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218 comments on DrumBeat: September 19, 2008
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218 comments on DrumBeat: September 19, 2008
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Warren Buffett told us so:
Buffett's "time bomb" goes off on Wall Street
They always say, "Nobody saw it coming." When in fact, some people did see it coming, and were ignored. Even people as influential as Warren Buffet.
It was the same with the dot-com boom (and bust).
It's going to be the same with peak oil.
The first person who says to me "but nobody said that fossil fuels would run out" gets a biff on the nose.
To be fair I've already had someone say that they didn't really believe me when I said there was a peak around the corner (said in 2001), but when they saw $100 they remembered my prediction. It seemed so remote then.
Also got 9/11 ahead of time and a number of others. No pandemic yet and no impact of the demographic timebomb being noticed either. The dissolution of US is still on track.
The problem is always timing. Buffett issued his warning five years ago...long enough for people to assume he was wrong. Similarly, the first warnings about the dot-com boom came three years in...and the crash didn't come for another three years. So the party went on twice as long as the Cassandras expected. I sometimes wonder if it will be the same with peak oil.
There's that famous FEMA report, that came out in 2001, that predicted the three biggest and most likely catastrophes: a terrorist attack on NYC, a Cat. 5 hurricane hitting New Orleans, and a major quake hitting San Francisco. The terrorist attack happened shortly after the report came out, and Katrina came in 2005. You'd think this would worry the residents of SF, but they don't seem all that concerned.
There is a nice RAND report about the impact of a container nuke in SF (which has about the same probability of occurrence as an earthquake). Insurance turned out to be the big bugbear - which is interesting given AIG.
I'm sure such a thing would be considered a bigger shock, whereas everyone that lives there expects the quake.
We've built a system and a society that has little resilience at its heart. People aren't expecting large scale disasters, whereas simple stats should say they should prepare to cope with one every few years.
While an earthquake in San Francisco would be catastrophic, its effects on the nation would be comparatively limited relative to one in Los Angeles. Because the Port of Los Angeles is our major Pacific import/export port, 65% of all interstate truck traffic originates from the Los Angeles area. While diversion is possible, the disruption of the flow of trade would be immensely problematic. On November 13, there is going to be the largest earthquake drill in U.S. history in southern California.
Learn more here:
The Great Southern California Shakeout
Yes. The FEMA report took into account what was most likely. Apparently, they think the Big One is more likely to hit SF than LA.
The BIG one will be the Cascadia subduction zone quake centred just NW of Washington state. Forecast to be 9.75 on the richter scale, affecting Vancouver, Seattle and Portland, and it is supposed to be the most expensive natural disaster in history. Last I heard, they figured there would be a 10% chance of it happening this century.
When I first met PO, the date was set at 2005. Now it is 2010. Rembrandt says it will be 2012-2015, so yes, it will take longer to happen then initially anticipated. (though what is 7 years?)
And Katrina hit NO as a Cat 4, not a Cat 5 huricane. Another time maybe?
Katrina hit as a Cat. 3, but she was a Cat. 5 earlier, and brought a Cat. 5 storm surge.
Right. Thanks for the correction.
Global oil production crossed the 84 mbpd line in 2004. In the 4 years since then global population has grown by over 300 million yet global oil production has grown by a measly 1.5 mbpd or so.
So putting that as a percentage, global oil production has grown 1.7% despite prices quadrupling while population grew by over 4.5%
This is definitely Robert Rapier's "peak lite" scenario and it looks like it is happening just as we are reaching the crest of global production anyway. And on a 200-250 year total production curve, what's a year or three difference in picking the exact peak date mean anyway? Mere semantics.
plus the net is far less. even if measured in dollars. we are at marginal cost of oil and gas (in north america) now. so we will continue to pull out the cheap stuff found long ago. peak date a)is not the relevant question and b)due to banking/finance crisis is cemented in - rembrandt will have to adjust his numbers later this year..
It looks to me like the jury is still out on the exact "Peak Date" with 2005 still being in the running.
Barring truly unexpected growth in production we appear to be solidly into a 3+ year peak plateau where the exact peak production date will probably never be known any closer than +/- 1 year in any event.
The peak of true significance is peak net energy. It doesn't matter if you increase production, if net energy declines mean that less energy is available to run the global economy. Deepwater oil, tar sands, heavy oil, and most enhanced recover techniques like water injection all require extra energy to get the same volume of oil.
We've been on a gross production plateau since 2005, but net energy has been going down since then, or maybe a little before. IMO, using basing one's understanding on gross oil production is the most common mistake in oil analysis.
"The peak of true significance is peak net energy."
I heartily second that, and would only add, as GreyZone discusses above, that growing population means that peak net per capita is already behind us.
Quibbling over the exact point of peak oil just confuses the issue. The point is, unless there is a sudden upsurge in oil production in the next couple of years, we are at peak oil right now and have been at that point for a little over three years. What no one expected was this plateau. It could go on for two or three more years but it is still the peak oil plateau and it is happening right now!
Non-OPEC production has been on a plateau for five years. However 2008 will be the year of lowest non-OPEC production since 2003. It appears that non-OPEC production is sliding off its five year plateau. World production however may have a while to run on its plateau but it will now be much harder to stay there since non-OPEC production is trending downward.
But don't fret about the exact month of maximum peak production because it simply does not matter, it simply clouds the matter and detracts from the fact that we are on the peak plateau right now.
Ron Patterson
I agree with Ron that we are on the plateau right now and that trying to time it precisely is not very productive. And a global recession/depression could even further cloud the issue by
The most obvious signal for most folks that peak oil is happening would be the price of gasoline. That seems like an external phenomenon. If the price goes down in a depression but folks can't afford it because they lost their job, well, that seems like a personal problem. Hyperinflation, on the other hand, would seem like a problem with the treasury but not necessarily with energy supplies.
It's difficult for folks to see the relationship between peak oil, banking and the economy especially when the MSM is telling them Peak Oil is 'just a theory'.
It's my personal belief that showing folks data graphics with production curves for various nations and fields is the best way to convince thinking people that we have a problem right now. I'm not sure how to convince the masses, however.
Happy Exploring!
-- Jon
It already is.
People have been sounding the peak oil alarm for literally decades. They've been wrong for, literally, decades. Yet we know that at some point they'll be right, as oil is finite and hence must eventually peak.
If one wishes to actually provide warning or education, it's important to distinguish between "prescient" and "persistent". Saying "peak will happen" is prescient - it's providing a valuable insight, and not making unwarranted claims. Saying "peak is now" is making a bold claim, and making it over and over and over until at long last it happens to be true is just persistence.
Even a stopped clock is eventually right, but only long after people have given up on paying attention to it.
No, it isn't. Because we have not yet reached the point where everyone admits that peak oil is real, and has happened, and we were stupid for not worrying about earlier. We may never reach that point.
If we do, then we can determine if the party went on for twice as long as Hubbert, etc., predicted.
I can say with confidence that we will never reach the point where everyone admits that peak oil is real.
The fact that American oil peaked in 1970 is still denied.
How many of us here know that English coal peaked in 1913?
The deforestation of Europe for cooking, shipbuilding, and housing is still widely denied, hundreds of years later.
In New England you'll find very few people who believe in peak cod, either.
The human mind, it seems, has a blind spot for resource depletion.
Well, "everyone" is probably not reasonable. But even peak oilers still disagree about whether we are at peak oil or not.
I'll settle for as much acceptance as AGW has.
Yesterday I stumbled upon a paper published by a couple of PIMCO executives back in April of 2006. It illustrates that "they" certainly did know it was coming, or at least were forewarned, but nevertheless chose to throw caution to the wind:
http://www.pimco.com/LeftNav/PIMCO+Spotlight/2006/Spotlight+Dialynas+Par...
(This is pretty wonkish stuff and, for someone like me who is not trained in economics, it took hours to wade through this short 11-page paper.)
If one can look past their recommended preventative policy prescriptions (which at this late stage are worthless--the patient is already on the emergency room table suffering from a heart attack, eminent kidney failure and lung disease) and focus upon the assesment of the economic situation at the time the paper was published back in 2006, one is struck by the prescience of the authors of the paper. The paper also helps one to frame current economic events in a much larger, global framework, giving one a more universal understanding of just what in the Sam Hill is going on. Their warning was this:
The paper is chock full of wonderful information and insights, all fascinating and worthwhile, but I want to focus on just two.
To begin with, the authors observe that the foreign governments who hold massive and ever-increasing US dollar reserves "may, among many choices, decide to:
My concern is that, after the reshuffling of the debt chairs announced by our government last night, with its implication that the US government is to become guarantor of all US debt, that the new configuration will look like this:
1. Consume US goods in exchange for their exports 2. Consume commodities and raw materials for internal infrastructure 3. Invest their reserves in productive US assets 4. Lend the reserves back to US borrowers, which include • The US government ($31.6 trillion)I think the quandry/sentiments/concern of just about everyone this morning were expressed by Yves over at Naked Capitalism:
To put the enormity of the problem in perspective, consider that there are 116 million households in the United States. If we divy up that $32.4 trillion in debt amongst those households, the average debt burden per household is about $280,000. Given that the median US household income is only about $48,000 per year...
http://www.census.gov/prod/2007pubs/p60-233.pdf
...it's easy to see there's a problem here. The plan announced this morning comes straight out of the Hoover economic playbook. But, just like the Hoover administration's economic prescriptions, it fails miserably to deal with the underlying problem--a debt burden that is just too great to be borne by America's households and businesses. Regardless of how they shuffle the chairs, the debt burden is still too high. Some of the debt chairs will eventually have to be thrown overboard by default, or shrunk in size by inflation. And to make the problem even worse, our policy makers seem to labor under the delusion that we can not only keep all the debt chairs on board, but keep adding more.
The second point the paper makes that I want to emphasize is this:
The authors make the case that the global fiscal and trade imbalances that have existed for the last thirty years are similar to those that existed in the 1920s that caused the Great Depression, the subsequent rise of fascism and ultimately World War II.
Of course back then the U.S. was a creditor nation. Germany was a debtor nation. However, I will leave you with this one final thought from the authors:
PIMCO published a follow-up paper in September 2007. It deals a lot more specifically with energy issues and how they integrate into the larger economic picture. I am still wading through it, but am very interested to learn their thoughts on energy.
Wow, this is fascinating stuff. Thank you for posting it.
But...what should we do now? What's the best way out?
Everyone keeps warning of the terrible things that would happen if we allowed AIG, etc., to fail. What, exactly, would happen? That Joe Public would notice, I mean.
Gosh, Leanan, I don't know. The problem is there is no painless way out of what the authors call a "debt trap."
The prescriptions that the authors of the PIMCO paper recommended back in 2006 were preventative, so if they were viable then, they certainly wouldn't apply now. Our chain-smoking, bourbon-swigging, fast-food junkie is already on the emergency room table. It may be a little bit too late to cut out the booze and cigarettes and begin a low-fat diet and exercise program.
I suppose, taking examples from the past, three possible options are:
1. We can do what Great Britain did--tighten our belts, live within our means and pay off the debt. As the authors point out, "Estimates suggest that Great Britain paid a quarter of its wealth to the United States during World War I..."
2. We can follow the nationalistic path of Germany, implement national socialism, default on our foreign debt and direct our anger towards foreigners and chosen domestic minorities, or
3. We can follow the path of Russia and turn our anger against the economic, cultural and academic elite. The current version of this is the class warfare we currently see playing out in Venezuela.
I suppose some combination of the above is also possible.
IMO, deflation is the only way out of the debt trap, at least once we're this far into it. At one point we might have inflated our way out of it, but I think it is too late for that. The economy isn't going to recover until the debts are cleared out.
The good way to do that is with rising income/economic growth. We haven't had that for decades. Most (all?) of the growth of recent decades is just credit expansion. The bad way to do it is with inflation. The problem with inflation is that it will raise interest rates, so it doesn't work in the long run unles you stop taking on new debt. The ugly way out is default. Welcome to ugly.
I'm currently reading an interesting book on the Great Depression that was written in 1931 (A Bubble That Broke the World. I'm not very far into it, but right off he tries to identify the delusions that prevailed at the time. First of these is
.
That pretty much sums up the current situation.
As the authors of the paper pointed out, inflation was the path the Weimar Republic chose, which opened the door for National Socialism.
I want to stress that the United States during the Great Depression was a creditor nation. It is now a debtor nation. For the US, it may be a whole new ball of wax this go-round, very unsimilar to our experience during the Great Depression.
Here's a nice short article at Sudden Debt that captures the basic problem:
I agree completely.
What the administration and congress are currently doing comes straight out of Hoover's palybook. Frederick Lewis Allen, writing of the Great Depression in Since Yesterday, explained the problem thusly:
The difference is that during the Great Depression the debt was owed to fellow Americans. This go-round much of the debt is owed to foreigners. That gives the situation a little bit different twist. An uptick in jingoism is probably inevitable as Americans learn who it is that holds much of the debt that is causing them so much grief.
For all the complex explanations of the Great Depression, I think this is the simple (and unbearable) explanation underlying it. The bosses want us to spend more on their products than they're willing to pay us to make it. The banks want us in debt. Eventually these lovebirds will mate and produce a method for us to get hideously indebted and utterly indifferent to our real wages. Then we take on delusions that we too are part of the Republican investor class and elect the perfect idiots to oversee catastrophe.
No matter how many times we dig our way out of these messes, the survivors will die off over time and society will make the same mistakes until the resources that make them possible are exhausted.
At its most basic I see the problem as fractional reserve banking. This practise has been in place for centuries and is at the heart of monetary supply so it is rarely questioned and generally considered anathema to do so. However, if you have one dollar and you lend out nine dollars you are lying. Of course as you make money on your loans there is great incentive for this lying practise to continue. It is only possible where money functions as an abstraction for tangible wealth. If a farmer said I need to borrow 5 tractors for a harvest and the bank then showed up with one tractor and 4 pieces of paper you would say, you don't really have 5 tractors do you.
In normal times, fractional reserve banking works fine, though with many pernicious influences as detailed in a moment, as most people don't ask for thier money placed in safekeeping with a bank at the same time. That is it works fine when all is blue skies and sunny days, however, it is precisely when there is "systemic risk" that is when difficult events (funny the bank was for safekeeping) lead a large number of people to simultaneoulsy need their money that the system is exposed as a lie. Moreover, a number of positive feedbacks may come into play which worsen the crisis. First, if large numbers of people begin withdrawing large amounts of money and if economic expansion has been predicated on businesses using bank credit, i.e going into debt, to expand their businesses, well the banks having lower reserves now can't lend as much. Economic expansion slows or reverses and even more people need their money from the bank, while the initial precipitating financial crisis is magnified. Second, if people see large numbers of other people taking their money out of banks they (understanding quite reasonably that the banks actually lent out more money than they have) might also want their money precipitating a "crisis of confidence" or bank run. Considering the alternative, if I didn't know someone I'd be happy to say, don't worry, things will be fine, and hope that the crisis passes. But it's probably worth noting that George Bailey ran the small bank and Mr Potter the large powerful bank.
I am not saying put your money in a mattress, the people who have lots and lots of money will hyperinflate, hyperdeflate, start wars, kill people, put people in jail to preserve power, just that it is a bad situation and the central problem is that fractional reserve banking is predicated on a lie and no number of credit default swaps, hedging or derivatives can alter this.
There are also a number of pernicious influences, even in good times, from this fractional reserve system that might be touched on briefly. If one person deposits a dollar and the bank, for its livelihood, is striving from this reserve to loan out nine dollars, that is put nine people in debt one dollar, to the extent the bank plays a central role in a nation's economy how does debt not massively increase. From the bankers point of view, debt, to the extent it can be stably maintained, is profit, it is money and power. Secondly such a system, and this ties in with PO and so many other topics from this board, does not merely promote, it neccessitates conspicuous consumption. For the nine people who have placed themselves in debt for a dollar (from the one person who deposited a dollar) it is not enough to maintain themselves, they have entered a contract charging 5-10% interest on their debt. They must expand or perish. Once these people are in debt, the wolf is at the door. Hence the mantra of economic growth, the depletion of resources, the disregard for the environment.
Umm, isn't the false belief, that continued unmitigated economic growth is even possible, that got us into this mess in the first place? It's really time for politicians and economists to go study some basic physics, chemistry and biology. For starters I'd suggest that as part of their education they be loaned a half acre plot of land and a plow and told to sustain themselves for a year or two, if they survive then they can be allowed to proceed with their education.
IMO, deflation is the only way out of the debt trap, at least once we're this far into it. At one point we might have inflated our way out of it, but I think it is too late for that. The economy isn't going to recover until the debts are cleared out.
The good way to do that is with rising income/economic growth. We haven't had that for decades. Most (all?) of the growth of recent decades is just credit expansion. The bad way to do it is with inflation. The problem with inflation is that it will raise interest rates, so it doesn't work in the long run unles you stop taking on new debt. The ugly way out is default. Welcome to ugly.
I'm currently reading an interesting book on the Great Depression that was written in 1931 (A Bubble That Broke the World). Right off he tries to identify the delusions that prevailed at the time. First of these is
That pretty much sums up the current situation.
There are two extreme ways out of this: hyperinflation and default. Both are just two different types of defaults.
But neither is acceptable for TPTB as we would lose our status of a goods-for-paper nation. That's why I think they will try to do something in between - they will be running the printing press as fast as they can do it without creditors "noticing". This explains a lot of the delaying tactics we are seeing recently. Blow one-two more bubbles, hold the line for another year or two, and all those trillions will be just a loose change in Bernake's pocket.
Sorry for the double post. I intended to use preview then back up and fix any formatting errors. I guess I hit post instead, then backed and reformatted. Oops.
Thanks for your thoughtfull answer. Having just acquired this massive debt on top of the existing half a trillion, it may take a while before we see belt tightening and a debt reduction plan. Shoulda just bit the bullet.
I don't know how this is going to shake out but the beliefs of my lunch companions today may provide some insight:
"Bob" believes that oil is not of fossil origin but constantly forms in the magma. (This one's been floating around for a while.)
"Tom" believes that the human eye is far too complex to have evolved. It must have been created by an intelligent designer. Ditto.
"Joe" believes that we should conquer any country that allows citizens to chant or in any other way proclaims Death to America and install a dictator and leave with a stern warning: "Next time it'll be worse." He has no problem using nukes...as needed.
I work for a Fortune 100 company. These guys are professionals.
I have kids and I'd like to see, and I put my time & money where my mouth is, a better future and I'm one of many working for it. But I'll be damned if I know how it'll even begin to happen when a huge % of halfway intelligent people believe this kind of stuff. I can easily see my lunch mates in jackboots.
Just another day in Idiot America...(published awhile ago but still plenty relevant)
http://www.esquire.com/features/ESQ0207GREETINGS
BTW, thanks for posting this; I find it helpful when contemplating potential futures (and I don't mean commodities trading).
Wow, what a coincidence that the Creationist museum was created by something called AIG. A name shared with a firm that requires an $85 billion Federal bailout because:
1. its faith that America as a country would always grow enough to hide the lack of collateral for the paper it insured
2. our faith that the Federal government cannot now default on its added debt.
As comforting as Creationism.
Looks like it's time for even newer lyrics to Billy Joel's classic tune, We didn't start the fire
I see Nouriel Roubini hazarded a nuts and bolts proposal....
http://www.rgemonitor.com/roubini-monitor/253653/we_need_a_new_holc_-_mo...
He believes policy makers have began to see the light:
He argues that government intervention is necessary:
For his plan to succeed, regulators of good will, independent of banking industry lobbying and pressure, will be needed.
His proposal also left me with these questions:
1. How much of outstanding US mortgage debt is still on the books of the banks? Who owns the remainder of the outstanding US mortgage debt?
2. His proposal deals only with the debt still on the books of the banks. What about the debt that has been sliced and diced and is now owned by, for instance, the Chinese or Saudi government? If distressed homeowners are going to achieve the needed debt relief, won't there have to be a mechanism to write down that non-bank-owned debt too?
3. All that debt that was sliced and diced and sold off to the Chinese and Saudis was insured by credit default swaps. Since the banks, hedge funds and insurance companies who wrote that insurance don't have enough money to cover all the losses, is the U.S. government now going to step in and cover those losses?
Does that paper actually say how much is owed to whom? If a large percentage of that is owed to the American people then it makes the burden much lighter. If you like some reactionary pundits believe that Social Security obligations are part of that debt then the money owed to me and all working families from Social Security ought to be subtracted and actually can be counted as an asset. Same with the money owed to American banks can be counted as assets of the bank. All that money owed to foreigners is more of a problem for them than it is for us. If China cuts us off and we can no longer buy from them then they have a serious problem with a big increase in unemployment. High unemployment means the government must step in to prevent a second revolution. The same economic disparity between the rich cities of eastern China and the agricultural central and western provinces which led to Mao's Long March are there again.
SBS news in Australia focuses on world events. The last few nights they have featured an economics professor interviewed live who has explained very clearly how this debt has been growing since ww2. His view is that there is no way out of this crisis. Basically the world financial system must collapse.
What's ironic is the date... Check out the copyright date in the right side...
I humbly propose that that first domino is labeled incorrectly. It says, "CPI/inflation rises, etc."
I submit that the first domino should read "growth in world oil production stagnates, 2005. Prices for energy, and thus everything, begin to skyrocket," and so forth, down the line.
It's all one big picture, a large "cluster," if you will, like those peanut-studded candies.
We can't leave energy production shortfalls unremarked.
(BTW: Michael Klare's article "Barreling Into Recession" says basically this.)
Yes! And when also considering population growth, and declining EROEI, the net available energy per person has been in decline for some time now, and the gross extraction peak is accelerating that decline. We built the industrial economy on an energy return of more than 100:1, which is like getting a 10,000% return on your investment. Since per capita net energy plateaued around 1980, we've been operating industrial society on an energy return of roughly 20:1, or a 2,000% ROI (note the order of magnitude drop). We are now trying to run said society on an energy return of perhaps 10:1, 1,000% return (which sounds good until you compare it to the 10,000% we started with). And we are beginning to turn in desperation to energy sources with returns in the single digits (tar sands, ethanol...) Little wonder the wheels are starting to fall off. Money is ultimately worthless. It is only a construct of our monkey brains. Energy gets work done and feeds us. It is the first domino. And it is falling rapidly, if not precipitously, in net per capita terms.
And for some much needed levity, here's Jon Stewart's take on the financial crisis:
http://www.comedycentral.com/videos/index.jhtml?videoId=185175