Production. Energies, 2:490-503.

Gladwell, M. (2000). The Tipping Point: How Little Things Can Make a Big Difference. New York: Little, Brown & Company.

Hall, C. (January 4, 2008). At $100 Oil – What Can the Scientist Say to the Investor?  http://www.theoildrum.com/node/3412

Hall, C. (April 1, 2008). Why EROI Matters (Part 1 of 6). Retrieved from http://www.theoildrum.com/node/3786 Hall, C., and Cleveland, C. (1981). Petroleum Drilling and Production in the United States: Yield per Effort and Net Energy Analysis. Science, 211: 576-579.

Hall, C., Cleveland, C., and Kaufmann, R. (1986). Energy and Resource Quality: The Ecology of the Economic Process. New York: Wiley-Interscience.

Hall, C., Lindenberger, D., Kummel, R., Kroeger, T., and Eichhorn, W. (2001). The Need to Reintegrate the Natural Sciences with Economics. BioScience, 51(8): 663-673.

Hall, C., and Klitgaard, K. (2006). The Need for a New, Biophysically-Based Paradigm in Economics for the Second Half of the Age of Oil. International Journal of Transdisciplinary Research, 1: 4-22.

Hall, C., Tharakan, P., Hallock, J., Cleveland, C., and Jefferson, M. (2003). Hydrocarbons and the Evolution of Human Culture. Nature, 26: 318-322.

Hall, C., Powers, R., and Schoenberg, W. (2008). Peak Oil, EROI, Investments and the Economy in an Uncertain Future. In David Pimentel (Ed.), Renewable Energy Systems: Environmental and Energetic Issues (pp. 113-136). London: Elsevier.

Hall, C., and Day, J. (2009). Revisiting the Limits to Growth After Peak Oil. American Scientist, 97(3): 230-237.

Hall, C.A.S., and K. Klitgaard. 2011. Energy and the Wealth of Nations. The Biophysical Origins of Wealth. Springer.

Hersch, R., Bezdec, R. and Wending, W. (2005). Peaking of World Oil Production: Impacts, Mitigation and Risk Management. U.S. Department of Energy. National Energy Technology Laboratory.

Huang, R., Masulis, R., and Stoll, H. (1996). Energy Shocks and Financial Markets. Journal of Futures Markets, 16(1): 1-27.

Hubbert, M. K. (1969). Energy Resources. In National Academy of Sciences, Resources and Man, a Study and Recommendations (pp 157-242). San Francisco: W.H. Freeman.

Hubbert, M. K. (June 4, 1974). Testimony before Subcommittee on the Environment of the Committee on Interior and Insular Affairs, House of Representatives, Ninety-Third Congress , Washington, D.C.

Rubin, Jeff (October 31, 2008) Just How Big is Cleveland, CIBC World Markets. Retrieved from http://research.cibcwm.com/ economic_public/download/soct08.pdf

Sauter, R., and Awerbuch, S. (2003). Oil Price Volatility and Economic Activity: A Survey and Review of Literature (International Energy Agency Research Paper). Paris: IEA. Retrieved from http://www.awerbuch.com/shimonpages/shimondocs/Oilprice- Volatility-03.doc

Soros, George. (1987). The Alchemy Finance: Reading the Mind of the Market. New York: John Wiley & Sons.

Tverberg, Gail (January, 2008). Peak Oil and the Financial Markets: A Forecast for 2008. Retrieved from
http://www.theoildrum.com/node/3382#more

 

 

Posted in Charles A. S. Hall, Crash Coming Soon | Comments Off on Energy price increases and the 2008 financial crash: a practice run for what’s to come?

Charles Hall “Peak oil, declining EROI and the probability of degrowth”

Posted on May 25, 2014 by

Charles A. S. Hall . March 2010. Peak oil, declining EROI and the probability of degrowth.

Second Conference on Economic Degrowth for Ecological Sustainability and Social Equity March 26-29th 2010, Barcelona

Peak oil is not some fuzzy academic concern but a reality: for the US in 1970, for some 60 of 80 oil-producing countries and, at least for the moment, for the world since about 2005. In addition the net energy delivered to society (as opposed to the total) is declining in recent decades from 30 or more to one to ten or less to one as we have exhausted our largest, shallowest, closest to shore and highest quality oil and gas fields. While technological improvements have slowed the effects of depletion the net effects are that there is a declining EROI (Energy Return on Energy [and money] Invested). Most alternatives to oil and gas except hydroelectric or coal have a small or very small EROI, and even for these the highest EROI sites in the US are already dammed and coal has obvious environmental issues. All of these factors are affecting our economy.

In systems thinking we normally divide our problem into two controlling factors, those endogenous to the system under consideration and those exogenous. The latter are also called forcing functions . In recent decades most of our consideration of the economy has been dominated by those who focus on the endogenous factors and that believe that economies are most appropriately controlled by manipulating interest rates, the money supply and so on. The usual economic training emphasizes that fuels and other natural resources are commodities, and hence fungible, substitutable and of limited importance except for their market value. In fact the work of Reiner Kummel and others has shown energy to be THE most important input to economic production, far more important than the economists’ traditional labor and capital.

Probably most people at this conference are in the endogenous camp – i.e. believing that degrowth can and should be a consequence of deliberate decisions made for that purpose. But in fact degrowth, or at least a cessation of growth, has already occurred for the US and European economies without our slightest help, apparently due to the forcing of declining energy availability (and its increasing cost) and its impact on discretionary income. The latest available GDP estimates for the US economy give the GDP for the fourth quarter of 2009 as 13.1 trillion 2005 dollars, the same value as the first quarter of 2007. So for three years the US economy, according to these official numbers, has not grown at all, and since population has been growing per capita GDP has decreased by some 3 percent, as is painfully obvious to the unemployed.

While endogenous business cycles may generate economic constriction, in fact most recessions in the US are preceded by increases in energy price (Murphy and Hall 2010). During this same period the world has reached “peak oil” after many decades of steady growth, despite sharply rising prices during much of this period, as had been predicted by many geologists and others for decades (Figure 1). While it is not yet clear whether there will be a later, higher peak, it is clear that the production of oil, our most important energy source, is no longer growing (Figure 1). The US has also peaked, more or less, in the energy gained from coal (but not for tonnage used). Total US energy use has declined by about 5 percent starting even before the recession. Thus we might want to ask to what degree the two cessations in growth (energy and economic) are linked and whether future predicted restrictions in energy supplies (Figure 2) will continue to bring about degrowth independent of what this forum or anyone else may or may not choose to do for policy. In other words our future economy may be determined far more by external forcing rather than policy of this or any other group. Those who wish for degrowth might be able to capitalize upon this.

Growth has been, of course, the mantra of conventional (neoclassical) economics. However readers should be aware that conventional economics is under attack as never before, although in most cases working economists who routinely apply conventional economics are unaware of the attacks. But a near majority of the recent Nobel Laureates in economics have received their honors for, essentially, undermining the legitimacy of various aspects of the conventional neoclassical model. This includes Ostrum, Krugman, Kanahan, Ackerlof, Smith, Sen, Stiglitz and others. At a less lofty level economics is under even stronger attacks by Ecological Economics President John Gowdy (and many within that subdiscipline) as well as by myself and colleagues. Our main arguments are not that conventional neoclassical economics makes some errors by undervaluing nature, encouraging maldistribution, ignoring larger social needs (all of which are true) and so on. Rather it is that neoclassical economics is logically corrupt at its core and the mathematics, although often elegant, are inappropriately specified. This corruption begins with the basic system of firms and households that is familiar from every beginning text book in economics. This simplified model has incorrect boundaries, violates the laws of thermodynamics and has not been put forth as testable hypotheses (e.g. Hall 2001). The original Walrasian model was constructed by borrowing a model from physics but in fact not only was the model seriously incomplete it also violated the laws of thermodynamics that was the point of the original model in physics (e.g. Mirowski 1989). Of course many economic models can be parameterized from empirical data to “work”. For example the brilliant Egyptian mathematician Ptolemy could make a model of the solar system that “worked” (i.e. was a good predictor of the location of e.g. planets, the moon and so on) but that had the wrong essential structure (e.g. Ptolemy’s system had the Earth at the center of the Solar system, with epicycles for Venus and Mercury to explain their “erratic” behavior). It is easy to draw parallel critiques to economic models.

Economics is usually considered a social science, but why should that be since economics is mostly about stuff, and stuff must obey the laws of physics and many other constraints? We wish instead to generate a biophysical, instead of simply social, basis for economics (http://web.mac.com/biophysicalecon).  Money is not wealth, goods and services are, and they require energy to obtain them. Money is a medium of exchange (and a financial instrument). Some people think gold is wealth, but it is not either. When the Spaniards brought back gold from the new world to Europe they doubled the supply and halved its value. That is because the real wealth production (from farms, forests, fisheries, mines of useful metals, work of housewives and artisans) had not changed. The wealth was generated by the energy of the sun as captured by land and by the energy of labor, both of which transformed the materials of nature into what we want and call wealth. Energy is necessary to make wealth. There is no other way with a few minor exceptions in e.g. some art. Classical Political Economists, beginning with the Earl of Lauderdale, wrote extensively that the use values provided by nature were the source of wealth. That discussion was lost with the emergence and dominance of neoclassical economics, and needs to be reclaimed.

Energy and many materials will in all probability be unable to expand production for much longer (Heinberg 2007). Figure 2 shows some guesses of what the curves for oil, gas and coal might look like for the world. Some important materials (copper, gold, zinc) might look quite similar. Figure 3 shows that for US oil and gas drilling, market mechanisms do not work, i.e. that when prices and hence drilling rates increased in response to the “energy crises” of the 1970s production did not increase, and the converse. Figure 4 shows how the inflation corrected Dow Jones (as a sample financial indicator) tends to “snake around” the total US energy use. The ups and downs appear to be the psychological lemming actions of investors but that the general trend for 100 years is constrained by US energy use — which generates the real wealth but has plateaued and declined recently. Efficiency increases has some potential but I believe far less than generally believed.

All of these figures show the importance of energy and its potential restrictions for growth. The point is that energy use is what generates wealth (capital equipment is the means of using energy, but it is the energy that generates the wealth — wish Solow had got that right). Energy is a far better predictor of real economic activity over time than capital or labor or policy. Money is (or at least was once) how we keep track of wealth. Inflation is the ratio of money supply (times velocity) divided by energy use (times a nearly constant efficiency). On the upside (first 45%) of the Hubbert Curve we were generating more wealth every year so the government had to “create” more money via the Federal Reserve to lubricate the increased volume of transactions necessitated by growth or we would have enormous deflation. Thus when energy supply increased, the activities of the Central Bank and the Federal Reserve in “making” money makes sense. As long as energy use and hence production was expanding more money was needed to avoid deflation. However we may have, or may soon have, reached the point where energy use and hence real wealth production no longer increases. Then more money generated by the Federal Reserve just generates inflation, although this is buffered by the global demand for dollars as other countries have even more difficult economic problems. The problem is that we derived all our economic/financial principles on the left hand side of the Hubbert curve, when growth-based theory usually worked (recessions were a usually temporary exception) because the economy was growing through more energy use anyway. So then theories of the right, left, North, South, capitalists, communists, whatever ALL had a decent chance of success because the real economic potential tended to increase year after year regardless of policy because energy use increased at 2-3 percent per year. One could be fiscally conservative, prime pumps or whatever. Many financial institutions could make a great deal of money. Franklin Roosevelt’s debt became trivial as the economy grew and grew. But now if we paid off just Ronald Reagan’s debt to Japan and they used it to buy fish, rice, beef or fords it would take most of our remaining oil in US to make that stuff. Retiring today’s debt will be much tougher than FDRs as we will almost certainly not have an expanding energy supply and hence economy.

This is why we need a new economics for the second half of the age of oil. The “science” of economics can no longer even appear to “break” the laws of thermodynamics. Although it never did it thought it could, and few economists paid attention.

LITERATURE

Cleveland, C.J., R. Costanza, C.A.S. Hall and R. Kaufmann. 1983. Energy and the United States economy: a biophysical perspective. Science 225: 890-897.

Gowdy, J., C.A.S. Hall, K. Klitgaard and L. Krall. The end of faith-based economics. The Corporate Examiner. (New York) In press.

Hall, Charles, D. Lindenberger, Reiner Kummel, T. Kroeger, and W. Eichhorn. 2001. The need to reintegrate the natural sciences with economics. BioScience 51 (6): 663-673.

Hall, Charles A.S, Gowdy, John. 2007. Does the Emperor Have Any Clothes? Chapter 1. In Making Development Work: A New Role for Science. University of New Mexico Press, Albuquerque.

Hall, C.A.S., R. Powers and W. Schoenberg. 2008. Peak oil, EROI, investments and the economy in an uncertain future. Pp. 113-136 in Pimentel, David. (ed). Renewable Energy Systems:
Environmental and Energetic Issues. Elsevier London

Hall, C.A.S., Day, J.W. Jr. 2009. Revisiting the Limits to Growth After Peak Oil. American Scientist, 97: 230-237. Hall, C.A.S., Balogh, S., Murphy, D.J.R. 2009. What is the Minimum EROI that a Sustainable Society Must Have? Energies, 2: 25-47.

Heinberg, R. 2007. Peak Everything. New Society Press, Gabriola Island, B.C. Canada

Morowski, Phillip. 1989. More Heat Than Light: Economics as Social Physics, Physics as Nature’s Economics. Cambridge: Cambridge University Press, 1989.

Murphy, David J., Hall, Charles A. S. 2010. Year in review—EROI or energy return on (energy) invested. Annals of the New York Academy of Sciences. 1185, Special Issue: Ecological Economics Reviews:102-118

.

Posted in Charles A. S. Hall | Comments Off on Charles Hall “Peak oil, declining EROI and the probability of degrowth”

Charles A. S. Hall “The End of Faith Based Economics”

Posted on May 25, 2014 by

Charles Hall deserves the Nobel Prize in Economics for his book “Energy and the Wealth of Nations” and “Making World Development Work: Scientific Alternatives to Neoclassical Economic Theory”

Gowdy, J., Hall, C., Klitgaard , K., and L. Krall. 2010. Losing Faith in Economics. The End of Faith Based Economics. The Corporate Examiner. 37: No. 4-5: 5-11.

The last century has seen the ascendancy, indeed intellectual dominance, of neoclassical welfare economics (NWE), also known as neoclassical economics. The basic NWE model represents the economy as a self-maintaining circular flow among firms and house-holds, driven by the psychological assumptions that humans act principally in a materialistic, self-regarding and predictable way. As such NWE violates a number of physical laws and is inconsistent with considerable empirical evidence about human behavior. The NWE model is unrealistic and a poor predictor of people’s actions, as an array of experimental and physical evidence and recent theoretical breakthroughs demonstrate.

Despite the abundance and validity of these critiques, few economists seriously question the neoclassical model that forms the foundation of their applied work. This is a problem because policy makers, scientists, and others turn to economists for answers to important policy questions. The supposed virtues of privatization, free markets, consumer choice and cost benefit analysis are considered to be self-evident by most practicing economists, as well as many in business and government.

We offer a review and synthesis of NWE, paying particular attention to the lack of connection of NWE to biophysical reality and its inadequate characterization of human behavior. We end by sketching alternative characterizations of human behavior and economic production. When all the criticisms are taken as a whole it is clear the NWE framework stands on an untenable foundation and that some other basis for interpreting economic reality must be found. It is clear that NWE is very limited in its usefulness and cannot guide us in our attempts to deal with the most important issues of our time, such as the depletion of oil and gas, climate change, financial crises, and the destruction of nature.

The edifice of NWE is built on myths and based on an outdated worldview. These myths are not merely harmless peccadilloes, because they provide the foundation upon which economic policy is made and cultural attitudes are distilled. Thus the worldview and policy prescriptions of most economists can only be described as “faith-based” because many fundamental tenets of economics are inconsistent with economic reality.

Myth 1: A theory of production can ignore physical and environmental realities.

Real economies are subject to the forces and laws of nature, including thermodynamics, the conservation of matter and a suite of environmental requirements. NWE does not reflect the fact that economic activity requires the inputs and services of a finite biophysical world which is usually degraded by that activity.

Myth 1a: The economy can be described independently of its biophysical matrix.

NWE is a model depicting abstract exchange relations considered only as goods and services and money within a world unrealistically limited to markets, firms, and households. Real economies require real material and energy to allow that exchange, and economic activities are limited by the material and energy transformations necessary for economic activity. Students are introduced to the misleading Circular Flow Model of the economy in the first days of Principles of Economics. This conceptual vision of the economy is one of a self-contained and self-regulating system independent of the biophysical system and its laws. There are but two sectors, households and firms, with goods and services going from firms to households, and productive inputs (land, capital and labor) going from households to firms.

Households serve as loci of consumption and possessors of property rights to the factors of production. Firms exist to produce and to hold property rights to the finished commodities. These property rights are willingly exchanged in markets for money. Neither monetary value nor physical materials are lost to heat or erosion as inputs are transformed into goods and services. Thus the NWE theory of production is not a model of production at all, but rather a model of the distribution of productive inputs and the goods they had produced previously. No specific primary inputs from nature are essential in this model.

The NWE notion of scarcity is disconnected from biophysical reality for it is never absolute but only relative to unlimited wants. In this model if we are confronted by the limits of one resource, the imaginative human mind, driven by the proper set of monetary incentives and protected property rights, will always create a substitute. No input is critical, therefore neither absolute scarcity nor the need of any particular resource is a problem in the long run. Thus in the NWE world the economy can simultaneously experience relative scarcity and infinite growth. Competitive prices, formed in markets, assure that resources flow to their best use.

Nicholas Georgescu-Roegen, and his student Herman Daly, were among the first to point out the absurdity of this depiction of production. Real economies cannot exist outside the global biophysical system, which is essential to provide energy, raw materials, and a milieu.

values a certain economic outcome depends on how much it is valued by others. It is also well established that the consumption of market goods cannot be equated with an individual’s happiness. Nevertheless, the fundamental behavioral assumptions of NWE require self- regarding consumers whose happiness depends upon their consumption of market goods. The cultural context of behavior is deemed irrelevant to economic analysis as the emphasis is entirely on the behavior of the isolated individual.

Myth 2a: Homo economicus is a scientific model that does a good job of predicting human behavior.
At the heart of standard economic theory is the model of human behavior embodied in Homo economicus or “economic man.” Economic texts usually begin with a very general statement about human nature that is soon codified into a set of rigid mathematical principles resting upon the idea that “people maximize their well-being by consuming market goods according to self-regarding, consistent, constant, well-ordered, and well-behaved preferences.” The assumption that people are self regarding has been falsified by considerable contemporary work in behavioral economics, neuroeconomics, and game theory (Gintis, 2000, Camerer and Loewenstein, 2004; Heinrich, 2001). For example, Henrich and colleagues, after examining the results of behavioral experiments in fifteen societies ranging from hunter-gatherers in Tanzania and Paraguay to nomadic herders in Mongolia conclude: “[T]he canonical [NWE] model is not supported in any society studied.” (Heinrich, 2001). Gintis describes several experiments showing that humans are both far more altruistic and far more vindictive than the rational actor model allows (Gintis, 2000). They will make decisions to punish persons they will never again encounter if those people cheat in experimental transactions, even if this means considerable monetary loss to themselves. In experimental settings and under real-world conditions, humans consistently make decisions that favor enforcing social norms over ones that lead to their own material gains.

The centrality of the behavior of isolated individuals is reflected in the notion that consumers are sovereign in a market economy. Ackerman and Heinzerling point out that the rise of economic orthodoxy put consumers at the center of analysis. The idea is that producers respond to consumer preferences rather than the reverse (Ackerman and Heinzerling, 2004). Yet we all know that, in fact, consumer tastes are manipulated and that firms barrage us with advertising in order to increase their market share. Nonetheless, the centrality and preeminence of the individual in orthodox economic analysis precludes any analysis or emphasis on the context of individual behavior. Myth 2b: Consumption of market goods can be equated with well-being and money is a universal substitute for anything. Most economic texts simply equate utility with happiness and assume that utility can be measured indirectly by income without any substantive or formal discussion of the matter (Frey and Stutzer, 2002). The higher the per capita income, the better off a particular society is supposed to be. Yet there is considerable evidence that past a certain point income is a positional good; that is, if everyone’s income goes up there is little or no long-term gain in social well-being. This implies that policies designed merely to increase per capita income may have little effect if the goal is to improve social welfare.

Psychologists have long argued and documented that well-being derives from a wide variety of individual, social and genetic factors. These include genetic predisposition, health, close relationships, marriage, and education — as well as income (Frey and Stutzer, 2002). It is generally true that people in wealthier countries are happier than people in poorer countries, but even this correlation is weak and the happiness data show many anomalies (Diener et al., l995). For example, some surveys show that people in Nigeria are happier than people in Austria, France and Japan (Brickman et al., 1978; Blanchflower and Oswald, 2000; Lane, 2000). Past a certain stage of development, increasing incomes do not lead to greater happiness. For example, real per capita income in the U.S. has increased sharply in recent decades but reported happiness has declined (Meyers, 2000).

When economists equate utility with income in the NWE model this affects the policy recommendations of economists which impact the natural world. According to Arrow and colleagues, “sustainability” means simply maintaining the discounted flow of income over time (Arrow et al., 2004). Leaving future generations the same or greater real income than the present leaves them at least as well-off no matter what happens to specific features of the natural world. By this reasoning if the present discounted value of a rainforest is $1 billion in ecosystem services if left intact, but can generate a discounted investment flow of $2 billion if it is clear cut and sold, then it is the moral responsibility of the present generation to cut down the rainforest. With $2 billion the future generation could buy another rainforest or something of equal value and have $1 billion left over. This is the logic that is used by economists to justify the extinction of a substantial portion of the planet’s ecosystems and species (Gowdy, 2004)

Why Theory Matters

It is in the policy arena that the ideological nature of NWE reveals itself most completely. Most economists substitute the mythical NWE world of rational agents, certainty and perfect information for the complex reality and uncertainty of real economies. Where reality and the neoclassical model disagree, reality is increasingly forced through policy to conform to the neoclassical model (Makgetla and Seideman, l989). Neoclassical economists generally assume that people always respond rationally and consistently to price signals, therefore the goal of economic policy is to assign property rights and get the prices right. The corollary assumption is that things of value to people have a price, and anything without a market formed price must lack value. Prices are theoretically capable of reflecting all the relevant attributes of any good or service and all that people value. The rest of us are asked to take the validity of their assumptions and analyses on faith, and to turn our complex decision making increasingly over to barely regulated markets and cost benefit analyses. This emphasis frequently leads to fundamental policy-related failures and problems that include the following:

1. The ultimate policy goal of NWE is not to correct any particular problem directly but rather to correctly value the problem in terms of everything else so that the calculating machine of the market can establish the pecking order of priorities. The focus on establishing general market equilibrium frequently means neglecting essential details of the policy problems under consideration, especially those for which it is difficult or impossible to determine a price (i.e. oil depletion, environmental degradation and global climate change).

2. The NWE model makes no qualitative difference between needs and wants, even the most trivial of them, or among commodities produced, or among specific productive inputs, including energy. Everything we find useful is treated like an abstract commodity substitutable for and by anything else. Absolute scarcity does not exist nor, within certain broad limits, are any specific conditions deemed necessary for human existence. Value is a relative matter expressed in relative prices. Because no single thing is essential, substitution among resources and commodities will occur until the marginal value of a commodity divided by its prices is the same for all commodities. At this point rational individuals have made optimal choices, and the sum of all optimal choices leads us to the “best of all possible worlds.”

3. The model assumes that aggregate income is a complete and sufficient measure of well- being. Operationally this means that total costs and benefits of policies can be determined by merely adding the monetary changes in the incomes of all isolated individuals affected. This implies that relative income effects don’t matter to the individual – for example a loss of $1,000 to a poor person can be more than compensated for by a gain in $1,100 to a billionaire. Similarly, preferences are considered to be exogenous to social context. Yet numerous studies have found that relative income effects matter and sometimes these effects can completely cancel out increases in total income which is always the primary goal of NWE. How much one person values a gain or loss depends on what others get, the income of each person relative to others, the fairness (or not) of the income change and a variety of other social factors which are not included in the NWE model.

4. “Sustainability” in the NWE model means sustaining only the discounted flow of per capita income, not anything else such as biodiversity, oil stocks, human health or social cohesiveness. This is known as weak sustainability. However, to live within nature’s limits, we need to arrive at the conditions of strong sustainability, which requires that the profits from the depletion of a resource or degradation of an ecosystem are reinvested in developing alternatives or restoring degraded systems. This entails looking at the bigger picture of how market systems function and interface with the biophysical world. Consequently one cannot arrive at a social decision to achieve an optimal macroeconomic scale by merely aggregating many separate efficient market outcomes. NWE dominates policy making yet provides an inadequate toolbox for confronting the major problems of the present world: global climate change, biodiversity loss, oil depletion, loss of wilderness and the recalcitrant problems of poverty and social conflict. We are led to believe that our most pressing environmental and social problems can be dealt with effectively by simulating efficient market outcomes as if this provides the elixir for all that ails us. Yet we know that the concept of market efficiency rests on an untenable and faulty foundation and that the real market economy is not best described in this framework. But the perpetuation of neoclassical economics, usually to the exclusion of other possible approaches, is essentially the substitution of faith for reason, science and empirical testing in many areas of economics. We must move beyond this “faith-based” economics and find a more illuminating way of understanding economic activity and informing decision making so that our policies will amount to something more than window dressing for the status quo.

References

Ackerman, F., and Heinzerling, L. (2004). Priceless: On Knowing the Price of Everything and the Value of Nothing. New York and London: The New Press.

Arrow, K., Dasgupta, P., Goulder, L., Daily, G., Ehrlich, P., Heal, G., Levin, S., Goran-Maler, K., Schneider, S., Starrett, D., Walker, B. (2004). Are We Consuming too Much? Journal of Economic Perspectives , 18(3): 147-172.

Ayres, R. and Warr, D. (2005). Accounting for Growth: The Role of Physical Work. Change and Economic Dynamics , 16(2):211-220.

Blanchflower, D., and Oswald, D. (2000). Well-Being over Time in Britain and the U.S.A . (NBER Working Paper No.7481). Cambridge, MA: National Bureau of Economic Research.

Brickman, P., Coates, D., and Janoff-Bulman, R. (1978). Lottery Winners and Accident Victims: Is Happiness Relative? Journal of Personality and Social Psychology , 36(8): 917-927.

Camerer, C., and Loewenstein, G., (2004). Behavioral Economics: Past Present and Future. In C. Camerer, G. Loewenstein, and M. Rabin (Eds.), Advances in Behavioral Economics (pp. 3-52). Princeton: Princeton University Press.

Cleveland, C., Costanza, R., Hall, C., and Kaufmann, R. (1984). Energy and the U.S. Economy: A Biophysical perspective. Science , 225: 890-897.

Daly, H. (1977). Steady-State Economics . W. H. Freeman, San Francisco.

Denison, E. (1989). Estimates of Productivity Change by Industry, an Evaluation and an Alternative . Washington, DC: The Brookings Institution.

Diener, E., Diener, M. and Diener, C. (1995). Factors Predicting the Well-Being of Nations. Journal of Personality and Social Psychology , 69 (55): 851-864.

Frey, B., and Stutzer, A. (2002). Happiness and Economics: How the Economy and Institutions Affect Well-Being . Princeton:Princeton University Press.

Georgescu-Roegen, N. (1975). Energy and Economic Myths. Southern Economic Journal , 41(3): 347-381.
Gintis, H. (2000). Beyond Homo Economicus: Evidence from Experimental Economics. Ecological Economics , 35(3): 311-322.

Gowdy, J. (2004). The Revolution in Welfare Economics and its Implications for Environmental Valuation. Land Economics,
80(2): 239-257.

Hall, C. (2000). Quantifying Sustainable Development: The Future of Tropical Economies . San Diego: Academic Press.

Hall, C., Lindenberger, D., Kummel, R., Kroeger, T. and Eichhorn, W. (2001). The Need to Reintegrate the Natural Sciences with Economics. BioScience , 51(8): 663-673.

Hall, C., Cleveland, C. and Kaufmann, R. (1986). Energy and Resource Quality: The Ecology of the Economic Process . New York: Wiley-Interscience.

Henrich, J. et al. (2001). Cooperation, Reciprocity and Punishment in Fifteen Small-Scale Societies. American Econ. Review,91(2): 73-78.

Lane, R. (2000). The Loss of Happiness in Market Economies . New Haven: Yale University Press.

Makgetla, N., and Sideman, R. (1989). The Applicability of Law and Economics to Policymaking in the Third World. Journal of Economic Issues , 23: 35-78.

Meyers, D. (2000). The Funds, Friends, and Faith of Happy People. American Psychologist , 55: 56-67. Wilson, E. (1998). Consilience: The Unity of Knowledge. New York: Alfred Knop

 

 

Posted in Charles A. S. Hall | Comments Off on Charles A. S. Hall “The End of Faith Based Economics”

More diesel for tractors & trucks, less gas for cars

Posted on May 24, 2014 by

The 1980 rationing plan would shift whatever petroleum was needed to agriculture and other essential services before making it available to the public via rationing.   This would be diesel since tractors, harvesters, trucks, and trains can’t and don’t burn gasoline.

Now that clean diesel can be made, you have to wonder why we make gasoline. Look at a few of the advantages of diesel engines. Why on earth do we make gasoline-burning cars (98% burn gasoline, 2% diesel)?

  1. Diesel engines are 45% efficient, gasoline engines 30%.
  2. Diesel fuel has 15% more energy than gasoline.
  3. Diesel engines last twice as long and are far more reliable.  It takes a lot of energy, minerals, and other resources to make new vehicles.  Now is the time to make things last and stop our “throw away” economic system
  4. Diesel fuel takes less energy to refine than gasoline
  5. Diesel fuel is less explosive, doesn’t release a large amount of flammable vapor, and has minimal carbon monoxide emissions
  6. Diesel engines create less waste heat in cooling and exhaust

What about burning diesel in gasoline engines?
You can’t.  Your engine probably wouldn’t start, and if it did, would run and smoke terribly. Your engine might be okay, but it would take a very expensive fuel system flush to get the diesel out. If you tried to put gasoline in a diesel vehicle, you’d almost certainly suffer catastrophic damage to the engine and damage the sensitive emissions control components and system.

Refineries should make more diesel than gasoline

Done. Because fracked natural gas is so cheap, America’s refineries can refine raw petroleum cheaper than refineries elsewhere, so we import oil, refine about a million barrels a day into diesel, and export it.  This also helps keep our remaining 149 refineries operating.  On May 16 2014, petroleum was refined as follows: 54% diesel, 24% gasoline, 16% kerosene (jet fuel), and 5% bunker fuel (ships, fuel oil). (EIA Petroleum & Other Liquids Weekly Refiner net production).

 

Posted in Rationing, Transportation What To Do | Comments Off on More diesel for tractors & trucks, less gas for cars

Peak Resources and the Preservation of Knowledge

Posted on May 24, 2014 by

Peak Resources and the Preservation of Knowledge

By Alice Friedemann    January 6, 2006

“Peak oil will affect more people, in more places, in more ways, than anything else in the history of the world”. Walter Youngquist, author of Geodestinies

Summary

After worldwide oil production peaks, there are no substitutes ready to make up the energy shortfall.  The immediate problem will be a need for liquid transportation fuels.

Liquid, renewable fuels, such as ethanol and hydrogen, do not have a high enough Energy Returned on Energy Invested (EROI) to run civilization, let alone maintain the existing infrastructure, the majority of which was built when oil had an EROI of 40 to 100.[1]

Liquid, non-renewable fossil fuels that could be used to replace oil, such as liquefied coal, require a tremendous amount of expensive infrastructure that needs to be built at least ten years before the world peak production of oil, according to Robert Hirsch.[2]  We haven’t done that, nor is it likely we ever will, because after peak, fossil fuels will be rationed and apportioned to agriculture and other critical agencies.[3]

We’re likely to lose many of the books printed on acidic paper between 1850 and most of the 20th century within decades. For the last twenty years, many books and journals have been printed on non-acidic paper and put on microfiche.  Both can last for centuries if kept at an ideal temperature and humidity.  But that isn’t permanent enough.   Librarians are aware of this, and have turned to computers as a way to preserve knowledge.  Some libraries are stopping the delivery of many printed journals and have them online only.

But computers are the top card in the house-of-cards complex civilization we built with coal and oil, and computers will be the first to go when supply chains fail as global trade diminishes.

Declining energy supplies are likely to trigger a global depression, resulting in political instability, which may trigger resource wars.

Preservation of knowledge needs to start immediately, while nations are still stable and wealthy.  Now is the time to consider how to preserve knowledge with a material that won’t decay, rust, mold, or shatter easily.  We should leave our descendents knowledge they can use and be amazed by, information to fuel the next Renaissance.

Introduction

Since there are no alternative energy sources, except for fusion, which could possibly replace fossil fuels,[4] a priority should be the preservation of knowledge.  Fusion is unlikely to ever be harnessed as a source of energy, and certainly won’t be ready in time to save us from the impact fossil fuel decline will have upon civilization.

Fossil fuels enabled the human population to grow at a rate 133 times higher than all of human history before then.[5]   Fusion would allow exponential growth to continue until we used up all of the other resources on the planet (e.g. water, topsoil), and lead to an even greater loss of human life and biodiversity.

There aren’t any alternative energy sources that can replace fossil fuels in the window of time left.  If only we’d listened to Jimmy Carter, while there was still a chance of reducing the inevitable tragedy relying on non-renewable energy sources would bring.[6]

We are about to enter a time of social, political, and economic hardship and instability, and these human factors will exacerbate the problem of declining energy.

Our lives depend on oil, natural gas, and coal for our food, clean water, sanitation, transportation, electricity, cooling and heating, cooking, and health.   These fossil fuels are composed of complex hydro-carbon chains that provide the feedstock for over half a million products, including plastics, medicine, paint, chemicals, etc.   We are utterly dependent upon the fossil fuels entwined in all aspects of our lives.  They have enabled our population to grow from one billion before coal to six and a half billion now.[7]

The biggest mistake people make about the seriousness of “Peak Oil” is assuming there is a technical fix.  This is understandable, given how virtually all articles in the press and scientific journals are about advances and breakthroughs.

Plan B

There is a “Plan B”.  Hirsch’s stopgap measure, Peaking of World Oil Production: Impacts, Mitigation, & Risk Management,is the most likely plan to be attempted as the energy crisis worsens.  The solutions are heavy oil, gas-to-liquids & liquefied natural gas, enhanced oil recovery, efficient vehicles, and coal liquids.  Notice that nearly all depend on using low quality liquid fossil fuels (which would increase global warming).  Some highlights:

  • The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.
  • The problem of the peaking of world conventional oil production is unlike any yet faced by modern industrial society.
  • Oil is the lifeblood of modern civilization. It fuels the vast majority of the world’s mechanized transportation equipment – automobiles, trucks, airplanes, trains, ships, farm equipment, the military, etc. Oil is also the primary feedstock for many of the chemicals that are essential to modern life. This study deals with the upcoming physical shortage of world conventional oil–an event that has the potential to inflict disruptions and hardships on the economies of every country.
  • Use of petroleum is pervasive throughout the U.S. economy. It is directly linked to all market sectors because all depend on oil-consuming capital stock.
  • The world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.
  • Even if efficient vehicles were mandated or a technology breakthrough occurred, it would take 10-15 years to replace the existing vehicle fleet. In 2004, …U.S. oil consumption was 20 MM barrels per day, two-thirds of which was in the transportation sector.
  • The implications for U.S. … mitigation of world oil peaking are troubling. To replace dwindling supplies of conventional oil, large numbers of expensive and environmentally intrusive substitute fuel production facilities will be required. Under current conditions, it could easily require more than a decade to construct a large coal liquefaction plant in the U.S. The prospects for constructing 25-50, with the first ones coming into operation within a three year time window are essentially nil.

Congressman Roscoe Bartlett (R-MD), a co-founder of the House of Representatives Peak Oil Caucus, said that we should not try to fill in the gap between supply and demand with the Hirsch plan, because after these measures run out, civilization will crash even harder, and these measures will damage the environment.

Another Plan B would be to build new nuclear power plants.   Since the issue that needs to be solved is liquid transportation fuel, nuclear power is irrelevant.  So are solar, tidal, and wind power.

Currently there is only enough uranium left to power existing plants for about fifty years.  If Generation IV nuclear power plants can be made to work, they could stretch U235 fuel for several millennia, as well as reduce nuclear waste considerably.

Per Peterson, chairman of the nuclear engineering department at the University of California, Berkeley, said that Gen IV might start being built around 2025-2030. These plants generate tremendously high heat, which could contribute to solving the liquid fuel problem by splitting hydrogen from water to convert low-grade heavy oils into high-energy fuel.   We’ve known since 1969 that we needed to build these types of reactors to stretch out nuclear fuel, but still haven’t figured out how to do this safely[8].

Saudi Arabian oil reserves

So here we are close to Peak Oil,[9] and we haven’t started on any Plan B.   We‘ll know we’re at Peak Oil production when Saudi Arabian oil extraction declines, because they have such a huge portion of the world’s remaining oil, nearly a quarter of it.  But Matt Simmons believes that they may have exaggerated their reserves and have other problems:[10]

1)      There’s a 35-40% probability that Saudi Arabian oil fields “could fall over a 30 month period of time by 50-70%”.   Fields that are produced too quickly, (which has happened in the past and may be happening now as well), can drop off suddenly and quite sharply, leaving oil behind that may never be recovered.

2)      Saudi Arabia claims to have 260 billion barrels of reserves, but the real number is probably less than half of that.

3)      The Saudis damaged their oil fields by over-producing in the early 1970s and again after Iraq invaded Kuwait in 1990. That changed the subsurface pressure, creating huge water problems that will make it harder to recover oil.

4)      Congress had evidence in the 1970s that the Saudi oil fields had only about 30 years of sustained production left but kept it secret.

5)      There are no new large oil fields likely to be discovered in Saudi Arabia

6)      The Saudi’s are mining their oil in ways that Hubbert hadn’t anticipated. They’re using new technology, which depletes the oil sooner, which makes the decline rate steeper than what Hubbert and others calculated.

7)      We’ve used up the vast majority of the world’s high flow rate, high quality oil. We still have a lot of oil. But it’s heavy, gunky, dirty, sour, contaminated oil.  It doesn’t come out fast, and it’s very energy intensive to get out.

So not only do the Saudis probably have a lot less oil than they claim, but extraction could fall off precipitously due to poor management in the past and the use of new technology, which is depleting the oil sooner than it otherwise would have been.  Worse yet, what’s left is poor quality, difficult and expensive to refine oil that’s hard to get out.

Consequences of a decline in oil

When world oil production declines, all nations will be affected.  The major likely consequences are global depression and civil disorder as decline continues, starvation as agriculture is affected, and World War III over the remaining resources.  Wars have been fought over minerals throughout history.[11] Colin Campbell has written a global depletion protocol to try to prevent this from happening, but at this point most governments are not even aware of it, let alone trying to implement this plan.[12]

As time goes on, shortages will occur, triggered not only by declining oil supplies, refinery breakdowns, and hurricanes destroying oil infrastructure, but also from revolutions and terrorists blowing up oil refineries, pipelines, and oil tankers.

The USA is down to oil reserves that could power our country, at current rates of use, for four years.  This vast country, with limited train and mass transit systems, combined with massive dependence on vehicles to reach sprawling suburbs, makes the United States very vulnerable to oil shocks.

There are plans in place for rationing should shortages strike, [13] [14] and there is room for demand destruction.  The U.S. rationing plan calls for agriculture to take what it needs off the top.  After that other critical agencies will get what they need.  Anything left over will be distributed to everyone else.

Natural Gas Depletion

Natural gas heats over half of all American homes and provides twenty percent of our electricity.  Natural gas is also used to make plastics, chemicals, fabric, carpets, packaging, and many other products. It is the feedstock and energy source used to create nitrogen fertilizers that grow up to four times more food than could be grown otherwise.  It’s also used to refine oil and tar sands.[15]

North America will face the depletion of natural gas within the next decades.  Natural gas extraction has a much steeper rate of decline than oil – current annual new well decline is 31% and half of the natural gas needed in 2012 is going to come from fields that haven’t even been discovered yet.[16]  This problem is as serious as oil depletion.

Replacing fossil fuels with some other energy source

At one time, the Energy Returned on Energy Invested (EROI) for oil was at least 100 to 1.1   We are reaching the point where the EROI of oil will be 1 and no more drilling will take place.[17] It was while the EROI of oil was high that most of our current infrastructure was built.

Evidence suggests that the EROI of corn ethanol is less than one, which means it takes more energy to make than you get out of it – an energy sink.

Pimentel and Patzek have shown that it takes twenty seven to fifty seven percent more fossil fuel energy to create ethanol or biodiesel than you get in the energy returned.  Worse yet, this is done at a tremendous environmental cost, since biofuel crops harm soil structure and remove the nutrients, deplete groundwater, pollute water with pesticides, insecticides, and herbicides, cause eutrophication of water via nitrogen runoff, increase soil erosion, and contribute to air pollution and global warming at the ethanol plant and when burned in cars.[18]

Even if the highest claim of a net energy for ethanol of 1.67 were true, a much greater EROI than .67 is needed to run civilization.   The 1 in the 1.67 is needed just to make the ethanol.  An EROI of .67 has 150 times less energy than oil when we started building American infrastructure.

Charles A. S. Hall, who has been studying net energy for decades, believes that you’d need an EROI of at least 5 to run civilization, because you need to include the energy to make the machines, mitigate environmental damage, feed and house the workers, etc.[19]

For example, consider a windmill composed of steel and concrete.  A windmill farm in the Escalante desert, built to produce 5.55 TWh of power, would require 13.8 million pounds of aluminum, 2.8 trillion pounds of concrete, 639 billion pounds of steel, etc.  The wind farm would occupy over 189 square miles.[20]  Pacca & Horvath don’t give the capacity factor for these windmills, but an often used number is 30% (i.e. wind blows hard enough 30% of the time), so a 5.55 TWh wind farm might serve around 175,000 to 350,000 people, depending on the wind speed and how close people were to the windmills, since power is lost via transmission over long distances.

In 1992 such a wind farm would cost 200 million dollars, which doesn’t include labor and maintenance costs, and would serve less than one percent of the United States population.  It would cost over $200,000,000,000 to build enough windmills to generate electrical power for everyone (though of course, you couldn’t, since not all areas have enough wind).  With energy prices many times higher now than in 1992, the cost would be far more expensive.

After fossil fuels are gone, the windmills must be able to generate enough energy to maintain themselves and build new windmills, including all of the equipment used to mine the metal and concrete components, forge metal into blades and towers, and build the trucks and roads that enable windmills to be delivered to their sites.  Windmill energy must also provide the energy to build and maintain the electric grid and storage battery infrastructure, and all of the people involved in the process.  Any extra energy could now be used to run civilization.

It’s often said that once oil goes to “x” dollars a barrel, alternative energy will become economically viable.  But this will never happen, because the alternative energy infrastructure is built with fossil-fuel inputs, so alternative energy sources will always cost more than oil. To even talk about energy using dollar figures makes no sense — you can’t stuff dollar bills down your gas tank.

Energy can be reduced to physics, to the laws of thermodynamics and other rules that the Big Bang bequeathed our universe.  Oil has been a free lunch, one that nature spent hundreds of millions of years making, reducing 196,000 pounds of plant matter into one gallon of gasoline – pure, unadulterated solar power that no alternative energy source but fusion could possibly hope to replace.[21]  Oil is also incredibly easy to use, ship, and store.

The number of scientists who insist that alternative energies can substitute for fossil fuels, and ignore or deny the basic laws of physics and thermodynamics is frightening.  It’s reminiscent of Lysenkoism.

United States Infrastructure

While the EROI of oil was high, we built a vast infrastructure to deliver clean water, treat sewage, built roads, bridges, dams, and so on.

Any non-fossil fuel type of energy will have a great deal of work just maintaining the existing infrastructure.  The American Society of Civil Engineers gave the following grades to our infrastructure in 2005.[22]

Grade  Infrastructure Components

C+       Solid Waste

C         Bridges

C-        Rail

D+       Aviation                      Transit

D         Dams                           Energy             Hazardous Waste        Roads     Schools

D-        Drinking Water           Wastewater     Navigable Waterways

Consider just the drinking water infrastructure, the main reason our life spans have increased so much.[23] In this century, all of the 600,000 miles of pipes delivering clean water to homes will need to be replaced.  Every component of the water system is aging.  The energy required to replace or maintain thousands of treatment plants, pumping stations, reservoirs and dams over the next century is staggering.[24]

Useful Life Matrix

Clean Water  Years               Component

80–100         Collections

50         Treatment Plants – Concrete Structures

15- 25         Treatment Plants – Mechanical & Electrical

25    Force Mains

50          Pumping Stations – Concrete Structures

15          Pumping Stations – Mechanical & Electrical

90–100         Interceptors

Drinking Water

50- 80         Reservoirs & Dams

60- 70         Treatment Plants – Concrete Structures

15– 25         Treatment Plants – Mechanical & Electrical

65– 95         Trunk Mains

60- 70         Pumping Stations – Concrete Structures

25    Pumping Stations – Mechanical & Electrical

65- 95         Distribution

And consider the energy required to deliver the water.  According to Allan Hoffman,  “Energy is required to lift water from depth in aquifers, pump water through canals and pipes, control water flow and treat waste water, and desalinate brackish or sea water. Globally, commercial energy consumed for delivering water is more than 26 Quads, 7% of total world consumption”.[25]

The fragility of global trade and infrastructure

Science fiction movies used to scare us with out-of-control robots bent on world destruction.  If there’s a runaway robot now, it’s global corporations doing what’s best for the shareholder rather than the citizens and nations of the world.  Pensions have been looted, health care benefits taken away, taxes avoided, and regulations ignored.

Risks are being taken that could bring down the global financial system.

One of the risks to global trade is due large computer and electronic companies using the same outsourcers for similar components from the same region — even the same place – such as an industrial park in Hsinchu, Taiwan.  The risk is a single source of failure.

Microprocessors depend on electricity, electricity depends on microprocessors

Business interruptions can cost a fabrication plant 20-30 million dollars in lost revenue.  For instance, a plant that had a four-hour long electricity outage had to spend the next four days recalibrating their equipment, resulting in a $5 million dollar loss. Insurance companies have responded with huge deductibles and capped the loss amounts.[28]

As unexpected energy shortages and outages grow more common in the future, this will wreak havoc on microprocessor production.

The electric grid was originally designed for analog devices, which are much less vulnerable to momentary disturbances in electric power. But a nearly imperceptible one-second sag in voltage or other momentary disturbance at a semiconductor-fabrication plant producing microprocessors could ruin an entire 30-hour batch of chips, and possibly the equipment itself, (EPRI 2003).

Any device with a microprocessor is vulnerable to the slightest disruption of electricity. Billions of microprocessors have been incorporated into industrial sensors, home appliances, and other devices. These digital devices are highly sensitive to even the slightest disruption (an outage of a small fraction of a single cycle can disrupt performance), as well as to variations in power quality due to transients, harmonics, and voltage surges and sags. Another example from EPRI of possible consequences is if a microprocessor running a paint gun in an auto plant failed from an electrical disruption, it could destroy the finish on one or more cars, and disrupt part of the assembly process.

Today about 10% of total electrical demand in the United States feeds or is controlled by microprocessors. By 2020 this level is expected to reach 30% or more (EPRI, 2003).

Microprocessors are essential to the modern world

Billions of chips are created every year for a myriad of applications: in autos, airplanes, ATMs, air conditioners, calculators, cameras, cell phones, clocks, DVDs, machine tools, medical equipment, microwave ovens, office and industrial equipment, routers, security systems, thermostats, TVs, VCRs, washing machines – nearly all electrical devices.

So when an earthquake struck Taiwan in 1999, world markets were shaken. Willem Roelandts of Xilinx immediately knew this had the possibility of hurting the world economy.  “There is not an electronic product in the world that does not contain a Taiwanese component”, he said.

Even though the factories were fine, electrical and transportation systems weren’t, so production and delivery of components stopped, which caused assembly lines in the United States to halt as well.  Wall Street traders sold off electronic firms, especially Dell, HP, and Apple.

You wouldn’t think the United States would build microchip factories offshore in industries that were essential to its national and economic security.  But low wages are irresistible to corporations.  Also, many foreign countries are closer to sources of natural gas, which is declining at an alarming rate in North America.

According to Jack Gerard, president and CEO of the American Chemistry Council, “ “Natural gas is a raw material for compounds used in thousands of consumer products — from agriculture, telecommunications and automobiles to pharmaceuticals…and food packaging. More than 96 percent of all manufactured goods are directly touched by chemistry.  The industries that rely on chemistry together represent more than a quarter of the nation’s entire workforce. Unaffordable natural gas is driving away investment, crippling our manufacturing base, and reducing job opportunities. It is transferring to foreign countries the advanced research and technology desperately needed in order to compete on the world stage. In effect, our nation’s energy policy has become its de facto manufacturing and national-security policies as well.[26]

Industries also like to locate factories where environmental regulations are less stringent.

The chemicals used to create computer parts have resulted in 29 superfund sites in Silicon Valley, the most concentrated number of superfund spots in America.  At the Advanced Micro Devices superfund site in Sunnyvale, California, chemicals are in the groundwater and soil that can cause death, cancer, brain and central nervous system damage, leukemia, anemia, convulsions, nausea, unconsciousness.  The zinc and copper at this site are toxic to plants, ruining what were once some of the best orchards in the world.

The need to go where costs are lowest is driven by the enormous amount of money it takes to build a mega-size wafer fabrication plants — nearly ten billion dollars.[27]

Part of this amount is due to very high insurance costs.  In 1997, an Hsinchu Taiwan fabrication plant had a fire that caused $421 million dollars in smoke and water damage.

Outsourced products are delivered just-in-time to the factory assembly.   According to Barry C. Lynn, “Our corporations have built a global production system that is so complex, geared so tightly, and leveraged so finely, that a breakdown anywhere increasingly means a breakdown everywhere, much in the way that a small perturbation in the electricity grid in Ohio tripped the great North American blackout of August 2003”.[29]

Less major blows to assembly lines have come from strikes, SARS, fires, explosions, and manufacturing mistakes, such as the ones that resulted in Chiron’s failure to deliver half of the American flu vaccine.   Fortunately, the impacts so far have been temporary and regional. But it’s not hard to imagine events that could result in worldwide disruptions leading to a global depression.

Energy shortages for instance.  Already many businesses in the chemical, agricultural, steel, glass, and other industries have failed or are in pain from high natural gas prices in America.[30] [31] [32]  When enough key suppliers of infrastructure components fail, this will stop the downstream assembly line.  Suppliers might also go out of business because of economic failure in the manufacturing country, civil or regional wars, and extreme weather.

Despite the risk, single-sourcing occurs because cutting costs is how you stay in business, so the cheapest supplier wins the race to the bottom.  Corporations have gone cuckoo with outsourcing; letting suppliers located in potentially shaky political and economic countries hatch their nest eggs.

When the fledglings hatch they often fly on Fed Ex, which is so reliable it seems as if the supplier were on the other side of town instead of across the world.  But the airline industry is reeling from higher energy prices, so it’s possible that the intricate, just-in-time, high-speed aircraft delivery of electronic gear will shift to ships, a much slower, less predictable way to deliver cargo “just-in-time”.

Most products traded globally travel by sea.  Over 50,000 large ships carry 80 percent of the worlds’ cargo. Shipping faces critical challenges in the future.

Oil and LNG tankers are increasingly failing from corrosion. Over 2400 tankers split up or nearly did so from 1995 to 2001 according to the International Association of Independent Tanker Owners.[33]

Another hazard to shipping is piracy or terrorism. According to Gal Luft, executive director of the Institute for the Analysis of Global Security (IAGS), and Anne Korin, director of policy and strategic planning at IAGS and editor of Energy Security:[34]

  • The number of pirate attacks on ships has tripled in the past decade.  In 2003, there were 445 attacks. 92 seafarers were killed, and 359 assaulted and taken hostage, in 19 hijackings and 311 boardings.
  • Three-quarters of the globe is covered in water that is thinly policed.
  • Pirates are often trained fighters armed with automatic weapons, antitank missiles and grenades. Most of the world’s oil and gas is shipped through the world’s most piracy-infested waters.  Piracy is becoming a tactic of terrorists, who see it as a lucrative source of revenue. They’ve attacked tankers near Iraq, Nigeria, Saudi Arabia, and Yemen.
  • 60 percent of oil is shipped in 4,000 tankers passing through bottlenecks where they’re vulnerable to attack.  If a tanker were set on fire at one of these vulnerable points, the sea-lanes would be blocked.
  • Many shipping companies don’t report piracy lest their insurance premiums go up, but what is reported amounts to over 16 billion dollars per year.

Terrorism is affecting the worlds’ energy infrastructure. U.S. Energy Secretary Spencer Abraham has repeatedly warned that “terrorists are looking for opportunities to impact the world economy” by targeting energy infrastructure. Nigeria, Columbia, and Iraq have seen many attacks in the past few years.  There have been 282 attacks on oil infrastructure and personnel in Iraq from June 2003 to November 2005.[35]

Trading Partners

Trading partners matter.  Strategically, it’s probably not a great idea to partner with China because of their bloody history, economic booms and busts, and a landscape so environmentally devastated millions of Chinese are on the brink of starvation.

But it’s corporations that are now making strategic decisions about what’s best long-term for U.S. citizens based on how profitable next quarter will be.  The United States relationship with China began with Motorola, and Wal-Mart consummated the marriage.

China is on the verge of being unable to feed itself. More than 900 square miles of land degrade into desert every year while even larger areas are losing their productivity.[36]  The soils are becoming acidic and lifeless, making the crops vulnerable to fungal attacks. Worse yet, this shift has caused grain yields to fall by 20%.[37]

Water is growing scarce for farmers because cities usually win the rights to it. Aquifers are depleting and irrigation wells are drying up, forcing farmers to abandon their land.

According to Lester Brown of World Watch, “The cheap food of the last century may soon be history.  China will soon have to buy grain on the world market, and given their 150-billion trade surplus, will be competing with Americans for food, at a time when the USA is also losing cropland to aquifer depletion and soil erosion”.[38]

Much of the country is an environmental disaster.  The Gobi desert grew 20,000 square miles in five years and is now within 150 miles of Beijing.  This has been brought on by over-farming, over-grazing, and destruction of forests.  The dust from this desert is starting to affect the whole world, and contains arsenic, cadmium, and lead.[39]

We’ve become so linked to China economically that their frequent booms and bus could do the same to our economy.  Many industries have China to thank for their good times, especially shipping lines, which are hauling enormous amounts of oil, 150 million tons of iron ore, coal, and other raw materials to China, and bringing back finished goods like electronics, furniture, and clothing.

China has surpassed the United states in the market for cell phones and color TV’s, and is on their way to outdoing us in buying PC’s and soon, perhaps, energy.

There are almost 120 boys for each 100 girls being born in China, due to the one-child policy leading parents to prefer boys to girls.   Historically, this skewed ratio has meant big trouble, and one of the ways societies coped was by starting wars.

Women are being kidnapped and sold as brides. From 2001 to 2003 China’s police freed more than 42,000 kidnapped women and children.  And it’s only likely to get worse; one estimate puts the number of bachelors over the next decade at 40 million.

This could pose a threat to China’s stability according to Valerie Hudson and Andrea Den Boer, authors of “Security Implications of Asia’s Surplus Male Population”, which cites two Manchu Dynasty rebellions in areas that were disproportionately male.  They believe that young adult men unlikely to find wives are “much more prone to attempt to improve their situation through violent and criminal behavior in a strategy of coalitional aggression.”

Whether China dissolves in internal chaos, kicked off by hunger and unhappy bachelors, or explodes outward militarily as resources grow scarce, remains to be seen.  But given China’s violent history, it’s a sure bet there’s a conflagration ahead.[40]

Stephen LeBlanc, Harvard archeologist, believes that throughout most of history we have been engaged in constant battles.  When trying to find out why war was so prevalent, he assumed people were fighting for real reasons, and he discovered that the fights were always over scarce resources, usually food and often women.

He has evidence that we have never been able to control our population growth, which inevitably resulted in over exploitation of the environment, as far back in time as you go.

The consequence of over-exploitation is scarce resources, and that usually leads to war.

LeBlanc concludes: “Humans starve only when there are no other choices. One of those choices is to attempt to take either food, or food-producing land, from someone else. People do perceive resource stress before they are starving. If no state or central authority is there to stop them, they will fight before the situation gets hopeless”.[41]

Jared Diamond looks at the recent example of the Rwandan genocide in “Collapse”.  Although most people think this was an ethnic struggle between the majority Hutu and ruling Tutsi, that’s because most people understand the world in terms of ethnic conflict.

Since there were areas where Hutu killed Hutu, Diamond concludes that the real reason for the slaughter was for ecological reasons: “Look at the land: steep hills farmed right up to the crests, without any protective terracing; rivers thick with mud from erosion; extreme deforestation leading to irregular rainfall and famine; staggeringly high population densities; the exhaustion of the topsoil; falling per-capita food production. This was a society on the brink of ecological disaster, and if there is anything that is clear from the study of such societies it is that they inevitably descend into genocidal chaos”.

If LeBlanc and Diamond are correct about hunger resulting in battles, then we’re in for a rough time, as oil and natural gas grow scarcer.  Food, from planting, fertilizing, harvesting, and distribution, is utterly dependant upon fossil fuels in the United States.

How America handles a declining standard of living, given our addiction to comfort and super-sized meals, with over half of Americans owning guns, and 30,000 people killed with guns in 2002, [42] remains to be seen.

Continued global trade at current levels cannot be sustained as energy declines.  At some point global trade will lessen due to a combination of declining fossil fuels, piracy, terrorism, energy shocks, pandemics, natural disasters, political turmoil, global depression, and a shortage of large, non-oil based vessels.

Global trade will not disappear, since moving freight over water is very efficient, but there will be several discontinuities as declining energy forces us to roll backwards though history.

Most cargo is shipped on enormous container vessels that can be over 1100 feet long with ten thousand containers stacked many stories high.

The first discontinuity will come when we have to retrofit ships to run on coal, and set up coal stations and tenders all over the world.

The second discontinuity will occur when coal gets scarce and container ships are moved by wind power (if this is even possible), with liquid fossil fuel only used when entering and leaving ports.  A further step down will happen when it’s too energy-intensive to keep harbors dredged deep enough accommodate large container ships.  It’s already very tricky getting these large ships into port, a local pilot is brought in and complex computer systems are used to delicately park these gargantuan ships along the wharf.[43]

These huge ships would have to remain offshore and unloaded to smaller ships, if that is possible, since they weren’t designed for this.

The third discontinuity will come when containerization can no longer be supported due to lack of fuel and/or electricity for cranes, trucks, and trains.  Containerization revolutionized the amount of cargo and the swiftness with which it could be loaded and delivered from origin to destination by orders of magnitude over earlier forms of transportation.

The final discontinuity will come when ships need to be built from wood, because the remaining mineral ore is too low quality and energy-intensive to process, and when we can no longer recycle the rusted and dispersed iron and steel.

The Fragility of Microprocessors

I work in the computer industry as a systems architect/engineer.  My father got in on the ground floor, programming computers with wires before there were even punch cards.   As far as I could tell, his job was to draw squares, circles, and triangles and connect them with arrows.  I used to fill the flow charts in with crayons when I was younger.

I took an introductory course to find out what Dad had been doing, and was hooked.  I couldn’t believe you could get paid to solve intricate and interesting puzzles.  I abandoned my plans to get a PhD in molecular biology and started working at EDS.

I think computers are the most amazing achievement of mankind.  I especially like being in touch with family, friends, and new acquaintances from around the world with common interests.

The first computer, the ENIAC, built in 1940, took up 1500 square feet.  The same floor space now could contain 1.4 million microchips, each with orders of magnitude more computing power.  A car now has more computing power than the first lunar spacecraft.

Microchip fabrication [44] [45]

Creating a chip begins by cutting a thin 12 inch slice, called a wafer, from a 99.9999999% pure silicon crystal, one of the purest materials on earth.  Wafers require such a high degree of perfection that even a missing atom can cause unwanted current leakage and other problems in manufacturing later on.  This is the platform that about 5000 computer chips will be built on. Each chip will contain millions of transistors, capacitors, diodes, and resistors built by punching and filling in holes in more layers than a Queen’s wedding cake.

Cleanliness

Particles 500 times smaller than a human hair can cause defects in microchips. The more particles that get on a wafer, the greater the chance there is of a killer defect. Some particles are worse than others — a single grain of salt could ruin all the chips on a wafer.  Sodium can travel through layers even faster than stray bits of metal.  Particles that outright kill a chip are caught during the testing phase at the factory.  Sometimes only 20% make to the end.  The traveling particles are insidious, and can cause a chip to malfunction, perform poorly, or die later on (hopefully before your warranty expires).  Consumer reports recommends not even trying to repair a personal computer after four years, and in the two to four year range it’s a tossup whether to repair or buy a new one.

Typical city air has 5 million particles per cubic foot.  There are processes that require a maximum of 1 particle per square cubic foot.

People are among the worst offenders, as far as particle generation goes.  If you walk at a good clip, you emit 7.5 million particles per minute.  Even sitting still, you are still emitting particles.  A smoker is a particle-emitting dragon long after the cigarette, and a sneezing worker is even worse, a veritable Krakatoa.

City water is not pure enough to be used — it’s full of bacteria, minerals, particulates, and other junk.  To make city water clean enough requires many filters, UV-light, and other water treatments.  Some fabrication plants use millions of gallons of water a day, requiring a huge investment in water processing and delivery systems.

Microchip fabrication is primarily a chemical process, requiring ultra-clean 99.9999% chemicals and 99.9999999% gases.   About one in five steps use water or chemicals to clean the wafers or prepare their surface for the next layer.

Firemen practically need a chemical engineering degree to inspect and fight fires in a chip fabrication plant.   During a fire, they risk being exposed to volatile, flammable, or combustible solvents, and chemicals like arsine, used in chemical warfare.

The chips also require humidity to be just right.  If the humidity is too high, the wafers accumulate moisture, and the layers won’t stick.  Too dry and static electricity will suck particles out of the air and practically glue them to the surface, they’re so hard to remove.

So it shouldn’t surprise you that it costs over 3 billion dollars to build a clean room. The inside is composed of non-shedding materials, especially stainless steel. Floors have sticky mats to pull dirt off of operators’ shoes.  Pens, notebooks, tools, and mops – everything is built of material that sheds as few particles as possible, but even so, equipment particles cause a third of the contamination.

How chips are made

Wafers move from workstation to workstation and have different operations performed on them at each one.  Wafer fabrication for a chip might involve 450 processes with operations that overall take several thousand individual steps. The machines that make this all happen include high-temperature diffusion furnaces, wet cleaning stations, dry plasma etchers, ion implanters, rapid thermal processors, vacuum pumps, fast flow controllers, residual gas analyzers, plasma glow dischargers, vertical furnaces, optical pyrometers, etc.

If you were shrunk to chip size and tied to a wafer, you’d go through the car wash from hell.  You’ll be moved along by robotic wafer handlers from one machine to the next, where you’d be layered with different materials, centrifuged, electro-polished, dyed, scraped, heated to 1,800 F, ultrasonically agitated, sputtered, doped, hard baked, dipped in toxic chemical baths, irradiated, blasted with ultrasonic energy, spray-cleaned, dry-cleaned, scrubbed, micro-waved, x-rayed, shot with metal, etched, and probed.

At various points, the “Survivor” show comes on.  Chips are examined at an atomic level for defects, and their electrical functioning tested. They’re usually thrown out if anything is wrong, since most mistakes can’t be fixed.

There are many problems that can cause a chip to fail besides contamination. The wafer must be perfectly flat in structure and while it goes through the workstations.  If the wafer were 10,000 feet high, you’d see bumps or holes no higher than 2 inches – more than that and the layering is thrown off.   If the wrong step was performed after 3,841 correctly performed steps, the chip was under or overheated, the layer didn’t fully stick, was improperly aligned before the next layer was added, or a chemical misapplied, the chip is thrown out.  It’s amazing any chips make it out the door.

After your makeover, you’d emerge in a designer outfit composed of up to 25 layers embedded with millions of transistors, diodes, and resistors.  You’ll find yourself “best in show” at tattoo competitions and irresistible to Terminator fans.

The Case for collapse starting sooner than later

Jared Diamond lists five main factors for the collapse of civilization.[46]  All five are evident. The first two reasons, collapse from environmental reasons and climate change are so evident they require no further comment.

The third factor is not being able to adapt to new conditions.  Dmitry Orlov makes a good case for the eventual collapse in the United States being much harder than the recent collapse in the former Soviet Union due to our cultural weaknesses.[47] Ecologists believe that we needed to have started adapting to the decline of energy in the 1970’s by reducing our population and encouraging small family farms to get people back to the land.

The fourth reason for collapse is “relations with hostile neighbors”.  There is reason to believe sleeper Jihad cells lie in wait of an opportunity to blow up key pieces of infrastructure in America.  Russia, China, and Europe may unite against the U.S. to prevent America from taking the lions’ share of the remaining oil.

On the fifth factor, relations with friendly nation, Diamond said: “Almost all societies depend in part upon trade with neighboring friendly societies, and if one of those friendly societies itself runs into environmental problems and collapses, that collapse may then drag down their trade partners. It’s something that interests us today, given that we are dependent for oil upon imports from countries that have little political stability in fragile environments”.

Diamond’s “loss of trading partners” factor is another reason computers won’t survive PetroCollapse.  As global shipping, factories, and countries have a hard time keeping the lights on; computers will stop being made as supply chains break down.  If even one of the dozens of types of single-sourced equipment or pure chemical suppliers goes out of business, the assembly line stops.

Andrew Gould, CEO of Schlumberger, said of the oil decline that “An accurate average decline rate is hard to estimate, but an overall figure of 8% is not an unreasonable assumption”.[48]

Matt Simmons also believes that an 8% rate of decline is possible, given how Saudi Arabia’s fields were mismanaged, the use of technology to extract the oil sooner than it would have otherwise been pumped, other super giant oil fields having depleted rapidly after their peak, and the likelihood that Saudi oil reserves are probably half of what is reported.

The decline after peak might initially be low, buying a few years of time, but if it does reach 8% per year, world oil extraction would decline by almost half in eight years.   That is likely to lead to the collapse of civilization, because there is too little time to adapt.

Preservation of Knowledge

A project to preserve knowledge may be unable to continue in an unstable society beset with power outages, hunger, and crime. Once rationing and shortages begin, agriculture and other essential services will receive the most energy.   Scientists will be unemployed.  It is very likely that resource wars will erupt all over the globe, so the military will be taking a large portion of the dwindling energy resources as well. [49] [50] [51] [52] [53] [54] [55]

The time to begin is now, before we begin the inexorable retreat to wood as civilizations’ main energy source.

We’ve reached the point where we need to be concerned about the preservation of knowledge.  This cannot be done with computers, which are the least likely component of all to survive long-term, but this is the main plan for storing knowledge at institutions dedicated to this issue.

Computers are the top cards in the civilization house of cards.  Knock out any below and it all crumbles.  Computers have too many complex, energy intensive inputs and dependencies (Hawken, Shaw 2004, Shaw 2005, Boberg)

How can it be done?

We may be able to cannibalize computers for parts to keep some machines running, but eventually all the knowledge stored in computers will be unavailable.  By that time, most of the paper in library books will have decayed, become nesting material for rodents, or burned to heat homes.

Although archival paper and microfiche can last for five hundred years when kept at ideal temperatures and humidity, power outages will make it impossible to maintain them for that long.

It’s likely the unprecedented stable weather we’ve had the past ten thousand years will change, not only given the earth’s past history, but from our chemical alteration of the atmosphere.  While there may be initial global warming, that could change quickly to an ice age, or to extreme weather, with the climate warming and cooling so quickly that agriculture becomes tenuous (Cox).

If it is possible to etch words into metallic or other extremely durable substances, we ought to do it, not only for the coming dark ages, but to enable some knowledge to survive through future climate changes.

After all, we once put a disk on a space probe to explain humanity to potential aliens, why can’t we do that for our descendants?

Clearly not everything in print can or should be saved.  Priority should be given to information that would be useful to a society far simpler than ours.

We should leave our descendents with information they can use and be amazed by. We owe it to them.  It’s the least we could do considering we’ve driven so many species to extinction and left much of the land a toxic, deforested, desert.  If we can spend billions on microchip factories that are out-of-date within two years, surely we have the resources to save some useful knowledge and music for our descendants.

We need to find better materials than paper and clay tablets to preserve knowledge.  Someday there will be a new renaissance.

Maybe it’s as simple as converting Coca-cola factories from making soda cans to printing aluminum texts.

References


[1] Charles Hall, T. Pradeep, J. Hallock, Cutler Cleveland, M. Jefferson. 20 Nov 2003. Hydrocarbons and the Evolution of Human Culture   Nature 426, pp. 318–22.

[2] Robert L. Hirsch, SAIC, Roger Bezdek, MISI, Robert Wendling,  MISI. Feb  2005. Peaking of World Oil Production: Impacts, Mitigation, & Risk Management

[3] Standby Gasoline Rationing Plan. June 1980. U.S. Department of Energy Economic

Regulatory Administration, Office of Regulations and Emergency Planning

[4] M. Hoffert, et al. November 1, 2002. Advanced Technology Paths to Global  Climate Stability: Energy

for a Greenhouse Planet. Science, 298: 981-987.

[5] Garrett Hardin. 1995. Living Within Limits: Ecology, Economics, and Population Taboos. Oxford

University Press

[6] Transcript of Jimmy Carter televised speech April 18, 1977

http://www.pbs.org/wgbh/amex/carter/filmmore/ps_energy.html

[7] Vaclav Smil. 2000. Enriching the Earth: Fritz Haber, Carl Bosch, and the Transformation of World Food Production. MIT Press.

[8]  “It is clear, therefore, that by the transition to a complete breeder-reactor program before the initial

supply of uranium 235 is exhausted, very much larger supplies of energy can be made available than

now exist.  Failure to make this transition would constitute one of the major disasters in human

    history.” National Academy of Sciences.  1969.  Resources & Man. W.H.Freeman, San Francisco. 259.

[9] K. Deffeyes. 2001. Hubbert’s Peak: The Impending World Oil Shortage. Princeton University Press

[10] Matthew Simons. 2005. Twilight in the Desert: the coming Saudi Oil Shock and the World Economy.

Wiley

[11] W. Youngquist. 1997. Geodestinies: The Inevitable Control of Earth Resources over Nations &

Individuals National Book Co.   Chapter 3: Minerals and War, and Economic and Political Warfare

[12] The Rimini Protocol: an Oil Depletion Protocol ~ Heading Off Economic Chaos and Political Conflict

During the Second Half of the Age of Oil.  2005

[13] M. Wendling.  June 21, 2005 Britain Considers Energy Rationing to Meet KyotoObligations http://www.cnsnews.com

[14] International Energy Agency. Feb 28, 2005. Saving Oil in a Hurry: Measures for Rapid Demand

    Restraint in Transport

[15] J. Darley. 2004. High Noon for Natural Gas: The New Energy Crisis. Chelsea Green.

[16] Energy Information Agency. 2000. Accelerated Depletion: Assessing its Impacts on Domestic Oil and

Natural Gas Prices and Production and Peter Dea, CEO of WGR (Western Gas Resources), Nov 12,

2005  at the Denver ASPO conference, http://www.theoildrum.com/story/2005/11/12/0150/4833

[17] J. Boxell. Oct 10, 2004. Top oil groups fail to recoup exploration costs.  New York Times.

[18] David Pimentel and Tad W. Patzek. March 2005. Ethanol Production Using Corn, Switchgrass, and Wood; Biodiesel Production Using Soybean and Sunflower. Natural Resources Research, Vol. 14, No. 1

[19] Charles Hall. June 2004. The Myth of Sustainable Development: Personal Reflections on Energy, its Relation to Neoclassical Econimics, and Stanely Jevons. Journal of Energy Resources Technology, Vol 126 pp. 85-89

[20] S. Pacca, D. Horvath 2002 Greenhouse Gas Emissions from Building & Operating  Electric Power Plants

in the Upper Colorado River Basin.Environmental Science & Technology /Vol 36, # 14  3194-3200

[21] S. Kruglinski.  April 2004. What’s in a Gallon of Gas? Discover Vol. 25 No.04

[22] American Society of Civil Engineers Report Card for America’s Infrastructure.  2005.

http://www.asce.org/reportcard/2005/index.cfm

[23] L. Garrett. 2001. Betrayal of Trust: The Collapse of Global Public Health. Hyperion

[24] United States Environmental Protection Agency, Office of Water . 2002. The Clean Water and Drinking

    Water Infrastructure Gap Analysis.  (4606M) EPA-816-R-02-020 www.epa.gov/safewater

[25] A. R. Hoffman. Aug 13, 2004. Water and Energy Security. Institute for the Analysis of Global Security.

[26] J. Gerard. Nov 1, 2005. A vulnerable natural-gas supply The Washington Times http://www.washtimes.com/op-ed/20051031-090107-9287r.htm

[27] C. Skinner, G. Gettel. 1998. Solid State Technology. p. 48.

[28] R. Buys. 1998. Fire department participation on a fast track construction project for the semiconductor industry.  http://www.usfa.fema.gov/pdf/efop/efo28646.PDF

[29] Barry c. Lynn. 2005. End of the Line: The Rise and Coming Fall of the Global Corporation. Doubleday.

[30] Associated Press. Jul 02, 2004.  Oil prices raising costs of offshoots By Associated Press http://www.tdn.com/articles/2004/07/02/biz/news03.prt

[31] Forbes. May 24, 2004 Soaring energy prices dog rosy U.S. farm economy.

http://www.forbes.com/business/newswire/2004/05/24/rtr1382512.html

[32] Washington Post. March 17, 2004. Chemical Industry in Crisis: Natural Gas Prices Are Up, Factories Are Closing, And Jobs Are Vanishing

[33] R. Martin.  June 2002. Blame it on super-rust, a virulent form of corrosion that has destroyed hundreds of ships and could sink the oil industry. Wired. http://www.wired.com/wired/archive/10.06/superrust.html

[34] G. Luft, A. Korin. Nov/Dec 2004.  Terrorism Goes to Sea. Foreign Affairs. http://www.iags.org/fa2004.html

[35] Institute for the Analysis of Global Security. 2005. Iraq Pipeline Watch Attacks on Iraqi pipelines, oil installations, and oil personnel.  http://www.iags.org/iraqpipelinewatch.htm

[36] E. Eckholm. July 30, 2000. Chinese Farmers See New Desert Erode Their Way of Life. http://www.nytimes.com/library/world/asia/073000china-farmers.html

[37] New Scientist. Sep 18, 2004. China’s changing farms damaging soil and water.

http://www.newscientist.com/news/news.jsp?id=ns99996399

[38] L. Brown. Mar 10, 2004 China’s Shrinking Grain Harvest. How Its Growing Grain Imports Will Affect World Food Prices. http://www.earth-policy.org/Updates/Update36.htm

[39] H. French. Apr 14, 2002.  China’s Growing Deserts Are Suffocating Korea. New York Times.

[41] S. LeBlanc. 2003. Constant Battles: The Myth of the Peaceful, Noble Savage.  St. Martin’s Press

[42]National Center for Injury Prevention and Control. 2002. Firearm related mortality. http://webapp.cdc.gov/sasweb/ncipc/mortrate10_sy.html (select firearm)

[43] Sandra Dibble. Grounded Ship draws Curious. Tugboats are unable to free it; crowds line beach to

   watch. Dec 31, 2005. San Diego Union-Tribune.

[44] P. Van Zant. 2004. Microchip Fabrication, fifth edition. McGraw-Hill.

[45] M. Quirk, J. Serda. 2001. Semiconductor manufacturing technology. Prentice Hall.

[46] Jared Diamond. 2004. Collapse:  How Societies Choose to Fail or Succeed. Viking

[47] D. Orlov. 2005. Post-Soviet Lessons for a Post-American Century. From the Wilderness website.

[48] Andrew Gould. April 4, 2005. Howard Weil Energy Conference. New Orleans, Louisiana.

[49] Paul Roberts. June 28, 2004.  The Undeclared Oil War. Washington Post.

[50] M. Scully. Oct 1, 2004. The End of Easy Oil. Chronicle of Higher Education.

[51] G. Luft. Feb 3, 2004. U.S., China Are on Collision Course Over Oil.  Los Angeles Times.

[52] S. Glain.  Dec 20, 2004.  Yet Another Great Game:  Beijing’s aggressive petro-diplomacy in Africa has put it on a collision course with Washington.   Newsweek.

[53] James H. Kunstler. February 3, 2005.  Kunstler on China. http://www.kunstler.com/mags_diary12.html

[54] G. Gordon. Apr 3,2005. Recession, famine and war seen if demand outstrips supply Experts fear day when oil runs low. Sacramento Bee.

[55] Robert S. McNamara   May/Jun 2005   Apocalypse Soon.   Foreign Policy.

Boberg, Mark. Jun 28, 2000. PV. http://groups.yahoo.com/group/energyresources/message/1608

Cox, John D. 2005. Climate Crash: Abrupt Climate Change And What It Means For Our Future. Joseph Henry Press

EPRI (Electric Power Research Institute). 2003. Electricity Technology Roadmap: Meeting the Critical Challenges of the 21st Century: Summary and Synthesis. Palo Alto, Calif.: EPRI.

Hawken, P. et al.. 1999. Natural Capitalism. Earthscan Publications. Chapter 3: “Waste Not”, pages 49-50.http://www.bml.csiro.au/susnetnl/netwl49E.pdf 14-15

Shaw, Chris (a.k.a. Feral Metallurgist). July 12, 2004. Energy is the Donut, economics is the Hole.  Unknown News. http://www.unknownnews.net/040712a-fm.html

Shaw, Chris. Apr 26, 2005. Come on in — the quicksand’s fine.  My part in the oil crisis …  Unknown News. http://www.unknownnews.net/040712a-fm.html

Posted in Preservation of Knowledge | Comments Off on Peak Resources and the Preservation of Knowledge

Gardening – Grow Your Own Food

Posted on May 23, 2014 by

Best Home or small farm method

I’ve taken many gardening and permaculture classes, but by far the best way to grow your own food is explained in John Jeavons’ book “How to grow more vegetables And Fruits, Nuts, Berries, Grains and Other Crops Than You Ever Thought Possible on Less Land Than You Can Imagine”. I also recommend taking his biointensive workshop in Willits CA. Jeavons has you plant at least 60% of your garden plot with high-calorie potatoes, corn, beans, and grains.

Grow food with calories that doesn’t need refrigeration

This is essential because it won’t be long before refrigeration goes away as the grid gets less reliable. You will need to grow as much of your own food as possible, and try to have supplies of dried corn, beans, and above all wheat, which stores the longest – up to 25 years if properly stored. Grains are the basis of civilization because of this. It was very common to have a year or more of bad harvests. Anyone who could afford to stockpile enough grain to see them through these years of hardship stood a better chance of surviving until growing conditions were good again.

Any kind of seed, whether its wheat, beans, corn or whatever, is chock full of nutrition, because it has to have everything a baby plant needs. They’re full of vitamins, minerals, essential healthy oils, fiber, and can also have a good amount of protein.

You need to start using whole grains and legumes now, don’t wait to plant them. I wrote a book called Whole Grain Artisan Chips and Crackers to teach people how to use any kind of grain, nut, legume, or bean flour to make crackers, flatbreads, and chips. Besides being delicious and easy to make, crackers can last up to a year, so they’re a good emergency food, and I eat them as my go-to snack since they never go stale like bread. This is the most simple food you can make — just mix flour and water.  You don’t have to buy the book, my website www.wholegrainalice.com has videos and recipes.

Plant an orchard with nut and fruit trees

Hazelnut trees are a good choice (see Woody Agriculture – On the Road to a New Paradigm)

 

Posted in Farming & Ranching | Comments Off on Gardening – Grow Your Own Food

Civilians caught in a war

Posted on May 23, 2014 by

[ It’s very likely that the U.S. will collapse hard post-peak with so little preparation, and if we all don’t shoot one another the paramilitaries, gangsters, mafias, and bandits will. Or loot or move into our homes. Here are some examples I found in these history books:

  1. Peter Englund’s “The Beauty and the Sorrow” (2011).
  2. Brian Hall. 1988. Stealing from a Deep Place. Travels in Southeastern Europe.
  3. Giles MacDonogh. 2007. After the Reich. The Brutal History of the Allied Occupation.

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report ]

Homes

By 1945 over 1,800,000 German civilians died and 3,600,000 homes had been destroyed (20% of total), leaving 7.5 million homeless. After the war, another 16.5 million Germans were driven from their homes. Of these, about 2,250,000 died. Germany was so destroyed by bombs that towns often had few homes remaining. Occupying forces took the best homes over. Many Germans lived in ruins or holes in the ground, especially orphaned children.

WWI: armies take over homes of the wealthy. The Germans had to retreat from this Polish home, which the returning owner described as: everything was torn, smashed, ripped out, spilled, hurled around, knocked over and fouled. Every drawer pulled out, every wardrobe emptied.  The smell was indescribably awful. The library had been completely vandalized. The contents of all the shelves were emptied, the floor invisible beneath a layer of torn books and papers, all of it trampled by rough boots.”  Every dish and plate was hurled on the floor after they were used.  Jars that used to have jam, honey, and vegetables had been eaten and replaced with human excrement. They hadn’t found the food hidden in the sofa. Food could not be bought with money, potatoes and eggs were the most expensive.

Budapest, Hungary WWII: One woman had a large, opulent home that was one of the few still intact. It was taken over by 3 armies during the war: Hungarian, German, and Russian. All of the armies let the family live in the basement.

Isolated farm houses are vulnerable

German farms after WWII were robbed by Polish and Russian gangs

Roads are choked with fleeing Refugees

Most people don’t flee until it’s too late, they wait for the sounds of battle, because they don’t believe all the rumors flying about.

WWI Poland:   “the population was pouring out of the city in long files, men, women, children, dogs, cows, pigs, horses, and carts all mixed up in one grand mélange. On carts, on foot, on horseback. Everyone making shift to save himself. All of them carrying away what they could. Exhaustion, dust, sweat, panic was on every face, terrible dejection, pain, and suffering. Their eyes were frightened, their movements fearful: ghastly terror oppresses them. I lie sleepless at the side of the road and watch this infernal kaleidoscope. There are even retreating military wagons, routed infantry, lost cavalry

Rape

From tribal societies to the modern soldiers of today, rape and pillaging have always been a motivation. Women try to prevent this by looking unattractive – nuns used to cut off their noses in hopes invading Vikings wouldn’t rape them, committed suicide, or slept with high-level officers for protection and/or food.

Pillage

WWII Germany: Russians took booty of all kinds back to Russia as “repayment” — millions of tons of industrial machinery, sewing machines, art work, etc.

Black Markets

Germany after WWII: In urban areas, the black market thrived near rail road stations, as did prostitution and the homeless. Cigarettes were the main currency. Other popular items were soap, gum, butter, flour, coffee, chocolate, alcohol, wood, and oranges. Buyer beware: some tins had nothing but filth, goods might be rotten.

City dwellers go out to the country seeking food

WWII Germany: Special trains took town and city folk to country areas to trade with farmers, who preferred that over taking the risk of going to the city and having all of their produce stolen. If no farmers were around, city folk harvested the farmer’s crops and paid nothing for them. The Farmers didn’t trust money – you had to exchange useful goods. Farmers also converted their crops to alcohol.

WWI: Farmers told food at very high prices on the black Market. Townspeople were very much harmed by this since they had nowhere to grow their own food, so some of them broke into shops to get food.

Getting water during war outside the home

WWII Budapest: “People helped each other, shared their food, protected each other. Like going down for the water. Down in the streets, with the water bottles on our heads, we couldn’t tell where shots were coming from. Peole in the houses all down the hill would stick their heads out of windows and tell us which way to go or they’d tell us to wait, if the shooting was too bad for the moment”.

Coping with the Cold

Romania (1980s): Everything is rationed: the gas, electricity, oil. There is hardly any wood to burn. No one has fuel for their cars, so the roads are empty. My grandmother has no heat in her house some days, and on the coldest days she has to go to another house. She spends the winter with rags tied around her feet, her neck, her hands—and some days she just sits, all day, under a cover. She doesn’t leave it because she will lose her heat”.

 

 

Posted in Violence | Tagged | Comments Off on Civilians caught in a war

Global Bond Frenzy Raises Concerns

Posted on May 23, 2014 by

Global Bond Frenzy Raises Concerns

By LANDON THOMAS Jr. FEB. 19, 2014 New York Times.

Prospecting for oil in Brazil, manufacturing steel in Russia, erecting skyscrapers in China: Global bond investors have financed some of the grandest investment projects taken on by emerging economies in recent years.

But as growth falters in a number of developing nations, economists and regulators have become increasingly worried about the consequences of this borrowing frenzy and the risk that the mutual funds and hedge funds that have largely replaced more stable commercial banks as global financiers might all decide to rush for exits at the same time.

“It’s fair to say that the market got a little overexuberant,” said Scott A. Mather, the head of global portfolio management at the mutual fund giant Pimco. “Many years of private sector credit growth have created serious vulnerabilities.”

Analysts point out that compared to the Asian financial crisis in 1997, the borrowing binge this time is being funded largely by global bond investors and includes companies outside Asia as well. Unlike two decades ago, governments of developing countries have built up substantial foreign exchange reserves and are better able to weather any crisis. Still, fears remain that any panicky selling of Chinese, Russian or Brazilian bonds could turn into a financial rout. And over a longer stretch, the broader question is the potential effect from a closing of the once-welcoming global bond market to borrowers in regions of the world that have been driving growth in recent years.

The underlying problem, Mr. Mather said, is that bond investors with little or no experience in emerging markets piled in to pursue higher yields than they could get from safer government securities in the United States and elsewhere, snapping up the bond issues of companies with even riskier credit profiles.

The stampede has led to a so-called mirage of liquidity in which many investors may have been misled into thinking that selling the securities will be as easy as buying them was.

“The liquidity is much worse now than before the crisis,” Mr. Mather said.

Bonds Over Banks

In the five years since the Federal Reserve began taking extraordinary measures to stimulate the U.S. economy, emerging markets have relied more on global bond markets than banks to help finance their growth.

External debt of emerging market countries

IN THE 5 YEARS BEFORE QUANTITATIVE EASING (Sept. 30 ’03 – Sept. 30 ’08) Bank lending $1,097 Billion     Bond issuance = $432 billion   Total: $1,530

IN THE 5 YEARS AFTER QUANTITATIVE EASING (Sept. 30 ’08 – Sept. 30 ’13)

Bank lending $855 Billion     Bond issuance = $1,0e2 billion   Total: $1,898

its aggressive bond buying program, driving interest rates in the United States to lows not seen in decades, high-yielding international bonds issued by nongovernment emerging market borrowers have doubled.

Total bonds outstanding are now at a record high of $2 trillion, according to a new report by Merrill Lynch that warns of the consequences of this explosion in emerging market debt and the shift away from traditional bank loans.

Bond market veterans like Petrobras, the Brazilian energy concern that has issued close to $30 billion worth of foreign currency bonds in the last four years, are still leading the parade.

Petrobras is an investment-grade issuer; it issues bonds at relatively low interest rates because its oil and gas projects are considered to be ultrasecure.

But more worrisome are the high-yield or junk bonds, issued by, among others, steel companies in Russia and property developers in China. One particularly popular borrower has been Country Garden, a Chinese developer that has issued $4.2 billion in bonds since late 2009.

Most recently, in the autumn, the company raised $750 million by issuing seven-year bonds at an interest rate of 7.5 percent; the deal was so popular, bankers say, that it was oversubscribed by $18 billion. Like other risky bonds, Country Garden securities sold off aggressively in recent weeks, with the yield hitting 8.4 percent before regaining some strength in recent days.

As growth disappoints and profits suffer, some of these borrowers are defaulting on their debts. Among the largest defaults was the implosion of OGX, a Brazilian energy conglomerate that went bust recently; others include Mexican home builders and Kazakh banks.

“I think this is definitely coloring the expectations of investors,” said Richard Segal, an emerging market bond analyst at Jefferies in London.

Of late, the issue has received a public airing in Washington, after the Office of Financial Research, a newly created analytical body within the Treasury Department, came out with a report drawing attention to the lemminglike tendency of global asset managers to “crowd or herd into popular asset classes or securities regardless of the size or liquidity of those asset classes or securities.”

The report said that more than $1.5 trillion had flowed into bond funds in the last five years — far outpacing other segments like equities and money markets — and pointed out that large asset management entities such as Pimco, BlackRock, Capital Research and Fidelity had been the main beneficiaries of these inflows.

For a financial industry that already saw itself as over-regulated, the O.F.R. study came as a shock. The main trade group for asset managers, the Investment Company Institute, has aggressively contested the agency’s suggestion that too much exposure to risky emerging market bonds by American fund managers poses a broader financial risk.

By contrast, the agency’s decision to highlight this risk factor has drawn the support of several influential economists, including Hyun Song Shin, a financial economist at Princeton and the incoming head of research at the Bank for International Settlements, the idea factory based in Basel, Switzerland, catering to global central banks.

In a recent paper, Mr. Shin warned of the risks that prevail when bond investors, who traditionally have a shorter-term approach than commercial lenders, pile into and out of the same markets at the same time.

“We have never seen anything like this before,” he said. “It is unprecedented, and it is dangerous.”

Mr. Shin also worries that regulators, in pushing hard for big banks to increase their cash reserves, are missing the more critical issue: Aggressive borrowers in some of the larger emerging markets have been relying on fickle bond investors to fund their investments. And those investors are becoming nervous about their exposure to these economies, threatening to choke off the funding pipeline.

“It may not be an acute crisis,” Mr. Shin said. “But it will be slow and simmering and the impact on global growth will be damaging.”

Posted in Bond Market | Comments Off on Global Bond Frenzy Raises Concerns

Student loan crisis widens gap between rich and the rest

Posted on May 23, 2014 by

Student loan crisis widens gap between rich and the rest. Bill Zimmerman.   February 21, 2014.  San Francisco Chronicle.

Growing concern about wealth and income inequality overlooks a principal cause: the student loan crisis, which is much deeper than the $1.1 trillion owed and the tens of millions who owe it. Unnoticed are the astonishing profits banks have made from these loans and the impact those profits have had on redistributing wealth.

Since 2010, federal student loans have come from the Treasury instead of private banks (which previously made them with a federal guarantee) so the government now gets the interest rate profit that the banks once realized. In August, the Congressional Budget Office predicted that between 2013 and 2023, the government would make a shocking $184 billion in profits from its student loan program.

If expected governmental profits are that large over the next decade, it is logical that bank profits were as big in past decades. Interest rates were higher then, and the spread between them and the discount rate the banks had to pay to borrow money from the Federal Reserve was comparable to the future spread anticipated by the CBO. Thus, in the four decades before 2010, when the banks made federal loans, their profits must have been some multiple of $184 billion.

That doesn’t include profits from private student loans. When federal loans could no longer keep up with the expanding student population or snowballing college costs, the banks made millions of these private loans. They were not as numerous as the federal loans, but the interest rates were much higher.

Add to these profits a recent windfall. Following the recession, while the “too big to fail” banks got bailout money, the Fed also lowered its discount rate to 0.50 percent in 2009 and 0.75 percent in 2010. The banks gladly accepted these taxpayer-funded subsidies but continued to charge pre-recession interest rates, some as high as 8.5 percent, to their student loan clients.

Figuring conservatively, total bank profits must have been at least $500 billion and more likely $800 billion or more. This vast transfer of wealth came from student families with the greatest need. It was not an actual college expense, only the profit on their loans. Such a vast amount had to have played a significant role in generating our current wealth inequality.

That role continues.

Of the tens of millions still paying off student loans, many are underemployed and unable to make regular payments. Cut off from credit, they are stuck in a debtors’ prison without walls because laws passed in 1998 and 2005 prevent student loans, federal or private, from being discharged through bankruptcy. Meanwhile, no agency of government is even considering meaningful relief for these borrowers.

The Federal Reserve, the Treasury and numerous others have warned that this huge unsecured debt, much of which can never be repaid, creates dangers to the entire economy similar to those generated by housing debt in 2008.

Two reforms are needed:

Monthly payments on student loans should be a percentage of the borrower’s income, after essentials like food and housing are covered, instead of being fixed.

Interest rates on student loans should be nonprofit, which means equal to the Fed’s discount rate, currently 0.75 percent.

Government can adopt these reforms for the loans it makes and force the banks to do the same, retroactively, for all student loans still outstanding. While that would cost the banks billions, it would merely offset some of their past profits. Government used its emergency powers to seize the steel industry in 1952 and mandate wage and price controls in 1971, acts undertaken to prevent damage to the overall economy. Similarly aggressive action is now required to avert another debt-driven recession like 2008.

Over the past 40 years, conservative ideology has shifted the cost of college from the state to the student. Now, for the same reasons that government funds primary and secondary education, it must return to funding higher education. These two reforms can help move it in that direction.

Bill Zimmerman, a California political consultant, is the author of the e-book “The Student Loan Swindle: Why It Happened, Who Is to Blame, How the Victims Can Be Saved.” To comment, to go sfgate.com/submissions/#1

 

Posted in Debt | Comments Off on Student loan crisis widens gap between rich and the rest

Foreign Investment in Shale Gas is Drying Up

Posted on May 23, 2014 by

Jan. 2, 2014  For U.S. Drillers, the Days of Easy Money Are Over By Daniel Gilbert, Wall Street Journal.

Oil and Gas Companies Slash Spending as Foreign Investment Dries Up

Last year, 80 big energy companies in North America spent a combined $50.6 billion MORE than they brought in. That deficit was twice as high as in 2011, and four times as high as in 2010.  The same producers have dialed back through the first nine months of 2013, though they still spent about $18.7 billion more than their cash flow.

Since 2008, deep-pocketed foreign investors have subsidized the U.S. energy boom, as oil and gas companies spent far more money on leasing and drilling than they made selling crude and natural gas.

But the rivers of foreign cash are running dry for U.S. drillers. In 2013, international companies spent $3.4 billion for stakes in U.S. shale-rock formations, less than half of what they invested in 2012 and a tenth of their spending in 2011, according to data from IHS Herold, a research and consulting firm.

It is a sign of leaner times for the cash-hungry companies that have revived American energy output. The value of deals involving U.S. energy producers plunged 48% this year from 2012, to $47 billion, the first annual decline since 2008, according to an IHS report to be published Thursday.

So U.S. oil and gas producers have started to slash spending. “The days of easy money are over,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California-Davis. “The emphasis is going to be on lowering costs.”

Foreign cash helped cover the cost of the deep wells and heavy horsepower required to unlock oil and gas from shale and other dense rock in the U.S. The need for it has been acute: Last year, 80 big energy companies in North America spent a combined $50.6 billion more than they brought in from their operations, according to data from S&P Capital IQ. That deficit was twice as high as in 2011, and four times as high as in 2010.

The same producers have dialed back through the first nine months of 2013, though they still spent about $18.7 billion more than their cash flow.

U.S. and Canadian producers are “returning to spending within their means,” analysts at Sanford C. Bernstein wrote in a research note last week that analyzed spending patterns of 50 companies.

They are also turning to other investors, including private equity and the stock market, as overseas buyers lose their appetite for American energy projects. The shift has big implications for the oil and gas industry, analysts say, because Wall Street investors tend to be more sensitive to profits and stock prices, while foreign investors have historically been more focused on acquiring energy reserves and technology.

John Walker has seen this shift up close. The chief executive of closely held EnerVest Ltd. had courted big energy companies in Japan, Korea and China when he decided to sell vast holdings in Ohio’s Utica Shale.

But more than a year later, Houston-based EnerVest and its publicly traded arm, EV Energy Partners . . . LP, have sold only a portion of their Utica acreage for $284 million, well shy of the $6 billion Mr. Walker sought for all Utica interests. The buyer came not from Asia but Oklahoma: A new company backed by private equity and led by Aubrey McClendon, the former head of Chesapeake Energy Corp. . . .

“The whole market changed,” Mr. Walker said in a recent interview. Asian investors were interested in the company’s Utica Shale assets, he said, but very few bid. EnerVest has shifted gears, marketing the Utica properties in smaller packages to appeal to other energy companies with less cash on hand.

Mr. McClendon, who left Chesapeake in April, had raised $1.7 billion by October to launch American Energy Partners. His biggest backer was the Energy & Minerals Group, a private-equity firm.

Chronically low natural-gas prices have prompted international firms to cool on American shale, with some experiencing buyers’ remorse. Royal Dutch Shell . . . PLC in July concluded that its shale properties in North America were worth $2 billion less than it had estimated. A year earlier, BHP Billiton Ltd. . . . wrote down the value of its U.S. shale-gas fields by $2.8 billion.

In 2013 natural gas prices rebounded 26% to end the year at $4.23 per million British thermal units. But that increase come off near-historic lows. Natural gas prices sunk below $2 in 2012, the lowest level in a decade, as surging output across the U.S. and mild weather left a glut of the fuel. Prices rose last year as some power companies shifted to gas to reduce use of coal.

Some of the biggest financiers of the shale boom don’t expect the major Asian and European firms to reopen the spigot any time soon.

“They’re in digestion mode,” said Ralph Eads, vice chairman and global head of energy investment banking at Jefferies Group LLC. Still, he said, “as the foreign guys have withdrawn, we’ve seen a step-up in activity from private equity.”

Riverstone Holdings LLC, a private-equity giant focused on energy, said last month it would invest up to $300 million in closely held oil-and-gas producer Eagle Energy Exploration LLC. Riverstone has committed to invest about $25 billion globally, up from $20 billion a year ago.

The IPO market, too, remains a big source of financing for energy producers. Antero Resources Corp.’s . . . $1.6 billion public offering last month was the year’s fifth-biggest among U.S. listed firms. Combined, drillers that offered shares to the public on the New York Stock Exchange have netted $2.4 billion this year, the biggest haul in five years, according to figures from data-provider Dealogic.

 

Posted in Oil & Gas Fracked | Comments Off on Foreign Investment in Shale Gas is Drying Up