Wednesday, October 22, 2008

Peak Oil and the Global Financial Crisis

I am not an economist, nor do I play one on television. Nor would I want to be one. How limiting and depressing it must be to constrain oneself to constantly viewing the beauty and wonders of this magnificent living planet through the lens of cold, hard, lifeless money, seeking nothing more from it than profit.

Economist preach the faith that money makes the world go round. And they have the charts and graphs to prove it. And therein lies the problem. We can not solve our problems, including the serious global financial crisis, by looking at the world through a dollar sign, through the same economic lens that has contributed so largely to creating that crisis.

The environment is not a part of the economy to be bought and sold for a profit. It does not conform neatly to human economic rules and laws. The economy, conversely, is just one subset of the environment. We need to look at economics through a worldview that is broad and all-encompassing, need to put it in a more realistic perspective in tune with the realities of the planet itself.

We have pushed this planet and its environment to the brink and must now place human economy in the service of protecting and preserving what is left while there is still something of it left to protect and preserve. Because sooner or later that chance will be lost. We will at some point pass the tipping point, all for the sake of profit. In fact, if we continue with the same economic mindset we will probably try to make even more profit out of the terminal scarcity that our pursuit of profit has created.

Climbing back out of any recession means increasing energy consumption. Period. Recession recovery means increasing manufacturing production, transportation, increasing mobility, increased credit, increased shipping and trade. All of this involves increases in the use of energy.

In the five years from 1930-35 U.S. energy consumption dropped by nearly 14%. In the next five years, with the onset of war manufacturing and increased trans-Atlantic trade with the western European nations who would soon be pitted against Germany in WWII, it rose by 23.3% and another 29.5% during the war years to 1945. In fact, as Michael T. Klare points out in his excellent video, Blood and Oil, "The U.S. consumed more than one third of its total oil reserves during WWII." Other periods of recovery following recessions have also been accompanied by similar measurable peaks in increased energy consumption.

But how do we know if/when we are in a recession/depression? As they unfold there is invariably a serious and increasing disconnect between the Rosy and optimistic pronouncements - as if trying to wish it away - of leading politicians and industry leaders measured against the increasingly painful realities seen and felt by people on the street, whether that be Main Street or the workers and stock-hawkers in the pits on Wall Street. This is not unlike John McCain's confident campaign-trail assertion that "The fundamentals of the economy are strong," just hours before Treasury Secretary Paulson started the ball rolling on the $700-billion financial system bailout package.

In November, 1930 Alfred P. Sloan Jr. of General Motors confidently proclaimed, "I see no reason why 1931 should not be an extremely good year." Compare that to similar "public" optimism of today's GM leaders as the company implodes and seeks merger with Chrysler, itself currently struggling and a phoenix recently arisen from the ashes of near bankruptcy. On June 9, 1931, eight years before the depression was finally ended by WWII, Dr. Julius Klein, then U.S. Assistant Secretary of Commerce, announced "The depression has ended."

We, of course, have a very different reality to deal with today than what existed in 1929. If lack of energy or the high cost of energy in any way contributes to a recession, as it very clearly has in the 2008 global recession (depression?), then climbing back out of the recession will now be very much constrained by the same factors that caused it. That energy scarcity or high energy cost will increase right along with the increase in activity in the attempted economic recovery.

In the few weeks following the first admission of a global financial crisis, spotlighted by the U.S. Treasury's request for its first $700-billion bailout package, oil prices on the world's commodity exchanges began to move uncharacteristically in lockstep with the wild swings on global stock markets. Over the previous couple of years the stock markets and oil prices had more often gone in opposite directions as investors moved their money back and forth between equities and commodities in search of the highest profits. This new tandem pattern was the clearest signal that investors were simply removing their money from the investment arena, both equities and commodities, as profit opportunities dwindled and moving it into cash or gold.

If it's not this recession it will be the next one. There isn't time (historically 10-20 years to fully recover from a deep recession) to climb back out of this recession before the next one hits (bull periods tend to be 8-15 years duration). Peak oil is either already upon us or about to hit within the next 5-10 years, depending on who you listen to.

Suddenly real people, and economists, will come to realize that it is a serious liability, not an asset, that we have a credit/debt driven economy. The proposed solutions to this crisis thus far have been to throw more credit/debt at it. Our current global economy is critically dependent on growth. That growth is critical to support the U.S. Federal Reserve's policy (now essentially practiced globally by all national reserve banks) of growing the money supply through Fractional Reserve Banking. Through fractional reserve banking each dollar on loan (debt) is treated as an asset which the bank uses as the asset base to issue up to ten more dollars of loans out of money that does not exist, and can never, in a shrinking economy, be paid back.

Growth is also critically dependent on never-ending expansion of the energy supply tp support the social activity to generate the money to repay the debts incurred under the fractional reserve banking system. If you can't increase the energy supply growth stops. If growth stops the credit/debt economy dies. A debt-based economic system ultimately incorporates the assumption of its own eventual bankruptcy.

This recession, as has become painfully clear, is global. The recovery, likewise, must be global. For one nation to try to pull itself out of the recession at the cost of other nations cannot work, or at least will not be tolerated by other nations. There is considerable fear, however, that that is exactly what will happen. There is even greater fear in the U.S. that not one but many nations will decide to take advantage of the situation and use it to destroy U.S. hegemony by taking the U.S. dollar down the toilet.

There are many side effects to the growing global financial crisis. One of the most dangerous for the industrial nations is that the JIT (Just In Time) theology is breaking down. There is no credit available to finance shipping costs, to finance an inventory buildup, especially the large retail build-up for the Christmas season. Shelves will become bare so much more quickly than in the Great Depression because nobody holds an inventory. The inventory is in the pipeline. If the pipeline is shutdown the only inventory to draw on is what is on the shelves, generally a few days or weeks of product. The financial system will not free up massive amounts of money to allow for the building up of inventory, something manufacturers and producers would clearly love. What better solution to the woes of the manufacturing sector than to suddenly have retailers abandon JIT and suddenly start stocking their shelves and backrooms with inventory.

Since oil and other energy forms are such a crucial and costly input to the exploitation of all energy sources those other forms of energy have risen in cost in tandem with the price of oil (and do not, as we constantly observe, do not drop as quickly as oil when it drops). This has, however, had an odd and now clearly unfortunate side effect.

The higher selling price of energy has encouraged the development of many higher cost alternatives necessitated by the declining availability of the preferred and less costly primary sources such as crude oil, natural gas and black coal. The Canadian tar sands, deepwater offshore oil extraction and oil extraction in landlocked countries like Azerbaijan are prime examples. If and when the price of oil declines due to demand destruction, and other forms of energy with it, financially over-extended energy projects like those mentioned, which were viable only because of the high selling price of the energy those projects produced, begin to fall on serious financial difficulties. The energy they produce no longer brings the selling price that their much higher production costs require to remain viable.

The global oil production and demand figures show very clearly that we hit a peak in global oil production in May, 2005. We may still have times over the next few years where that peak is surpassed as we bounce along on the peak oil plateau. The trend, however, shows that growth in global oil production has ceased though the terminal decline has not yet begun.

Growth in liquid fuels since that peak has come not from conventional crude but from alternatives such as tar sands, oil sands, oil shale, coal-to-liquid, natural gas to liquid, synthetics and biofuels, primarily from sugar cane, corn and wheat. This latter, in fact, is contributing to a serious rise in world food prices that is raising the specter of a new round of mass starvation such as we have not seen since the beginning of the green revolution.

If this recession is prolonged, which there is every indication it will be, it is unlikely, considering the global energy production statistics, that we will have the energy required to support the growth in industrial and economic activity it will take to bring it to an end. If it does end it will not be for long. We will quickly run up against the limits in the energy supply and slip yet again into a global recession, that one terminal.

Governments of the major economic nations, and their economists, are beginning to make noises about redesigning the global financial system. If that redesign does not properly take into the account the current energy limitations and future energy declines it will be very short-lived.

Friday, October 03, 2008

"The Shock Doctrine" and Political Peak Oil Denial

For several decades now, dating back to at least the Reagan-Thatcher era, the primary underpinning of U.S. foreign policy has been The Shock Doctrine. First used successfully by Augusto Pinochet in Chile and keenly observed by the U.S., this doctrine has been enthusiastically embraced by U.S. administrations ever since it was first introduced to them by Milton Friedman. The late Milton Friedman was a now well-known but generally-viewed-as-radical economist from Chicago whose teachings were responsible for turning out the soldiers at least partly responsible for Pinochet's victory and enduring success. Friedman's philosophy that became the Shock Doctrine is best and most succinctly summed up in his own words; "Only a crisis – actual or perceived – produces real change. When that crisis occurs [my words: whether by design or happenstance], the actions that are taken depend on the ideas that are lying around." Successive U.S. administrations have, with varying levels of success, put that doctrine into practice in Iraq, Afghanistan, and across the world stage. Those decades of practice, and the lessons learned in foreign arenas, have served well to equip Washington for now unleashing The Shock Doctrine in the arena for which it was ultimately intended by them, at home against America's own citizens. Naomi Klein's new book, The Shock Doctrine: The Rise of Disaster Capitalism, does an excellent job tracing the history of this doctrine and it's use both in the U.S. and other nations such as Russia, Chile, Argentina and elsewhere.

No previous U.S. administration has so successfully employed the Shock Doctrine, both abroad and at home, than that of president George W. Bush and his dangerous VP, Dick Cheney. It has been used, perhaps not yet successfully, in the attempts to turn Iraq into an oil-rich puppet state from which the U.S. hopes and plans to ultimately control the vast oil reserves of the middle east. It has been used with great effect at home following the events of September 11, 2001, following hurricane Katrina, and is now being used in an attempt to change the economic landscape with the so-called $700-billion bailout resulting from the collapse of the housing market and the resultant sub-prime mortgage fiasco.

The beauty and effectiveness of using the Shock Doctrine is that you do not have to initiate or even execute the crisis event that you use for the springboard to implement your plans. You just have to be ready with those plans to capitalize on any crisis event that fits your needs. It was pretty clear that with the speed with which the Patriot Act was brought forward and passed that it had been created and was sitting in the wings just waiting for an event like 9/11. Whether or not there was foreknowledge by the members of congress is uncertain and, frankly, irrelevant because they too, like the voters they represent, have been turned into victims of the Shock Doctrine. It does not mean - and I am not passing judgement either way - that the administration was in any way complicit in the events of 9/11, despite the suspicion of guilt rising because of the whitewash job that became the 9/11 Commission Report. It does mean that the Patriot Act was planned and was sitting in abeyance, waiting for an event like 9/11. The ratcheting up of the fear factor since 9/11, the constant warnings from the administration and the compliant media, have garnered the administration an endless series of successes in implementing new legislation increasingly eroding America's civil liberties and freedoms.

In autumn 2005 I wrote an article entitled Paying the Executioner which appeared in the Online Journal Blue-Green Earth in November 2005 ( This article explained how our current rendition of capitalism with the willing complicity of government was not only picking our pockets but destroying the overall prospect of survivability for our children and grandchildren. The new erosion of American freedoms initiated since 9/11 will exact their ultimate toll not from you but from your children and grandchildren. Government and industry, hand in hand, are feeling increasingly emboldened by their successes in the use of the Shock Doctrine, in particular over this past decade. The erosion of rights and freedoms will not stop at what they have so far accomplished. Indeed the $700-billion+ bailout bill currently passed by the senate and before the house for a probable vote today has dramatically increased the price that Americans, and indeed the world, are paying for the escalation of this Shock Doctrine.

I am sure you were waiting for it so here it comes. What does this have to do with peak oil? Well, let me tell you.

One of the most frightening events that could happen to Americans in general is to have their energy taken away from them, to lose the ability to use their cars, to have to -ugh - use public transit to do their shopping, to have to car pool, to have to submit to fuel rationing, to have to pay a toll to enter the city to go to work, to have to hop on the bus or train to see America or to go to Grandma's for Thanksgiving dinner. As George Bush so admitted, "America is addicted to oil." In fact, America and the hegemonic power it enjoys on the world stage was built on oil. And America likewise is critically dependent on oil and other forms of energy in every way. Not only does the country run on oil but much of its infrastructure is built on materials derived from oil, its industrial agriculture and food production/delivery system is totally dependent on oil and other fossil fuels, the medicines the increasingly-medically-dependent population relies on are largely derived from oil and dependent on oil for their manufacture, the homes in which Americans live and the "things" with which they fill their homes are derived from oil. There are over 300,000 products in everyday use that are made from oil and its derivatives. Most importantly, however, the suburb-centric lifestyle developed in America since WWII is a totally oil dependent lifestyle. The simple fact of earning a living is dependent on being able to get from that home in the suburbs to the job somewhere else.

Do the administration and the congress and state legislatures know about peak oil? This is a subject of endless speculation and discussion on the online peak oil groups in which I participate. Of course they are aware. Bush and Cheney are ex oil men. Roscoe Bartlett has made endless - though largely ignored - presentations in the house about peak oil. One of Dick Cheney's first acts as VP was to form an Energy Task Force to brainstorm future responses to peak oil. Cheney was, while he was still with Halliburton, talking up peak oil in speeches as early as 1999. There is a growing concensus that W's invasion of Iraq was undertaken because of a growing awareness of the approach of peak oil.

Why, then, is there still a pervasive atmosphere of political denial of peak oil? Why is the phrase "Peak Oil" the words that must not be spoken in public?

The Shock Doctrine!!! But the timing is not yet right.

Peak oil is not yet the crisis they need in order to use it as the catalytic event to turn it against the populace. You couldn't sell fuel rationing yet. You couldn't yet sell compulsory car pooling, street tolls and all of the other measures that the government will undoubtedly implement as a result of peak oil. There is, admittedly, a growing sense of discomfort and pain from rising fuel prices and the downstream impact on food and goods prices. But it is not yet a sense of crisis and not close enough to one for any attempt to portray it as one to be credible. Appearances are that we have bumping along on the peak oil plateau since May 2005 but the irreversible decline in global crude oil production that will start to put pressure on the global growth society has not yet begun. When will that be? No one knows for certain but I would put my money on sooner rather than later, more likely over the next few years than 2030+ as CERA continues to suggest.

There have been lineups at gas stations in the southeast over the past few weeks but this is not a result of peak oil. This is a result of the refineries shut down by hurricanes Gustav and Ike. This is a shortage of refined fuels, not of oil. But when those lineups become general and widespread, when your gas station has only a fifty-fifty chance of having any gasoline tomorrow morning when you need it, when the store shelves start to be increasingly bare because the store can't get delivery from an increasingly undependable transportation system, when you can't get fuel oil in the middle of a cold winter, when natural gas pipelines start collapsing because they are empty, then and only then does it start to become the generally-recognized-and-understood crisis that is needed to use it to push forward the increasingly restrictive legislation that will allow government (and industry) to the control the population on the way down the downslope.

It is a mistake to interpret the lack of public discourse on peak oil as a lack of awareness. That silence, especially in the face of growing signs that peak oil is indeed upon us, should be viewed with alarm. You should be afraid of what is to come when the silence is finally broken because that is the signal that government and industry believe things have reached crisis level and they have you by the throat, or whatever other part of your anatomy you most fear being in the hands of someone wanting to destroy it.

See the following excellent videos featuring Naomi Klein's Shock Doctrine:
Naomi Klein: Disaster Capitalism
Naomi Klein "The Shock Doctrine" & "No Logo" interview
The Take - Naomi Klein and Avi Lewis