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Jerome a Paris,
First, my compliments on what is a fascinating article, and the choice of topic I find very compelling. Allow me to say that in my opinion there should be no danger of you, to use your words in the closing paragraph, being accused of "talking nonsense". I will admit to needing more time to really grasp the nuances of your positions and assertions how ever, but I would still like to venture some inquiries of my own. I hope you continue working the topic of what I take to be your concern aboout "Manufacturing vs. Financial" sector expansion, and the nature of real growth/wealth.
I was told many years ago that one of the most deadly theories in history and the one to be most cautious in using or accepting is "this time, it's different."
But, we have to keep in mind that there are occasions when the statement "this time, it's different" will be true, in other words, that we are not just talking about the standard "business cycle" swing back and forth between opposites (unerinvestment vs. overinvestment, deflation vs. inflation, growth vs. contraction, etc.). After all, we have mechanisms to cope with those. But what is almost impossible to prebuild a mechanism to control is the "revolutionary premise" (Alvin Toffler's term), or the complete paradigm shift.
Mr. Paris, do you see the current period as a time of complete paradigm shift?
Peak oil of course would be just such a paradigm shift, and would basicall junk the normal financial assumptions, i.e., there would be no way to invest in a way that could cover the normal contingencies.
Likewise, let us assume a positive revolutionary premise, say the rapid introduction of some system that would alter production and distribution in a radical way (distributed PV or radical breakthrough in storage batteries leading to super long range electric vehicles and use of renewable energy for instance). While the advance would create massive new opportunities, the "creative destruction" edge of the sword would basically junk out massive wealth producing firms (GM, Ford, ExxonMobil, Chevron, etc.) that are staples of many stock and bond portfolios. In other words, a radical breakthrough in technology/production/manufacturing, the hard money sectors, could have a catastrophic effect on the "soft money" side. In one way, real wealth would destroy what could be called "fiat wealth". Again to use an old Toffler term, we could end up with a "shabby gentry". This actually happened as we know during the industrial revolution, when some stayed locked into the "agrarian" methods of wealth production, while the more liberal and advanced moved on to the industrial model.
The question we must ask is (a)Where to put our money if we simply believe we are in a contraction phase of a normal business cycle (the normal bets have always beeen interest bearing investments, high grade corporate and government bonds, and hard assets (real estate, metals, and inflation hedges), or do we actually take the "this time it's different" bet, and go for the post industrial investments, and if so, what would they be?
The Western model assumes that growth in the industries we now know and are used to will in fact, after a time of contraction, return. If we bet against that, let's admit it, we are taking a huge chance. I once said that historically, to bet against the success of your own culture is very, very painful if your wrong. There were those who actually did it in the 1970's, pulling money out of investments seeing the energy and economic troubles of that period as permanent. When growth returned in 1982, some refused to reenter the markets, thinking it was a dead cat bounce, a scam, etc. They missed the greatest period of personal wealth building in history. Many of the folks that you mention as having stagnant incomes created that situation themselves. They refused to advance educationally, invest in the future (because they believed there really wasn't one) and thus, did not advance financially. Now, they are later in life, with little time left to repair the outcome of earlier bad decisions based on a misreading of the events.
If however, we are on the edge of the "revolutionary premise" (either negative, post peak collapse or even leaving peak aside, the collapse of standard Western models) or the technical blast upward of advanced technology (the aforementioned energy breakthroughs, some type of advanced and cheap "fusion in a jar", etc., then we have to ask ourselves where to position to take the greatest advantage of it. "Safe money" might be anything but safe, while radical plays may be the best bet for wealth accumulation.
The thoughts above are more in the way of inquiry than commentary, because I am getting later in years (49 years old) and really need to read this one right. I am honest about that fact that to this point in life my readings of the future financial picture have been poor. In the 1970's, I was one of those who bet that Carter was right when he quoted the CIA and said "the end of the big oilfields is here, there are no more fields to be found." I assumed nothing good was going to come to the U.S. and world economy in my lifetime, and missed the 1980's-90's runup. By the time I saw how far behind I was wrong and how badly wrong I had been, it was essentially too late. So I went with what I saw as the safe bet, good dividend plays, American electric utilities.
Again, I misread, as this was just before Enron, Calpine, Aquilla, Duke, Dynergy, etc., and I lost most of what I had managed to save. And then, the "revolutionary premise" struck in an instant on 9/11 and I was almost wiped out.
Post 9/11, energy prices slid, stocks slid, and business pulled in it's horns. I completely misread what path our nation would take at the political level. My assumption was that we would pull in our horns, possibly tax fuel massively and call up first voluntary and then possibly mandatory service, i.e., a World War II austerity program. I could not have been more wrong. I assumed that even without that however, it would be MANY years, perhaps two decades before the stock market would get back to where it had been. My guess for the Dow right now, if I had been asked then, would have been somewhre about 9500.
I recount all of this not to bore you (though it may well have that effect!) but to let you know that I am a complete cynic (and I have many friends in exactly the same position, experienced investors who have been wiped out over and over....that's why I often doubt many of these stories about people willing to take risk, and huge liquidity bubbles of easy money....I have not seen them in person, and niether has anyone I know....money has been damm tight where I am, credit....VERY hard to get and at very poor terms, and earned wealth from investments, very seldom heard of) but back to the cynic: I think the Dow for example, in 5 years could be (a) 5000 (b)22000, or non-existant. I think oil per barrel could be (a) $22.00 per barrel (b) $122 per barrel, or non relevent.
I could go on. So as a last question, I would like to ask you what what methold you use to establish rational price on money (interest rates) on stocks, on oil, or on any other commodity? Do you have a way to rationaly say, the financial sector is overbought, or a way to say the manufacturing sector is overbuilt? Because while everyone says we should be in manufacturing, the question is, manufacturing what? Are we not over capacity in every sector, from farm equipment to clothing, cars and electronic goods (never mind houses, would we really want more manufacturing capacity there?)
But, back to the fundamental question: This time, is it really different?
Roger Conner Jr.
Remember, we are only one cubic mile from freedom
Roger,
I think I hear where you're coming from. I was first alerted to "Peak Oil" in 2004 - some oblique reference in a news article I read had me do some Googling. I can't say I was overly surprised, more afraid of the prospects for a reasonably large mortgage attached to our house (about 40 minutes drive outside of Christchurch, NZ - it seemed obvious that it wouldn't be good for property values in commuterland ...)
By the end of 2004 we had sold the house (I'm not sure my wife was entirely convinced, but I was losing enough sleep over it). Of course, my crystal ball probably should have had "events may be further away than they appear" etched into it.
I feel as if I've been in a "holding pattern" for the last three years - we're renting, and waiting for the tide to turn.
I'm in IT, and can't see the prospects of getting any return on time invested in projects paying off (either due to the impact of "Peak Oil", or more imminently, perhaps "Peak Debt/Real Estate").
So, while we've cashed up our house equity (as it turns out, perhaps prematurely, but I think I prefer that to being too late), I can't see anything I'm prepared to risk it on at the moment.
The trouble is that I think events in the foreseeable future will turn the economics of just about everything we currently know upside-down. If I decide to, say, invest in manufacturing something now, what's to stop me going broke before things change and it becomes profitable?
Trying to profit on financial investments (taking into account "Peak Oil" and likely outcomes) also seems far too risky. Big losses could be just as easy to come by as big profits. (And something tells me that longer-term bets could be risky even if you win - you also have to collect them!)
So, the "plan" at the moment, such as it is, is simply to keep working (for immediate cash income, not on speculative projects), and wait for an opportunity. Quite possibly, buying a house on a useful-sized piece of land well outside of any major city, assuming prices revert to something half-way sane, and not feasible otherwise. Hardly a detailed plan though, we'll just react to events and opportunities (if any) as they occur.
I wouldn't be too surprised if "Peak Oil" went unnoticed by the majority, as the current global financial bubbles pop/unwind. (I.e. your $22/barrel price could be about right, if adjusted for inflation, for those that happen to have $22 to spare!) Imagine the impact on investment etc., in the oil industry! If the economy ever did show signs of clawing its way back up, it might then hit its head on the limits, at a much lower level?
So, I sit here, watching everyone around me scramble to borrow even more money, to buy more expensive houses, figuring they'd better do it now, before they can't afford to (I suspect they won't be able to soon, but not for the reasons they think). Wondering what will survive, and what won't. What industry will make sense, and which may still have to compete with those trying to wring the last drop of value from their capital investments in China, despite perhaps getting next to nothing for their products? Assuming anyone can pay to ship them here, or anywhere else for that matter. Concentrating manufacturing where it's cheapest is obviously a mistake, but I'm not prepared to wager valuable capital making specific bets against it at this stage!
Meanwhile, I'm just as stuck for ideas. It seems like there should be ample opportunities to prepare, and be better positioned for what's coming. I'm hoping that by not being in debt, and at least expecting trouble, I'll be better prepared than the majority when the time arrives ...
Is this time different? I'd say yes - at least in terms of the financial cycle. The coming "recession" is going to "have knobs on it" ... with or without "Peak Oil". It'll probably be talked about for generations ...
Meanwhile, perhaps I'll wake up one morning to the news that Japanese housewives and hedge funds propping up the $NZ will have realised that figuring the size of the NZ economy, by counting the number of legs and dividing by two, gives a completely different answer if you don't count the sheep. I don't know if that will be good news or bad, but it'll certainly be interesting ...
And thanks to all at the Oil Drum - probably the best of the "Peak Oil" related sites I've come across so far! (Though I won't pretend to understand the more technical aspects!!)
-Ian.
the first paradigm shift was the discovery and for the first time in human affairs, use, of cheap oil.
the second paradigm shift will be forced by peak oil.
Go ahead, Roger. If you believe it is different, bet your money. I'll be betting against you. But by all means, we need suckers on the other end of the bet so if you are volunteering, I won't discourage you.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
GreyZone challenged,
"Go ahead, Roger. If you believe it is different, bet your money."
Ouch, the old slap in the face with the glove, "I challenge thee to an investment duel...!" :-)
But of course, that's the problem, I don't "believe" it's different, but I don't
"believe" it's not different. Oh the issue of the "great collapse" I am agnostic.
But likewise, on the issue of what could, for lack of a better phrase be called the "great technical cornucopian deliverance", I am also agnostic. I root for it, I think it's possible, I think it's a choice we may be able to make, but will it happen? Who knows. The odds are even at best, and if we delay much longer the odds turn harshly against us.
But the issue we were going to duel on was investment, "betting our money".
I have already admitted to my poor history in investing, and my tendency to sell America and technology short over the last 40 years. I know that you wouldn't think so by some of posts, but I am very cynical about technology for example....it really has to start showing revolutionary advance before i take notice. Most cars for example that do not sell not because they use too much fuel. They don't sell because they are a BORE! Design and technology over the last 20 years has indeed been a failure (on that at least, I agree with Kunstler), but past performance is no indicator of future returns (where have you heard that one? Maybe from the "investment community" who promote everything but assure nothing!).
1. So let us play out scenarios for a few minutes: If I assume this is a replay of the 1970's, then I am in high cotton, as we say in the South, I know just how to bet....split between hard and interest bearing assets, and inflation hedged bets, and buy property with the profits after it crashes throgh the floor. Conventional "blood on the street" investing. Buffet and Trump made billions on it in the 1970's.
2. But what if "this time, it's different". There will be no return to readily available influxes of fossil fuel, there will be a shortage situation driving higher prices and finally spot and then broader shortages. Where to invest, other than in guns and ammo, canned food and a can opener? (I had a person recommend exactly this to me in the 1970's) In other words, is there any future for monetary investment of any type? If we take the full "Olduvai Gorge" theory seriously (I don't, but if we do) then of course we must study the cave man and agrarian village lifestyle, and forget the idea of monetary investment. Again, we have a precedent. Maybe not a happy one for those of us who rely on modern technology to remain alive, but a precedent none the less.
3. The other option would be closer to what I will call, after Alvin Toffler, "The Third Wave" model. This would be a complete and rapid restructuring of Industrial legacy technology, to a changed energy base, a changed manufacturing and service base, a changed informational base, and restructured wealth creation, which would result in a massively changed economic and even social structure.
Option 3 would not mean the end of a modern technical culture. But it would mean a very fast moving "ad hoc" type of creation, investment and yes, even destruction. How one would fair in the post industrial world would depend on how quickly one could read the fast moving situation and invest in it.
Solar? maybe. Which, thermal or PV? Concentrating solar? Which, concentrating lenses on PV cells or concentrating thermal mirriors?
PV? Which, silicon or CIGS Copper indium gallium selenide cells? What about the newest generation of nano and plastic cells? What about the direct water/sun to hydrogen solar panels without electrolysis? Could that really work on large scale?
So when we ask, "Are you going to invest in solar?", we have to ask "by solar, what do you mean"? It will be easy enough to guess right on solar but guess wrong on which format will prevail?
Now, play that same set of complex arcane options out over and over....battery, distributed generation options, wind, electrical power storage options, methane recapture, coal to liquid, carbon control and sequestering, groud coupled heat pumps, solar assisted heat pumps and refridgeration....the list goes on, to the point that it gives you a headache...no wonder people on the doom side say "oh screw it, give me the freakin' stone age, at least I can get some sleep and sex, and no one will gripe when I eat fatty meat!", while the cornucopians say "hey, all this thinking is bad for you but more, it's pointless when we are awash in oil!"
The doomers and the cornucopians have in common that they are both dreaming of a simpler world. Overchoice and complexity are the enemies.
Now, which way will you bet your money? And here I will stop asking and make an assertion: DON'T assume the situation will get simpler and less complex, or that the pace will slow down. Whether you are a doomer or a cornucopian, believing in a simpler age must be viewed as an exercise in believing in fables.
So if you take the true fast crash scenario, frankly, not much matters. Your talking learn to be a barbarian and bring it on.
If your talking the 70's redux, again, you know what to do.
But if your talking what I am assuming is the more likely scenario, a very fast moving, complex, technically advanced, information loaded "ad hoc" economy worldwide, full of organizations and networks, many with no true "standing" in the acadamic world, perhaps even on the outside in relation to the authorities and powers that be, coming into being rapidly, making alliances, raising support and money from conventional as well as unconventional sources (illegal sources in some cases?), buying, designing, licensing products and ideas, and then fracturing, only to be recombined at a into new alliences. This is NOT your fathers corporate stability, but from it, great advances could be made, and technology introduced. Think, as an example of Calcars, Felix Kramer's outfit, the pioneers behind the birth of the "plug hybrid" in it's modern concept. What standing did they have? What right did they even have to be in this industry? How can you invest in them? What will be the contractual obligations of "open source" style energy advances. Who will profit, and how?
So in response to your challenge, "Go ahead, Roger. If you believe it is different, bet your money.", I would reply, my money, what little I have of it, is being bet everyday. (So is yours, by the way) Whether I like it or not, prices are being set, interest rates are moving, the value of what I own is moving, my ability to heat my home or secure food is being decided. The question is, will I attempt to take an active part in controlling my own financial destiny. I can run for the hills, become a modern day Danial Boone...that would be a financial choice. Or I can hedge with the safe bets, i.e., the ones that would have worked in the 1970's, lay low and wait for the good times. Again, a financial choice.
Or I can attempt to learn fast, move fast, and try to read the next wave (it really will be a bit like surfing) and be ready to move and change direction as needed, fast, but with as much information as I can get access to.
Can I pull it off? I don't know. The odds are not with me, to be honest. I am by nature a bit droll and risk averse (otherwise, why would I be here? :-), and have a built in sense of doom of my own to deal with. But one thing keeps hanging in my mind: As I said above, my future is already being determined, I am just not nearly actively involved enough in determining it.
By way of a closing example, I was talking to a friend of mine in the investment community not too long ago, and asking him what he thought of the oil and gas situation. "I don't know, it could go up or down, it's almost impossible to know. Either way....I make enough off energy dividends from shares and partnerships in the energy industry to pay for all the energy I buy."
I know the guy. He was NOT kidding. And do you think he gives the valuable information as to where he finds these deals to his clients? What do you think?
(not spell checked, time limit, sorry)
Roger Conner Jr.
Remember, we are only one cubic mile from freedom
I have given the "great collaps" thing many thoughts, and swung this way and that. I recently start to believe that many of the disputes betewen the collapsionists and the optimists are nothing but mere semantics. Let's take a look at one of the most defining periods of European history: the second worldwar. Can this be called a "great collaps" or not? Was it a die off or not?
Optimists may use this example as well as collapsionist: It
almost wiped the Jews from Europe, it did cost enormous human suffering, the old ethnic make up of the continent was entirely destroyed. Yet within 10 years after it ended half the continent experienced economic growth that was unprecedented. Side by side it was the culmination of old European feuds, a real die off, a total destruction of everything that was, and yet within 20 years the continent was voluntarily united.
The twentieth century was boom, total collaps and die off almost at the same time. Doesn't history largely escapes our narrow models!
But Cheap Energy was available from the US and from abundant domestic supplies of coal. Also massive help from an undamaged superpower was available: Grain , Meat, other foodstuffs and machinary - all these required cheap and abundant energy to get to the right places.
Because the US was rich in all these things and undamaged by war, she was able to put Western Europe on a life - support machine until rebuilt. And, unlike the Warsaw Pact, Western Europe was able to devote less energy to defence and more on rebuilding. The WP had to try and do both with no external help.
The Second World War is not a good guide to this coming event. The only guidance the Second World War can offer is how the people of the UK managed through the Battle of the Atlantic with respect to domestic food production and rationing.
This time, each geographic region in turn will be dealing with its own internal problems of energy loss and critical shortages. Each region will look to its own resources to get through.
There will be no external help as energy abundance and available foodstuffs contract globally.
Do not look for help as none will be forthcoming.
We have not seen anything like this since the decline of the Western Roman Empire.
The only guidance the Second World War can offer is how the people of the UK managed through the Battle of the Atlantic with respect to domestic food production and rationing
And how Switzerland got through a 6 year 100% oil embargo while maintaining a Western industrialized democracy with a decent quality of life. Some lessons from Sweden too,
Best Hopes for non-oil transportation,
Alan
Switzerland was a nice little piggy bank for the Nazis, and never much in need of Oil and with a low population. And a lot of small-holding farms with farmers at home.
Sweden kept a lot of trade going, had a low population and a lot of small-holding farms with farmers at home.
UK was 40 million and fighting for its life. Coal for industry, oil for ships tanks and planes. With a lot of workers in khaki, substituted with land army girls. Markets for finished goods were lost (not that we continued making much as factories converted to war materials)
And of course, the Nazis were not trying to strangle the Swedes or the Swiss.
Not the best comparison I think, but still something to learn from.
Even on a war footing, with victory gardens and massive attempts to feed itself, the UK did not survive without help. Of course, not every ship was loaded with Grain and meat, many were prioritsed for munitions and armaments of all types and fuel.
We are now 60+ million and climbing and have paved stubstanial areas of prime agricultural land especially in the South East and the midlands.
Example 1: Earlier this week the High Court overturned a small group of allotment farmers. They found in favour of the council who wanted to sell the allotments to developers.
Example 2: The flooding in the UK as seen this week is as much due to paving farmland, meadows and wood land as any unusual weather. Actually the weather is not unusual. Its just the 'june monsoon'. Just a bit heavier because of the dry April.
A slow squeeze might allow some mitigation with effort and national leadership and a unity government. A rapid interruption of food and oil flows would be an immediate disaster. We have traded national resilience for just in time efficiencies at every component level of society, from gas storage, to imports of milk, butter and cheese (on an island made of lush grass and rain every other day - we import cheap milk! While UK Dairy farmers go bankrupt on a weekly basis). Most of our clothes and shoes come from Chindia.
So, in summary, Were we to build any kind of resilience in the UK for the times ahead, we would have to turn modern capitalism and economics completely on its head.
As you may well say yourself:
Best hopes for a voluntary return to the resilience of a less efficient, vertically integrated, management - capitalism economy.
O, but that wasn't the point I'd tried to get across. It's more that even in retrospective one can still differ about defining a historical period.
But now that I think about it: The dutch famine of 1944, the socalled "hongerwinter" probably gives some guidance. The German occupier more or less forbade transportation of food.
My perents were kids back then. My father was sent to spend the winter at a farmer my grandfather knew and my mother remembered seeing people die. My mother always thought of throwing leftovers away as a sin. I inherited that somehow, I always reuse leftovers.
I'd like to add to that that the dutch famine mainly occured in cities. This was not a food production problem, it was a transportation problem, even if initiated by the occupying forces. With that regard I find it odd that peakoilers have so little attention for something which I think has even more impact with regard to coming events then mere population growth: Next year more than half of the worldpopulation will live in cities.
To give yo an idea why that fact might have more impact then population growth as such let us take a look at Sofia, capital of Bulgaria. While the overall population of Bulgaria is declining the number og inhabitants of Sofia is actually increasing.
O dear, me and my big mouth..
http://www.theoildrum.com/node/2720#comment-206542
The 20th century was never dieoff at all on a global scale which is what matters. Even during WWII, population increased, not decreased. Even during Mao's cultural revolution that supposedly saw tens of millions die, the global population increased.
The last time global population decreased was during the plagues of the medieval era.
You might consider WWII a collapse of sorts for some states in Europe but it was never a dieoff.
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett
I do not disagree with you, yet I still like to add some comments.
The jews might feel like it was.
The huge famines that Mao caused are called the "Great Leap Forward" and actually did cause a dent in population growth. Not for long though, and with small impact.
http://www.iiasa.ac.at/Research/LUC/ChinaFood/data/pop/pop_10.htm
Oddly enough that dieoff did not lead to a collaps of society.
Society was in a very low state of organization anyway during the plagues. Remember the feudal system? And even within the feudal system there were breakdowns of individual fiefdoms so you don't see any monolithic collapse because society was not monolithic, even though there was a nominal "king" of a region. In those fiefdoms was a high degree of independence of other fiefdoms. So the collapse of one did not affect the others around it too greatly other than to present an opportunity to expand their own fiefdoms.
The modern situation is far different with extreme specialization of labor, huge interdependences, etc. A massive fire in one memory chip factory in Asia back in the early 1990s caused global repercussions. At one point in time, a Wisconsin company made 80% of all hard disk read-write heads in the world. The global economy is far more fragile than you realize. There are not hundreds of memory chip manufacturers. There are not hundreds of aircraft builders. There are not hundreds of electrical transformer manufacturers. These manufacturing areas that I mention are so small yet so key to industrial civilization that they each represent near single points of failure and these areas are not alone.
One great danger to society is these very narrow areas of specialization coming up against economic collapse in the geographic region where these things are made. How do you restart the modern economy? Economists last year met and discussed this issue at a US government sponsored conference and concluded they had no idea how to restart it. This may be why Ben Bernanke, when faced with the choice between inflation and deflationary collapse has vowed to choose inflation?
Ghawar Is Dying
The greatest shortcoming of the human race is our inability to understand the exponential function. - Dr. Albert Bartlett