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71 comments on The 2008 IEA WEO - Oil Reserves and Resources
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71 comments on The 2008 IEA WEO - Oil Reserves and Resources
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That graph is instructive Gail - thanks.
I see it somewhat differently, though I agree with you that peak oil, especially peak in 'net energy' produced from oil (barring being replaced with similar scale energy gain, which it has not) means the end of growth. But that is not what has caused this meltdown in the credit markets, unless indirectly through lack of energy gain attempted to be replicated with increases in virtual wealth and easy money, easier regulations to maintain growth in weaker areas of society (Glass-Steagal).
The overextension of credit with no underlying fundamental backing and the proliferation of human agents trying to swing for fences in the arena where social power is most concentrated currently (paper and digital assets) overwhelmed any energy constraints-whether they were caused by them or not will never be known. Since I started writing here I have pointed out that small amounts of financial (abstract) capital could overwhelm the total size of real capital (partially represented by commodity markets, including but not limited to oil and gas). I don't have time to get the stats right now but if you aggregate the notional leverage allowed to investment banks and hedge funds at the peak this summer (which coincided with the oil peak and peaks in most other commodities and currencies), this aggregate dollar amount would have an order of magnitude greater than the sum total of real commodities consumed. This is THE classic example of Soros' reflexivity concept, as ironically the people who understand the energy future the best, are going broke the fastest (McClendon, Pickens, etc.) The deleveraging would have eventually happened irrespective of the energy situation, though high prices might have kicked it off.
The main difference between what we believe and what the public believes (and here is where my view converges with yours) is that once/if the economy rights itself with some new currency/SDR/Bretton woods arrangement, we will immediately be faced with energy limitations, both price and availability. Oil and other commodity prices give VERY correct signals about current supply demand imbalances but are awful long term predictors of scarcity. At least for things that have no ready substitutes. That is why your whale oil graph is instructive - price signals have ceased to be valid information for policymakers years ago!!!!
Irrespective of all that, whatever the reasons for arriving at our current long-term dire energy straits, the importance of explaining all this and spending so much time on this blog is so that we don't spend our few remaining bullets on wasteful choices that put out immediate fires at greater risk to future. And regarding debt financing, there is a HUGE difference between not being able to repay loans and the publics perception of not being able to repay loans - I suspect the former will happen a good many years before the latter. That's where we are at right now. Hard choices to make. Biophysical and biological constraints (and opportunities).
I'm impressed by your reasoning, but I wonder if "we will immediately be faced with energy limitations, both price and availability " is necessarily true. Now, the general decline in economic activity has brought down the demand for oil to the point that world producers are having no problem keeping up with demand. If the world financial system reconstruction can be accomplished while still keeping world population reasonably fed, we can expect at least a short period of operation under the new financial system before growth again brings oil demand up to available oil supply. There will be, I hope, a short window of opportunity to address energy supply towards the end of the financial turmoil.
Of course, if the financial collapse leads to a failure to plant sufficient crops, then there will be serious loss of life before we climb out of this mess. Such loss of life will decrease the demand for oil, IMHO, and keep oil prices at depressed levels. Maybe, serious loss of life will extend the period of depressed oil demand to the point that your predicted energy shortfall never happen. (Not a preferred scenario, just a different scenario.)
Your talking about this 2.3% decline ? Or about 500kbd ?
From Gail:
You know, understanding the problem has hardly helped me envision a "new system". Could anyone out there present us a system where money supply is not based on dept like ours is? One, where money is not "created" by a central bank writing a note of dept to the government? One that is also flexible, unlike one based on Gold, for instance?
How about basing it on a unit of energy - the Watt, for instance (as in Watt? Money? :-)
Nate, you know a lot about how "it works", do you have a proposal about how it *could* work? I've been waiting for this financial crisis aout four years now (debating with John Denver back then) but I've never come up with a serious proposal on how to change "the system" based on geometric interest-based growth..
Cheers, Dom
It's very complex. And the further we go down this path the less politically viable it will be, but there is a long history of an energy theory of value starting with the Technocrats in the 1930s (King Hubbert one of their founders). We would base our currency system not on trust, not on gold, but on energy stocks and flows. Countries without much indigenous energy would have to trade for it (labor, and other resources). Our annual spending budget would have to come down dramatically which would be the problem, and would be linked to some combination of extractable fossil fuels and renewable systems - over time the objective would be to have currency based entirely upon the renewable flow rates of 'sustainable' infrastructure.
The problem with such a forward looking, radical system is in the end it wouldnt be radical enough. Because once we aligned to our energy use, there would then pop up other limiting variables like water and soil...i.e. even if we were 'energy rich' in the future just as we are 'currency rich' right now, we might be decoupled from the reality of all the water used in energy production.
A multicriteria model of natural resources and ecosystem services would be the ultimate way to base a currency. But that is 5 steps beyond what current policymakers are thinking. By discussing these things in a forum like TOD, one hopes that such an idea or a related one becomes only 4 steps ahead. The rest is a leap of human faith.
It's always worth remembering that gold and silver represent energy indirectly. They embody the huge amounts of energy necessary to mine them. As oil becomes scarcer, the embodied energy value of these metals will only increase.
O.k., let's all go join the Technocrats (after reseaching Wikipedia:-). But Nate's right, it's all very one-sided. At first, when I came into the circles of thought where "everything" is based on energy, I immediately thought of the physiocrats of the 18th century:
I realize the role of (commercial!) energy at the present, and that understanding it might help us construct a new monetary system. But Nate's right, we still need something neutral to "price" all of the above.
Cheers, Dom
I really like the concept. It's very logical really. Almost everyone would agree that a currency could be based on gold, provided everyone on earth did the same, because it has been done in the past. All you're really suggesting, Nate, is that we should expand the list of resources used to back currency from just gold, to every sustainable resource used in society. Conceptually its not that large a leap. However, I haven't taken the time to think through the reality of it yet, suspect the devil may be in there somewhere.
Also that added criterion "sustainable" on resources could be a kicker at the outset. Would that mean that eg. remaining oil resources become worthless? Obviously not ideal in a transition period.
Very complex in detail.
With a gold-backed currency, the promise is that any note can be exchanged for equivalent gold at the local bank, on demand. No overhead compensation to the bank for providing the service.
With an "all-resources" backed currency, would the promise be that any note can be exchanged for equivalent resources of your choice at the local trading market, on demand? No overhead compensation to the market for providing the service?
Interesting effect is that it provides a viable way to establish how much currency any country may have in circulation at any time. No country may establish more currency than the total of their "sustainable resources" .... It at least intercepts this inflation scam we've been caught in. Becomes an issue when jurisdictions try to share a currency, eg. EU. Is a one-time audit of world "sustainable resources" taken, and tha becomes the world limit of ow much currency is allowed to exist?
One big advantage is it provides very solid and slow-to-change exchange rates among currencies, eliminating speculators.
gold, while more of a store of value than a fiat currency, has no real use in a future world where basic necessities are food, water, heat, shelter, etc. Historical civilizations had all of these things so gold became a concentrated store of value. But if I were hungry or cold, I would gladly give up a Krugerand for a multi-pack of heirloom seeds and some gardening tools, etc. I know there is a faction that thinks we should go back to gold standard, which effectively would send gold over $5,000 per ounce. For one thing, those folks are mostly talking their position (i.e. they are long gold, not long societies best interests) and second, backing currencies by gold and we quickly are right back where we started, as gold is not fundamental building block for any economy(other than being needed at the margin in catalytic converters, etc.)
I'm not advocating a gold-backed currency, but an "all-resources" backed currency.
There are some useful ideas out there about backing your currency with a basket of commodities. For example, the ancient Egyptians had farmers bring grain to stores and they'd get a receipt. That receipt could be turned in at any time to get the grain back, so it acted as a store of value and a medium of exchange - a currency.
With the Egyptians, they had the receipt drop in value to reflect losses due to rot and rats. If you brought in 100lbs of grain in March and then came back with your receipt in April, you'd get (say) 90lbs back. So it was a depreciating currency, which encouraged people to spend it quickly rather than hoard it. A classic Keynesian pump-priming, four thousand years before he thought of it.
By adjusting the rate of depreciation, the people controlling the store can have a tax on it, and get revenue for public works. For example, if the grain actually rots at the rate of (say) 2% a month, then you have the currency depreciate at 5%, and use the 3% difference to issue your own currency in payment for labourers building roads or whatever.
Nowadays we'd want to base it on a variety of stuff, grain and cheese and meat and cloth and iron and so on. You'd probably want quotas on some goods, since your purchase of them encourages their production - you don't really want everyone to only grow flax for linen, and have no food. But the basic principle is sound.
There are lots of other possible systems, more when you decide that the two functions of currency - as medium of exchange and as a store of value - are things which can be split from each-other, or one tinkered with a bit.
Now, such a system is never going to be put in place by a central government. Past experiments with currency by the people have been squashed if they threatened the central money supply. Success brings a crackdown, since central governments cannot exist for long if the money they offer isn't wanted.
But if we face a Depression or a stronger civilisation-shaking crisis then it's something which might come up locally. If the central governments are wiped out or simply not around - some years-long version of post-Katrina in the US - then such systems could be very successful. If you're a doomer then you should be investing in a printing press and warehouse rather than buying up gold.
I'm also concerned about how items like "intellectual capital" and "human labour potential" get valued. They should probably be part of the "sustainable resources" setting the currency cap allowed. But if the system of counting those two is at all affordable, the shortcuts required are very liable to give governments a large incentive to encourage population growth among their people, a bad idea.
Conversely, it gives countries a large incentive to increase the levels of skill and education among their populations, a good incentive.
Hello Lengould,
Your Quote:"I'm also concerned about how items like "intellectual capital" and "human labour potential" get valued."
Consider my earlier postings on I-NPK as currency and stored in my speculative 'Federal Reserve Banks of I-NPK':
1. Consider how much "intellectual capital" and "human labour potential" are embedded in the creation and subsequent utilization of I-NPK.
2. From prior posted weblinks: A high-potency I-NPK ratio fertilizer such as DAP might have energy-embedded 5 gallons of gasoline energy equivalent in the 'transformity & distributive' process.
3. A 100 lb sack of I-NPK is damn hard to easily steal [especially if you don't have a wheelbarrow], conceal, or hide. Compare to an equivalent $$$value of fiat cash or precious metal. A thief would rather steal food first.
4. If I-NPK sample testing & certification can be assured--impossible to counterfeit--> the Elements by chemistry & physics don't ever lie.
5. Recall my Ft. Knox posting series: gold bullion stacked outside in machine-gun bunker formation to protect the seeds & I-NPK safely stored inside the vaults.
6. Using RFID tech: each bag could be identified, serialized, inventoried easily, and tracked.
7. At an idealized Liebscher's Law of the Optimum: I/O-NPK combo results in an agro-ERoEI of 20:1. Gresham's Law doesn't apply because O-NPK as a 'substitute' for I-NPK has a high intrinsic value to improve topsoil mulchiness, water-rention for drought, and micro-organism growth. Liebig's Minimum assures a bottom pricing floor for NPK, same as a bag of junk silver coins has a legal tender value of the face value of the coin.
My feeble two cents: have you hugged your bag of NPK today?
Bob Shaw in Phx,Az Are Humans Smarter than Yeast?
Another issue to sort. How does the "sustainable resource" of a country like Iceland get established? A large proportion of their economy is based on harvesting of sea creatures in international waters. It seems unlikely that they would be assigned a "right to create currency" based on their ownership of fish off the continental shelf of the USA or Norway etc. It would need to come down to an evaluation of their population's ability and willingness to do the harvesting combined with regular evaluations of the sustainablity of the proposed rate of harvest, a very difficult item to count. Also gives them an incentive to try to falsly increase the "sustainable harvest rate", which is not a good incentive vector.
Needs a solution.
“How about basing it on a unit of energy - the Watt, for instance (as in Watt? Money? :-)”
I think you are absolutely right, there is nothing funny, or wrong or nonsensical in your suggestion.
It is a very sensible and viable thing to have money based on energy units, that’s what the “New Bretton Woods” should have: "Credits" backed by Energy Drawing Rights or whatever you call it, making, for example, 1 Credit= 1 BOE = 1680 kwh