Monday, March 17, 2008

"No Wolf! No Wolf!"

If recent events haven't convinced you that we are headed for a meltdown and you need to start preparing for a rocky future, then you are definitely living in an impenetrable state of denial. I was fascinated watching and listening to a group of talking heads on CNN filling time waiting for President Bush to take the podium for his March 14, 2008 speech to the Economic Club of New York. They were discussing how he couldn't be too up-beat because it would scare people but he couldn't sound too down because it would scare people and he couldn't use the "R" word (recession) because it would panic people. Essentially they were trying to decide the words to convince people the economy is still in great shape when clearly it is headed into the tank.

During the same newscast they talked about how the chief executive at Bear Stearns kept responding to people's queries about the company's health by saying things were great, then "suddenly", on the morning of the 14th (was it just happenstance the timing of this coincided with the President's speech before the Economics Club?) the company says things have changed dramatically in the past 24 hours (Yeh, Right!) and the company - the 4th or 5th largest investment bank in the U.S. and considered too large to fail - had to be bailed out by a competitor (J.P.Morgan who, on the morning of the 17th announced they were buying Bear Stearns for $2.00 a share, shares that had cost $173.00 only a year earlier) and the Federal Reserve, this just a week after the Federal Reserve already pumped $200-billion into the market in an ultimately failed attempt to maintain market liquidity as the markets simply continued their downward slide, closing the week under the 12,000 mark where not long ago they were over 14,000.

And on the same day there is news that the nation's largest petroleum refiner, Valero, has put up a third of its refineries for sale - which will likely ultimately result in their closure - further decreasing the number of operating refineries in the U.S. (now a third of the number they were twenty years ago) where a new refinery hasn't been built in thirty years. And all this week oil has held steady around $110. a barrel and gasoline in two states has topped $4.00 a gallon, many weeks before the summer driving season, while Dick Cheney is going to the middle east, cap-in-hand, after Bush failing in his recent trip, to beg OPEC to pump more oil (they claim they are already pumping more than their customers are ordering) to bring the price of oil down on the world markets, and oil majors are busily announcing two-year-old, geologically-questionable oil discoveries trying to convince people that fantastic new oil discoveries continue to be made. And the U.S. dollar has fallen to all-time lows against the Euro and the Yen over the same period - and possibly a bunch of other currencies that no one pays any attention to - while gold climbed over $1,000. an ounce (interestingly the price of oil in gold has remained relatively steady these last couple of years). And over 63,000 jobs were lost from the U.S. economy in the past week. And the experts say we have only reached the end of the beginning of the U.S. mortgage meltdown while in the same week there was an announcement that the overall, multi-trillion-dollar American mortgage debt now exceeds total American home equity. In several states the foreclosure rate is in excess of five percent and people find it better to cut their losses by simply walking away from their house and leaving it to the banks. Is this the American way of life that is not negotiable, Mister Cheney? If the mortgage industry today began a margin call requiring home-owners to make up the difference between their mortgage and their home equity the collapse would be complete.

All of this in the same week?! I guess the question the CNN people were pondering is a valid one. How, in the midst of all this, do you somehow convince people that the economy is strong and healthy? How about the truth? That would be innovative! If the economy isn't strong and healthy, if it is going in the tank, why are they debating how to convince people it is healthy? People are not idiots, despite consistent attempts to treat them that way. They can see what is happening. What? Are all CNN viewers non-English-speaking who don't understand the lies and deception they are discussing? Isn't continuing to tell them the economy is healthy when it is not the negative equivalent of crying wolf? Excuse my mixed fairy tales but isn't it like the three little piggies covering their eyes and crying "No wolf! No wolf!" when the huffing and puffing is already done and the damned thing is breaking through the door? How are people ever to believe you when you then say the economy is healthy and it really is? If that ever happens again.

We peak-oilers - and I proudly wear that label - are consistently derided as pessimistic doom-n-gloomers. We dare point to the harsh realty that the world's finite supply of oil is about to go into irreversible terminal decline (conventional crude has already done so). Is a pessimist simply anyone who has abandoned their rose-coloured glasses - or orange-tinted, or yellow, or green or blue - and chosen instead to look at this imperfect world as it really is? In my mind optimism, not religion, is the opiate of the masses. And far easier to sell.

I am now convinced more than ever before that the global economy is soon to come crashing down about our ears. It is a house of cards and we are currently engaged in a game of Russian Roulette removing card after card from the supporting levels. Whether it collapses from the bottom, as with the mortgage meltdown, or comes crashing down from the top with the collapse of Bear Stearns, Northern Rock and other banks, and the Federal Reserve itself taking on unrecoverable debt trying to keep the financial market afloat, it doesn't really matter. As we saw with the World Trade Center, a monolith that begins to collapse from the top makes just a messy a pile of rubble in the end as one that starts at the bottom.

Two years ago, long before all of this began, I wrote an article (available on my blog) entitled Why There Will be a Fast Crash and not a Slow Decline. In that article I focused on trust and faith being the underpinning of an economy, especially a debt/growth-based economy as most modern, globalized economies are, and how an erosion of that trust, especially a rapid erosion, results in a crashing down of that economy, whether that be a company like Enron or Worldcom, a nation, or the entire global economy. We are now witnessing that rapid erosion of trust and faith in the U.S. and global economy.

It gets really messy from here on. All modern economies are based on growth and debt-based expansion of the money supply. But more importantly the underpinning of the economy, the fuel if you will, is energy, especially energy derived from cheap, abundant supplies of oil. Modern economic expansion is fueled by cheap oil!

It appears that the growth in conventional oil ended in 1999-2000. It further appears, though this is still uncertain and hotly debated, that the growth in global crude production/supply may have ended in 2005, perhaps early 2006. The continuing growth in liquid fuel supplies since then (government industry departments and industry reporting agencies increasingly shift to reporting "all liquids" to mask this) has been a function of alternatives like tar sands (which, despite the fact it is bitumen and not oil, the U.S. DoE now wants to classify as "conventional" crude), CTL (coal to liquid), GTL (natural gas and methane to liquid), biofuels, and steadily dipping into SPRs (strategic petroleum reserves). Similarly growth in electricity supplies has been increasing dependant on alternatives like solar, wind, tidal, geothermal, and, in many nations, nuclear, but also increasingly from coal and, increasingly, lower, dirtier grades of coal.

The energy support for the rate of economic growth required - with a debt-based growth of the money supply - to keep the economy from going into terminal contraction, however, is greater than can continue to be made up by costly alternatives to oil and conventional electricity generation. As their application expands alternatives are running into their own resource limitations (e.g. natural gas, copper, zinc, silicon, uranium, cadmium, potassium, lithium, selenium, nickel, et al) and the rate of expansion of those alternatives (still only representing a very small fraction of overall energy generation) is already beginning to slow. They simply are not scalable to the point that they can replace even a significant portion of the current energy options.

It is popular in the oil patch, and to an increasing extent in economics, to blame tree-huggers, greenies and environmentalists for the lack of access to those "vast" untapped reserves of oil that must surely lie under ANWR and the Arctic Ocean and off the east coast and in Antarctica and under Central Park and a thousand other off-limits places. Of course there is plenty of oil, if those greenies would just let the oil companies drill for it. It's a catchy tune, as long as you don't have to deliver on your cornucopean "belief" in those vast reserves.

And it is equally popular to claim that advances in technology will dramatically increase the recovery rate from reserves. But every instance of the use of new technology in recent years (in Saudi Arabia, Kuwait, Mexico's Cantarell, the North Sea, the North Slope, et al) has simply increased, often dramatically, the rate of decline once the field passes peak which, of course, is reached sooner than it otherwise would have been because of the higher rate of extraction achieved with the new technology. That new technology has not increased the total recovery (often decreasing it by damaging the reservoir), just the speed of extraction. Over the past couple of decades, partly the result of reservoir damage from new technology, and despite continuous advances in extraction technology, the average rate of production per well has, in fact, steadily declined.

There is no odd coincidence in the timing of the surge in oil prices, in all energy prices, the surge in gold prices, the carry-on impact on all other prices, the rapid decline in the value of the hegemonic U.S. dollar, the frantic rush to biofuels that threatens to dramatically increase world hunger, the first wave of the total collapse of the housing market, and the collapse of two major banks in the past year. A fuzzy look in the rearview mirror suggests that global crude oil production peaked in 2005. The "unexpected" events that have occurred since that time are the first indicators of an energy-decline-induced global economic collapse from which we will not recover.

What is the alternative to money?

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