The Slavery of Oil
Posted by Francois Cellier on May 14, 2009 - 11:00am in The Oil Drum: Europe
Last week, I attended a round table discussion of ASPO Switzerland held here in Zurich. The topic of the discussion concerned the price of oil. Can we explain what happened in recent months to the price of crude oil? Why did it rise sharply last spring to a value of $147/barrel to then drop again down to a value of $36/barrel? What can we expect that the next few months and years will bring?
The aim of this short article is not to discuss that meeting in any detail. Such issues have been discussed to quite some depth already here at the Oil Drum. The purpose of this article is to discuss a single remark that one of the attendees, a Professor of Economics of the University of Geneva, made during the discussion.
This gentleman, unfortunately I didn't get his name, claimed that the price of crude oil could not rise much above $120/barrel in a sustainable fashion, because at such prices, we would use up our entire GDP for the procurement of energy only.
We all know that, after the peak, the oil must invariably become more expensive. We also know that, as the oil becomes expensive, demand destruction sets in that reduces the demand for the commodity, driving its price back down again.
What I had not come across before was a methodology that would allow me to quantify the price level at which our economies will stall, and this is precisely what my colleague from Geneva suggested.
The goal of this article is to review his proposed methodology.
-
Let me start from the beginning.
Many years ago I read a science fiction novel, I don't remember its title, with the following plot. The story played in a mining town somewhere in Latin-America. Employees of the mining company were lured with an offer of free housing and an attractive salary. Yet, as they arrived they found out that there was only a single store in town, owned by the mining company, that sold food, and that food was horrendously expensive. In fact, it was so expensive that the employees had to spend more than their entire salary just to stay alive.
The company would allow them to buy food on credit, but if and when they did, they had to sign an agreement that they would not leave town until they had repaid their debt. As they were forced to spend more than their entire salary just to stay alive, they had essentially become slaves of the mining company. The longer they stayed, the more indebted they became.
Most economic systems are difficult to understand. They are entangled, and there are so many conflicting variables with opposing effects that it is hard to predict how they develop over time. Yet, the above ploy is so simple that it doesn't require a higher degree to understand how it works.
My colleague argued that a similar mechanism applies to our procurement of energy. As energy becomes more expensive, we may soon experience a situation where we spend our entire GDP and more just to procure the energy needed to maintain our life style. This claim is what I wanted to verify.
I started out with population data. These are easy to come by. I used Wikipedia to jot down the populations of the 100 most populous nations on this globe.
Also the annual GDP of different countries (measured in U.S. Dollars) is easily found on the web. I augmented my spredsheet with data from Nationmaster.
Primary energy consumption data are more difficult to come by. I started out with the BP Statistical Review of World Energy. However, this report lists only the most important countries independently. Many of the less important energy consumers are grouped together. I found additional data on the website of the International Energy Agency. All energy consumption data are given in Mtoe (millions of tons oil equivalent) consumed by a given nation per annum. I simply eliminated from the spreadsheet those few countries for which I couldn't find energy consumption data.
I then calculated the annual GDP per capita, as well as the annual energy consumption per capita. I converted the per capita energy consumption from Mtoe to barrels on the one hand (1 toe = 7.4 barrels), and to kWh (1 toe = 11,630 kWh) on the other.
I then plotted the per capita annual GDP against the per capita annual energy consumption (in kWh):
Switzerland is the most energy-efficient among all of the countries displayed in the graph. It generates the highest GDP per kWh of consumed energy. Canada is the biggest spender in absolute terms. It consumes the largest amount of energy per capita, while generating a GDP that is considerably lower than that of Switzerland. The least energy-efficient country is Uzbekistan, as it generates a very low per capita GDP while still consuming some energy in the process. The U.S. is about average with respect to energy-efficiency, but it is also the second biggest spender in absolute terms.
Some countries weren’t included in the graph as they didn't make the list of the 100 most populous nations. Luxembourg generates a per capita GDP that is almost twice that of Switzerland ($84,161 per person), but is considerably less energy-efficient than Switzerland (104,072 kWh per person). The United Arab Emirates are bigger per capita spenders of energy than even Canada (154,005 kWh per person) with a lower per capita GDP ($28,202 per person).
I then fitted a straight line through the cloud of data points using a least square's fit. This line shows that, on average, the different countries exhibit a GDP-to-energy ratio of $0.47/kWh. Yet, this is a per-nation average. It is not weighted by the number of people living in the individual countries. If we take the total GDP produced by the entire world ($48,385,988,612,830.00, according to Nationmaster) and divide it by the total energy consumed (11,099.3 Mtoe = 1.29e14 kWh, according to BP), we obtain a GDP-to-energy ratio of only $0.37/kWh.
This means that, if ever the price of energy should rise to a level of $0.37/kWh, we would spend our entire GDP just on the procurement of energy. This corresponds to an oil price of $590/barrel.
If the price of crude oil should rise even higher, we have only two options left. We can either simplify our life style, or we can indebt ourselves. At that moment, we have all become slaves of the oil companies.
Clearly, our economy will stall much before then, because we also need other things beside energy alone. We need to wear clothes and live in houses. We need to invest money in these items. The $590/barrel therefore constitutes only an upper limit. In reality, the maximum price of oil (or other energy resources) that our economy can handle is considerably lower than $590/barrel, probably lower than $200/barrel.
And by the way, before I forget it, whereas it is true that I read the story about the hypothetical South-American mining company in a science fiction novel first, the plot is based on historical data. You may read up on the truck system and debt bondage, for example.
------------------------
You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don't you call me 'cause I can't go
I owe my soul to the company store.
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There is considerably more useful information contained in the data that I used for my article, information that is worthwhile to be explored. However, I didn't want to water down my story by going off on different tangents simultaneously. For this reason, I saved these additional observations for the discussion.
I marked a few more countries on my graph:
There is a cloud of countries located just below Switzerland. This set includes three of our direct neighbors: Austria, France, and Germany, as well as the United Kingdom and Japan. All of these countries have similar living standards, and they are located at similar latitudes, i.e., have comparable climates. It is therefore not surprising that these countries consume comparable amounts of energy per capita. You would also expect that they are about equally wealthy.
The anomaly is Switzerland. In economics when applying similar experimental conditions, we expect to obtain similar outcomes. Whenever we encounter an outlier, the alarm goes off, and it doesn't matter whether the outlier performs considerably better or considerably worse. The fact that one country is able to get significantly better results is a reason for concern. What are they doing that the other nations don't? Why don't the other nations perform better, when this is evidently possible?
Why are the Swiss wealthier than the Austrians? It is not because we produce better chcolate bars (which we do). In fact, it has nothing at all to do with our production. We would generate approximately the same wealth by means of our chocolate bars, baby food, and Tamiflu as the Germans or the Austrians are capable of generating. The difference is to be found in our banking sector. The entire additional wealth of the Swiss over and above that of our neighbors is generated by our banks. No wonder that Mr. Merz is a bit nervous right now. The good news is that, in spite of our additional wealth, we are as frugal as our neighbors in terms of our energy consumption.
Then there is a second cloud of countries further to the right. This set of countries includes Australia, Belgium, the Netherlands, and Sweden. They are about as rich as our neighbors, but they are consuming considerably more energy per person, in fact, they are consuming roughly 50% more energy per capita than we do.
Why is that? There is no good reason for it. It simply means that these countries have done less to save energy. One could argue that Sweden is located at a higher latitude, but those parts of Sweden where most of the people live don't experience winters that are harder or longer than the winters that we get here in Switzerland.
Now let's look at two countries that aren't included in the graph.
Norway = Sweden + oil. Because of the oil, the Norwegians are more wealthy than the Swedes. They have a per capita GDP of $64,566. They are wealthier even than the Swiss. Unfortunately, they are also more wasteful in their energy use. They consume 108,665 kWh per person per year. They are worse than the U.S. Americans and almost as bad as the Canadians. The Norwegians make 60% more money than the other nations in that group, and they are also spending 60% more energy. Why are the Norwegians spending more energy than the Swedes? There is no good reason for it. They do it, because they can.
Luxembourg = Belgium + banks. The banks play an even bigger role in Luxembourg than in Switzerland. They make the citizen of this small country the richest people on this planet. They generate a per capita GDP of $84,161. Unfortunately, the people of Luxembourg are also less concerned about wasting energy than their neighbors. They spend 104,072 kWh per person per year, more than twice the amount of neighboring Germany. There is absolutely no meaningful reason for it. It simply means they don't care.
The biggest energy wasters on this planet are the United Arab Emirates. They spend 154,005 kWh per person per year, while generating a per capita GDP of only $28,202. This is cause for alarm, as we shall see.
We notice further that the countries above the straight line are mostly developed nations, whereas the countries below the straight line are mostly developing nations. Canada is the exception to the rule.
An energy price of $0.37/kWh will hurt those countries much more that are below the straight line. As most countries (except for the net energy exporters) have to buy their additional energy on the world markets, a country located much below the straight line will get energy-starved much earlier.
For example, Uzbekistan spends its entire GDP on energy already at a price of $0.03/kWh, and even the rich United Arab Emirates get bankrupted at a price of $0.18/kWh. In contrast, Switzerland spends its entire GDP on energy only at a price of $1.13/kWh.
Consequently, as we move over the oil peak and energy becomes more expensive, the developing nations will drop out of the rat race much before we do. Even China gets bankrupted at an energy price of $0.12/kWh.
I take it the $0.37/kWh is for the gross oil inputs to the country. If you figure in useful energy, assume that only 20 percent of the input oil is turned into some kind of useful energy (after being ran through an engine, chemical energy to mechanical energy). That turns it into $1.48/kWh. Also, not all the inputs are used specifically for energy production. Figuring in useful work will give you a better idea of when the economy will not be able to support the energy. I would think somewhere around 6%-9% of GDP spent on energy would be too much for modern societies.
It is the price at which we acquire primary energy, but it is more than just the energy that we consume directly in the form of energy (heat, electricity, fuel). It also includes the energy that we use for the production of materials, such as the energy used up in the production of cement.
What is the highest percentage of our GDP that we can spend on energy is indeed the 500 Dollar question. Assuming that we can spend 100% of our GDP on energy is evidently silly. We need health-care, for example. This alone already consumes more than 10% of our wealth in some countries. We need schools. We need housing. Traditionally we were used to spend up to one third of our income on housing.
Your suggested numbers of 6%-9% are too low. We are using already more right now. You find a useful graph in the paper by Charlie Hall that was referenced already further down in the thread:
Over the years, the percentage of our wealth spent on the procurement of energy will undoubtedly rise further. It may rise to a value of 20%. Any number above 30% is probably unrealistic.
Good article, thanks Francois.
I remember reading a study (by Soc Gen?) that showed oil prices would have to rise to around USD 180/barrel to match the same share of GDP as in the previous oil shock and may have posted this on TOD.
Also I seem to remember that Euan has shown a much higher percentage was spent on energy in the past.
Growing up on the edge of the Appalation coal mines in SE Ohio, we knew the song "Sixteen Tons" http://en.wikipedia.org/wiki/Sixteen_Tons
all too well. Especially the phrase "I owe my soul to the company store" was used in daily speech. I was educated on the system before I was 10..
"You load sixteen tons, and what do you get?
Another day older and deeper in debt.
Saint Peter, don't you call me, 'cause I can't go;
I owe my soul to the company store..."
Cheers from Munich,
Dom
Ever read the treatise below
http://www.ohgen.net/ohathens/coal.htm
Quite interesting 1980 analysis of the Hocking County Coal fields.
Nelsonville native here.
FF
Well God bless you 'Flow! Grew up 20 Miles upstream on Rush Creek, the "bigger" branch of the Hockhocking River, near Bremen, Ohio. South of Logan (where we did our Christmas shopping) was noman's land for all my doings. Pappy worked at South Central Supply for a (short?) while. I'll be at the homestead from 27th of May to 9th of June.
If you want to reminis, send me a note..
Cheers, Dom
ps Great article. Gives a good sense of what was going on while the mines were producing. My sister (Lives near New Lexington) says the trains are trucking out the coal once again. !!
oops wrong thread
Nice article, Francoise
The quote below caught my interest;
My emphasis
Did you ever consider that there might be a structural difference with regard to industrial activities between the countries which may help explain differences in energy consumption before you draw firm conclusions? Norway has the benefit of huge amounts of hydroelectric power which to a large extent is used for production of aluminum and within the electrochemical industry.
I think a more fair comparison would have been to look on households energy consumption (adjusted for geography) before any conclusions was drawn.
As you are a professor, Francoise I hope that you are able to document the statement above in this post.
Specific energy consumption (energy consumption per capita) is not evidence of waste.
it is probably the downstream refining industry. Most petroleum producers spend a large amount of energy making fuels and chemicals for export. A better accounting system would assign those costs to the consumer country.
You bring up a valid point: gray energy.
If a country has an extensive heavy industry producing goods for export, this will show up in my statistics as additional energy spent by that country on goods that are in fact being consumed elsewhere on the planet. Switzerland is a net importer of gray energy. We import about 30% of our energy in the form of gray energy, which doesn't show up in my statistics. If I understand you correctly, you claim that Norway is a net exporter of gray energy, in which case, there may indeed be an understandable reason for spending so much more energy per capita.
Norway is a net exporter of aluminum and some other energy intensive products from the electrochemical and petrochemical industry.
In this way you may view Norway as a net exporter of hydroelectric energy (though this energy is embedded in aluminum or other products). One of the reasons for establishment of aluminum plants in Norway (which also goes for Canada and Iceland, just to name a few others) was the availability to cheap and plenty hydroelectric power.
Nat gas consumption in Norway is primarily within the petroleum industry generating electricity for (amongst others) pumping the oil either to onshore facilities or onboard tankers.
Nat gas is extensively used offshore also in the separation process of oil, water and nat gas and to recompress the nat gas for pipeline transport or for reinjection into reservoirs to increase recovery.
To explore for oil and nat gas also requires energy which is accounted for in the total Norwegian energy consumption.
Refineries, petrochemical plants and gas processing plants also uses electricity from hydropower.
Norway presently also have a strict building code for insulating houses.
For Ormen Lange (the second largest gas field in operation in Norway), the high pressure needed to deliver the nat gas to customers is generated by compressors running on hydroelectric power.
As of now Norway is a net exporter of;
- Oil
- NGL's
- Nat gas
- Coal (though small amounts)
- Hydroelectric power (in some years directly), but also embedded in exported products (what some refer to as "grey" energy).
To be a net energy exporter requires some energy.
Yep. This damn EROEI once again.
The BP statistics don't include the oil that Norway exports in the consumption statistics, but it does include the oil that is needed to produce the oil that Norway exports.
I quickly looked at EIA data. It seems that Norway exports about 10 times as much oil and gas as it consumes locally. Assuming an EROEI of 20, which is a reasonable guess, Norway spends about 5% of the exported energy to produce energy. This would then be almost 50% of what it consumes locally, which would almost explain the 60% higher energy consumption in comparison with Sweden.
The numbers aren't easily comparable, so I may be off by a few percentage points. I would need a complete Sankey diagram for Norway to do a better job. However, the EROEI of exported oil together with other types of gray energy (such as the energy spent in producing aluminum for export) may indeed account for the higher energy consumption.
It's a similar story for Canada, which is a large, cold country with a sparse population and relatively large transportation costs for goods. Canada exports about 55% of natural gas production (NRCan data) and about 75% of its oil production (BP workbook).
An excellent post. Thank you.
Perhaps the next step in this analysis would be to adjust energy usage based on import/export. That is, if a country is a net importer, such as the US, that country should, logically, be assigned the energy used to produce and transport those imports. Likewise, countries that are net exporters should receive an adjustment downward to reflect that the fact that some portion of their energy use is going to goods and services that they are not actually using.
I have seen this done for carbon emissions and, personally, I think it presents a more accurate picture of usage based on actual demand. It doesn't allow the industrial net importers to offload their impact/demand/consumption when they offshore their work force, etc. In short, it generates a consumption-based distribution... "costs" are assigned to the consumer of whatever.
Not sure what the best way to do this would be because I haven't thought about it at all. A simple method would probably be to adjust energy use by the percentage of import/export relative to GDP. If country X is running a 5% trade deficit relative to its GDP, you would increase its energy use by 5%. While not terribly accurate, this would tend towards reasonably scaled adjustment.
A more accurate (and much more complicated) method would be to determine imports/exports on a per-source country basis, and then calculate energy used based upon the relative value of that trade to the exporting country. For example, if the US imports $X of goods from China, determine what % of China's GDP is represented by X, then take that % of China's energy use and shift it to the US. Note that this works both ways. Even though the US is a net importer from China, its own energy use does need to be decreased by the amount of energy used to generate exports to China. This same exercise would be done for every country relative to every trading partner. Obviously, this is much more complex as it requires tracking import/export breakdowns on a per-country per-partner basis. But it would be more accurate. Probably. ;-)
I'm sure their are other better ideas, but those are what came to mind reading the above comments.
Brian
Yes! We should include the gray energy in the energy statistics. This would be more honest. However, BP has no interest in doing that. They are only interested in accounting the energy as it gets paid. They don't care about local energy (e.g. your photo-voltaic panels on your own roof that never passes through any energy counter), and they don't care what happens with the energy after it has been paid.
This may not work very well. For example, Switzerland has a trade surplus, i.e., we make more money on our exports than we pay for our imports. Yet we import about 25% of our overall energy in the form of gray energy.
just a little niggle, quite off topic.
The man is called Francois.
Francoise is a woman.
If you ever met a frenchman called Francois (pronounce fra(n)swa), and you call him Francoise (fra(n)swah ze), I doubt your encounter would go quite the way you envisaged.
While it is nice that "economists" recognize the importance of outliers... it would be nicer if recognition of such occurred on axes that are statistically valid. Your normalisation of both axis on a per capita basis of course invalidates that assumption of parametric statistics. The data are not truly independent.
Which brings me to my main point.
While it is true that many countries (I'm Australian) could do more - blanket statements like this ...
should be tempered by some recognition of some absolute facts.
Australia is an arid continent of 7,617,930 square kilometres
Switzerland is a land locked nation of 41,285 square kilometres TOTAL.
180 Switzerlands fit into the entire continent and about 2 Swittzerlands fit into the smallest Island state of Tasmania.
Being a landlocked nation it is nice and convenient that all the surrounding countries obligingly provide the transport links to the minuscule borders.
I suggest a different normalisation. Make the energy axis a per area one. This will make the axis independent... and seems logical given the large part that transport plays in a countries energy consumption (normally!) you can put your eye candy line on it then...
They might not be "good" reasons... but I suspect there are reasons why a country that derives a vast measure of its "wealth" from secretive banking arrangements might appear as an outlier in this kind of analysis.
True. My remark was directed at the neighboring countries: Belgium and the Netherlands. There is no reason that is obvious to me why Belgium should consume 50% more energy per capita than France or Germany. Australia is a quite different case.
There might be a partial reason for Luxembourg: VAT on gas. Many people from border countries (France, Germany, probably also Belgium) are coming to Luxembourg to fill their tank. I do however not have numbers, but since Luxembourg is a small country it is probably not negligible.
Luxembourg is truly a special case both for energy and GDP calculation since 40% of its workers are non-resident of Luxembourg and most cross the border from France, Germany and Belgium everyday to work in Luxembourg (http://www.statistiques.public.lu/fr/population/index.html). For example there are 137,000 French "frontalier" (trans-border worker) working in Luxembourg which has a total population of only 490,000. So the energy usage and GDP output should take in account the contribution of these outsider but it is difficult to evaluate it precisely. The frontalier contribute to the industrial side of energy usage but little to the residential one. Also they spend part of their money in Luxemburg (food and cheaper goods in general) and part in their home country (home financing, most taxes...). The simplest way would be to remove 40% of the industrial and transportation energy usage but not to the residential. To ajust the GDP would require more investigation in the salaries taken home by these workers and the tax/social security agreements between Luxembourg and its neighbors. Switzerland also has a lot of trans border workers but less proportional to its population.
Wouwh. I didn't know that. I knew that Luxembourg has the highest percentage of foreigners living in Luxembourg (Switzerland coming in second), but I didn't know that there are so many daily border crossers (Switzerland has many seasonal workers, but not many daily border crossers). This indeed falsifies the statistics significantly and may explain the anomalous statistics obtained for that country.
Thinking about it some more, the effect of the daily border crossers can actually be assessed quite easily.
In reality, there are 40% more people participating in the economy of Luxembourg than are counted in the population statistics. For this reason, both the per capita GDP and the per capita energy consumption figures are inflated.
We should divide the per capita GDP by 1.4, leaving Luxembourg with a true per capita GDP of $60,000.
We also need to divide the per capita energy consumption, but by a smaller factor, since the daily border crossers use some of their energy in their houses/apartments outside Luxembourg. It might be reasonable to divide by a factor of 1.3. In this way, the per capita energy consumption is reduced to $80,000. This is still more than the energy consumed by their neighbors, but no longer by as outrageous an amount.
The same, by the way, holds also for Switzerland, because our seasonal workers (mostly waiters in restaurants in tourist places and people working in construction) are not counted in the population statistics either.
Good thinking. This would be a form of gray energy also. However, I don't have any numbers to quantify this effect, and I wouldn't know any easy way to find these numbers either.
There are general elections in Luxembourg in June this year, so some points have been discussed. Taxes on gasoline and diesel seem to be a very important income for the state. A minister said that he could not increase more the taxes because it would have been dangerous for the state budget.
Another problem of Luxembourg is a poor public transportation system and a not very efficient urban planification. You need your car to go to work, to go shopping, to go to the restaurant or the movie theater. A tramway should be built, but it looks like the finacial crisis will not make it possible.
In Luxembourg, it is easier to get help to produce renewable electricity than to reduce the amount energy you need. Access to energy seems more important than saving it.
Luxembourg politicians are very good at having great ideas that are too expensive or impossible to realize, so you stay with the old thing.
That Uzbekistan is already spending more than their GDP on energy according to these figures shows there is a big flaw. My guess is that GDP is a largely meaningless number. GDP is inflated by all sorts of economic activity that doesn't actually produce anything concrete of value.
If I grow tomatoes and eat them I have not created any GDP. If you raise chickens for your own eggs you have not created any GDP. But if I sell my tomatoes to you instead of eating them and you sell me your eggs instead of eating them, we affect GDP even though it is the very same tomatoes and eggs being eaten as before.
A lot of the changes that will likely come about as a reaction to rising energy costs, localization, higher efficiencies, reduced waste, etc. will reduce GDP.
I've heard the argument that the US is in a much better situation with respect to deficits and debt then in the past because our GDP is so much larger. I expect that here too GDP will prove to be sadly irrelevant.
What you just described was the overstatement of GDP resulting from a service based economy. Another aspect of the USA economy is the massive size of the health care and government sectors (including defense spending) adding to GDP yet producing little of quantifiable value (the USA life expectancy stats are unimpressive).
No it doesn't. And the fact of GDP being inflated by pseudoproductive activities can't account for that gap anyway (because wrong direction).
The correct interpretation of the Uzbekistan data would surely be either: (1) it has a negative national balance sheet, heading down the sink rapidy; and or (2) it has a lot of cash income that is below board, so not figuring in GDP, such as drug trafficking, people trafficking.
Reminds me of when I mentioned to a local youth about xx area having the lowest income in the country, and she said that's because the drugs dealing isn't being counted in that income.
There is probably some truth to the objection. The energy statistics don't include energy produced locally at your house that never passes through any meter, and the GDP statistics don't include trade that is based on bartering.
I would assume that a country as poor and rural as Uzbekistan has quite a bit of bartering going on. In fact, bartering may be the dominant form of trade in that country.
Thus, if you have a rural community that produces most of what it needs locally on its own fields, sharing with their neighbors the produce of their fields, such a community will show almost zero GDP, but they still need some energy, e.g. electricity for their houses and government offices.
How do they pay for their electricity? Probably in the form of chicken eggs.
Also, corruption is rampant in Uzbekistan, so rampant in fact that it may significantly falsify the GDP statistics.
Thank you, Francois, I have been working on this thesis for awhile also and it is interesting to see where the price inflection point is. It is critical since at some price point the economic system starts to malfunction after which point energy prices can fall to zero and there are still very serious consequent problems ricocheting through the system.
I agree that relatively 'low' prices start compounding problems, even in the USA. I suspect - but I cannot prove - $55- 60 per barrel prices start unbalancing transport and commercial functions which ripple outwards; the current price level may be enough to cause another round of deleveraging in the credit markets as debt service for many companies requires a large percentage of company aarnings, added to this is higher energy cost and there are only so many employees that can be fired until the doors of the business must be closed.
Actually, I find it somewhat insulting (to Swiss people) calling the Swiss banks mainly responsible for the wealth in Switzerland.
After all Denmark has roughly the same GDP per capita as Switzerland without banking. Now, does this mean, that the Swiss people were only able to reach the same wealth as Denmark because of their non-producing banks? And is therefore the rest of Switzerland's economy much worse than the Danish economy?
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita
Not to mention: The average Swiss is not necessarily wealthier than the average Austrian, because most Swiss are not bankers.
Also, Austrians have lower living costs (rent, health care, food).
Indeed. One of the criticisms of GDP as a measure of wealth is that the GDP is not cost-of-living adjusted.
The Swiss are currently more wealthy than either the Austrians or the Germans, because the cost of living in Switzerland is only about 20% higher, whereas the salaries are more like 40% higher. One would also need to take taxes and social services into account, which vary quite a bit in different countries.
Yet, I don't see it as insulting. The banking sector is a service activity like any other. I don't know what particular economical niche the Danes have found to be able to generate a higher GDP. For the Swiss, the economical niche is the banking sector, which in recent years has benefited from the fact that Switzerland is a stable political island within the EU with a separate and highly stable currency.
Thanks for this. Regarding the UAE, The dark side of Dubai is an interesting read.
Wow. "Interesting read" indeed.
That story about employees not getting paid enough to live in mining towns is fact not fiction. For example the flying doctor service couldn't afford the rents in Port Hedland, Western Australia
http://www.abc.net.au/rural/wa/content/2006/s1592529.htm
The crazy thing is some of those mining towns have been deserted in 2009.
If $120 is the long term limit price for oil maybe we will have damped oscillations. $147 and $36 will never again be the high and low. If $60 is the new low then maybe $130 will be the new high until smaller swings make it level out to $120.
Yes. That is what I said toward the end of the article.
Maybe. We don't know that for sure. You make a lot of hidden assumptions. You assume that the oil price can, as a first approximation, be represented by a linear under-critically damped dynamical system of second or third order.
Unfortunately, I don't believe this to be true. If the price decay would have been caused by the eigen-dynamics of the oil alone, we should have seen a flat roof, i.e., the price should have risen to $147, then become flat, and then turn around. This is not what we saw. We saw a sharp corner. Sharp corners are indicative of something outside the system (an input variable to the system) affecting the eigen-dynamics of the system.
The oil price broke down primarily because the economy turned sour. The deterioration of the economy may in part have been caused by the high oil price, but not exclusively. There were other factors involved as well, and probably, these other factors were even dominant.
For this reason, we cannot say with any certainty that a price of $147/barrel will never be reached again or even surpassed.
BTW the flying doctor service who couldn't afford the rent in a mining town have another plug for little Switzerland; they mainly use Pilatus aircraft.
But how much oil could we really remove from the economy if we had to..and still have a decent life? I don't have any concrete numbers, but I'd bet 1/4 of all the energy consumed in North America is "just because"...because we want to drive to the next city to go to the mall..or because we buy a pizza made in Germany and shipped to our grocer..or because we feel it's OK to drive 60 kms to work because we want to live outside of town in a house rather than in a townhouse in the city ?
I once saw a program on TV that showed fish caught in Canada that were caught here, shipped to China and then returned to Canada to be sold. How much oil was used in this process? How about if we did it here ?
TRUE conservation could probably cut 15 to 20 million barrels a day of oil consumption if the world really set out to make a difference. Sure, it would require driving less, eating locally grown food and the end of buying cheap Chinese made goods in Wal Mart..but would we really be so bad off?
I work in the oil industry and last year I decided I'd return to living a minimal "lifestyle". I have a condo that's powered by wind generated electricity. I live in a building that's central. It's got a liquor store, a grocery store & a variety of other places in the building that offer shopping. At the liquor store, I make a habit of buying locally produced beer, at the grocery store I buy local produce (or I walk to the market 5 blocks away). It means less mango's and more carrots, but my life is just fine. I changed my oil in Jan and I'm at 2900 miles and it's May. I don't buy a Pizza in a box, I make it myself (and it's faster). Sure, occasionally I pay a bit more for a local product, but my life is culturally filling & rewarding.
Maybe I sound like some left wing hippie (not the case) but what's most ironic is that the area I live in is the most desired area in town..and the main street here (Whyte Ave) is often filled during the summer with suburbanites that come here, park their cars and walk around to enjoy my neighborhood. Maybe we should build more of these neighborhoods and let folks live here rather than just hang out on Saturday.
We'll all have to learn to live on less energy. We have no choice. Cf. my recent store Is the 2000 Watt Society Sustainable in Switzerland? here on the Oil Drum.
Recent article, not recent store. (and now I must get back to my learning the Swissish language...)
I meant "story" rather than "store." The stupid spelling checker didn't catch my mistake ( :-) ).
I couldn't life without a Spelling Chequer.
Quoit
Francois/Elvis -- I agree that here in the United States we could reduce energy consumption significantly and not degrade the life styles of the MAJORITY of the population. But at the same time any meaningful reduction would devastate the lives of many millions of our citizens. Yes…stop buying all that junk food and cheap imported toys. But then the folks that sell these products loose their jobs. Same goes for the restaurant industry, entertainment industry, etc, etc. We can all look around and see unnecessary consumption. But while it may be unnecessary for the consumers it’s a critical component of our economy. I don’t know that stats but I suspect the US has one of the highest service industry components of any developed country. We love to pay others to provide services. Unlike manufacturing that generates a physical product which has a life span much of our economy is spent on personal gratification which evaporates almost as quickly as it is generated. We truly are energy gluttons IMO.
Easy solution: retrain all these “non-essential” workers and have them designing solar panels and building wind farms. A nice fantasy but not a practical answer from either a time frame or capital expenditure basis IMHO. The US built a great economy based upon the benefit of not having to be energy conservative. Just as the housing industry here boomed based upon not having to require buyers to be financially capable of maintaining their life styles in the face of economic bumps in the road. The subprime borrowers have already hit their big bump in the road. The US economy is heading towards its big pothole (PO). We built this trap for ourselves and have no one else to blame. I’ve listened to may ideas on how to escape this predicament but have yet to see a practical approach. Yes…lots of great ideas on how to adjust but I’ve yet to see one that our politicians would offer or society would voluntarily embrace if it were offered to them.
Rockman: Crucial point there, well stated. "One man's luxury spend is another man's life-support income" might be a good summary of it.
But one might then argue that if all the hairdressers and trinket-makers starve from lack of custom, the rest of us can still get by (after due grieving). But then those starved non-essential members are no longer buying x, y, and z themselves so the rot goes on perhaps (or does the falling demand hence falling prices resolve the problem?--brain currently too out of joint to reckon).
Meanwhile my mother remains firmly convinced that in hard times people will "need" the arts (and more particularly her pricey music lessons) all the more.
There is a fundamental problem that due to industrialization it takes a remarkably small amount of human labor to satisfy reasonable human needs.
Only part of this is due to energy.
As a case in point: my wife is a true wonder of fibercrafts, she can knit or crochet amazing pieces faster than anyone I've seen. I can beat her output using a hand-cranked knitting machine and I barely know enough to do the finish stitches. The embedded energy in such a device is amortized over the entire useful life of the device and comes out amazingly low.
The same issues apply to many other necessary items, even food production if you take all the oil out is likely to take fewer people today that it did in the 18th Century.
Which brings up the issue: what to do with the excess time? Since the people actually producing are likely to spend as much time as they reasonably can producing the idle time will tend to wind up concentrated in the people who aren't producing.
I have a group of well-educated friends who approach this question now and again and wind up stumped every time.
[Edit]
I saw someone else on here, I didn't save a reference, who suggested that this was actually the primary driver behind the 1930's Depression.
Which brings up the issue: what to do with the excess time?
After gardening and horticulture? There's reading, talking long walks through the neighborhood socializing with neighbors (Italians call this passeggiata ), spending time with friends, enjoying multiple hobbies, playing one's musical instrument(s), ... does there really seem to be an issue here? :-)
Furloughs in a Round-Robin sort of fashion?
The problem is that it doesn't manifest itself as more spare time for people who are otherwise productive.
Corporations have been formed to concentrate the productive potential in as few people as possible, resulting in the spare time manifesting itself as unemployment and employment in non-productive sectors.
The other problem is that this excess productive capacity isn't acknowledged as such (at least in the English-speaking world).
This results in what I see as a massive malallocation of resources in a vain attempt to keep the world working 40+ hours a week when it simply isn't necessary.
In software this is sneaking out in the free-software community, the fundamental economics of software pretty much doom any company whose business model revolves around rent-taking for any software that is doable as a community project.
Well, people could spend their idle time marketing, trading, lawyering, generally bureaucrateering or shopping.
Alternatively people could produce inefficiently, breaking their backs farming a marginal or tiny piece of land, shifting through heaps of garbarge or working in a mine that would not feel out of place the 19th century.
That's just the proven solutions. I've got utopian ideas too but it would be way off topic.
"Which brings up the issue: what to do with the excess time? Since the people actually producing are likely to spend as much time as they reasonably can producing the idle time will tend to wind up concentrated in the people who aren't producing."
These people eventually end up in the finance industry, become extremely wealthy, and over consume, driving up the prices of goods, requiring the producers to work twice as hard to simply afford the necessities, which increases the flow of money, which increases the opportunity for the finance folks to siphon off more wealth… and around and around she goes.
This is what we've done. That and unemployment for the folks without the resources to climb onto the gravy train.
Obviously, it is not an adequate or sustainable solution.
And since the fundamental "problem" is that we can simply do more with less human effort, and in fact with less effort of any kind in many cases, it isn't effected by population levels. If it takes an average of 10 hours a week to meet the needs of each person and there is a societal expectation that people work 40 hours a week to meet their needs then stuff breaks. Worse, people break.
Excellent conclusion. The only reason mechanization, automation and high energy use haven't reduced that "standard work week" in 30 years is because society doesn't want that to happen. Why, I'm not sure.
Greed and vanity have been worked from every angle to the exclusion of many of our less controllable emotions, and when greed and vanity lose grip fear is the trump card always played. Why some feel the inordinate need for power that has brought on this sort of manipulation is of course even more basic and I have no answers there being a classic 'underachiever' myself.
Could it be because those who decided in the name of society have benefit from this arrangement?
Remember how the "standard work week" came about in the first place? Does Haymarket ring a bell?
I grew up in Chicago so yeah Haymarket rings a bell, but it still doesn't help me personally to understand why some so need power. But I was lucky and got education when it was cheap (the big state U. tuition was cheaper than my Dominican Friar run high school's was). Even when I fled the city for the cash strapped north woods and worked harvests for minimum wage I always could see options.
I've been able to skirt the edge, find resource rich areas and benefit from old (and current) union actions and in general get comfortable without trying to jam someone else. Or is that 'not jamming someone else' an illusion as I benefitted from the system plenty and just had enough luck and sense to work it without being totally caught up in it.
I may not see the need for constantly grabbing more power because I grew up in a very energy rich time, and wriggled out the edge of the big struggle while still laddling out plenty of the goodies it was churning up. Hard for me to get any real perspective when I am part of the picture.
You catch my philosphy Robin: why state a point clearly in a few words (like you) when you can write a book. You paint the ugly picture I imagine everyday. As I said the other day, if all these non-essential types were to just crawl off into a hole and die we could begin our restructuring efforts. But they won't. That leaves us with the task of dealing with them compassionately or violently as the situation demands. Perhaps a combination of the two. Either way being on the survivor side of the wire probably won't be too pleasant.
Rockman:
Your post is an excellent summary of why change won't happen voluntarily. There are 101 good reasons why we may prefer to avoid change, why we may try hard to fix a system that isn't fixable any longer, and if the fix doesn't work as it can't, try yet harder to fix it. We throw good money after bad, because we hope that somehow, miraculously, we can trick the system once more.
Unfortunately, physics doesn't care. The planet will force a sustainable life style upon us, whether we like it or not, and with a high probability we won't like it a bit.
To back up Rockman's point, one of the causes of high unemployment during the 1930's depression was the dramatic increase in productivity caused by electrification, farm mechanization and the elimination of work animals. It took many years to develop low cost consumer goods and services markets to employ the surplus labor.
Theories of the Great Depression:
http://www.southerndomains.com/SouthernBanks/p5.htm
Former President Jimmy Carter mentions the plight of farmrs during Great Depression in his childhood autobiography:
An Hour Before Daylight : Memoirs of a Rural Boyhood
He mentions the impact of mechanization on the economy, particularly farming and also talks about the surplus crops and low prices brought about by the productivity miracle.
He devotes a chapter to the practice of share-cropping, a modern form of serfdom.
I read that President Lyndon Johnson's autobiography, a generation before Carter, discusses the hardships of farm life at the beginning of the 20th Century.
Interesting Paul. I suppose we can look at the recent tech improvements (computers, communications, etc) and perhaps see a parallel. The result: excess labor particularly at the lower end of the skill sets. And I suppose it goes beyond high tech. Maybe even using WalMart as a model. They provide the country with a very big chunk of our consumerable goods. My sweetie is a dept manager there. Lots of negative comments can be made about the company. But they are efficient with a capital E. I don't have the stats but I bet they generate one of the best employee/revenue ratios in the US. But this also means they employ a lot fewer folks as a result.
The result: a large low skilled labor force = low cost workers = a good basis for any service industry which depends much more on personnel costs then material costs compared to "hard industries". Add the availability of ever increasing disposable income in our society and maybe it's not too difficult to see how we've painted ourselves into this corner.
Back to your point about the Great Depression. We all know the gov’t set up work programs to deal with the problem back then. I have no sense of that scale or success. But WWII certainly made good use of that excess labor. And the excess labor (at least those who survived the war) eventually benefited from the economic growth and expansion of the post war years. A perfect storm of sorts: a large trainable but under utilized population and rapidly expanding manufacturing/housing industries. Now we’re perhaps heading into another perfect storm: an economy with a shrinking need for a large portion of the labor pool and the loss of the cheap energy the whole system was predicated upon. Maybe the potential salvation just over the horizon is another war. Many talk about the prospect of future resource wars. But many also find it difficult to imagine the enlightened PTB would ever go that route. But that assumption reminds me of a statement a certain general made after WWI: we’ll never see a war such as this again. Now that the newly developed air power can bring death and destruction to the homes of a country’s civilian population, no gov’t would even allow this to happen.
He was wrong.
Rockman reminded me of when he mentioned Wal-Mart, that globalization is the modern day equivalent to the productivity miracle of the early 20th Century. Globalization resulted in the de-industrialization of the USA and other developed countries. I watched that happen throughout my career in manufacturing. As a consulting engineer, I rarely saw new manufacturing capacity meet projected returns. Eventually building new capacity practically ended and the landscape was littered with closed plants. Millions of jobs in the USA vanished in the process.
US manufacturing only survived because machines and computers replaced workers; however, there is too much capacity world wide in most industries.
Our leaders are starting to get the message that something is wrong, but they do not exactly understand what it is or how to fix it. Cap and trade is a step in the right direction, but we need to extend the concept to all non-renewable resources while at the same time giving tax breaks for energy conservation.
I understand that people don't like change, but planed change is better than the alternative.
x
Yes but Naziism and ww2 happened because Churchill & Co thought that by economic bullying of Germany (outrageously punishing a whole nation) they could prevent it from rising again. Naturally this led to Germany feeling itself (rightly) a victimised people and it just so happened that it coincided with the rise of tech enabling them to also develop the means to get their revenge.
The history of recent aggressive warfare appears to be largely one of a long list of failures (except that the arms trade wins all wars).
All that aside WWII essentially ended up a great big fight for control of oil rich regions, with newer industrial powers trying to grab what the old colonial empires had been able to hang on to. Oversimplified but not so very much. The U.S., which had been cruising along in its own hemisphere with little outside obstruction, hung out past the edge of the fight as long as it could and benefitted from it the most in the end.
It is impossible to say if a similar conflict could have been avoided with a different treatment of Germany after WWI. Newly industrialized nations were stretching their muscles and doing pushing matches everywhere, the parameters of the war were set by how strong the nation/machines were and how well they could be kept in repair and supplied with fuel.
That fight was on the way up when access to abundant energy and resources would allow a great growth spurt. The next big fight will be on the way down when the overgrown nations can't find a way to divide the pie peacefully any longer, unless, of course, some amazing things happen in the interim.
Oversimplified indeed... you describe the conflict with Japan. Oil did not play that role in the conflict with Germany.
Except for the UK and Japan, access to oil was not really an issue until oil fields and railroads got bombed.
Then again, a different treatment of Germany might not have forestalled war in Europe.
Russia didn't mistreat Germany though that was where most of the fighting took place. Instead, the very existence of the USSR was a casus belli.
Italy went after French controlled oil in Africa immediately, Japan seized Dutch controlled oil in the Indian Ocean region right out of the gate, and Germany turned on Russia and headed for the Baku oil fields while Russian grain trains were still headed to the Fatherland. Saudi and Iraqi oil would have been the big prize once Egypt and points east and north were securely in German hands . Oil was central to the whole conflict. No doubt the ideologies were used to motivate peoples but the nation/machines craved oil, and we have been making sure our machines get fed for some time now.
The outcome of the war certainly had some big losers, mostly in the eastern European sphere and mideast. But the main goal of the allied victory was achieved, and it was explicitly stated repeatedly. The big three wanted to shape the world so there would not be an armed conflict between the major powers for at least 50 years. We are now at 64 years and counting. New raging conflicts with more devestating weapons would probably have been much harder on nearly all concerned than even the worst misfortunes that befell those east of the curtain. We will see what this new world order brings.
Off-topic but there are factual issues here and I think tunnel vision about oil is always worth addressing on TOD so here's a quick reply:
The USSR was supplying Germany with oil before the war. Germany had Romanian oil too and could make do with that and coal.
Germany only headed for Baku in the second year after failing to take Leningrad and Moscow.
They didn't pull all the stops to take the Middle-East like they did on the Russian front. Italy started that mess.
Oil was strategic but not central.
Nazi Germany had many irrational policies from a realpolitik perspective, some of which are quite sensitive. Tread carefully when discussing that regime's priorities.
OTOH, Japan had the US & UK maneuvering to cut off its supply before the war. Without oil, it was finished.
No assigning of rational motives or policies to the Nazi regime was intended. Rational motives for most wars are hard to assign and rational policies don't start them. The underlying pressures that caused WWII are probably more important than any sets of motives. Kind of like plate tectonics, enough pressure and something got to give, hard to predict exactly how much or where or how big the aftershocks will be but without the pressure very little would happen.
So if I misassigned the rationale for the axis strategy I will turn my original statement on its head. Not realizing that oil was central to the conflict is what doomed the Axis strategy to failure. Whether they knew it or not once the war was started it was about oil who could get it and who couldn't. That might seem awful simple but when you have an ocean on each side of you in 1940 and long transport is your game, you know you are dead in the water or flat on the runway without oil, that might not have been as obvious to someone running coal locomotives over land.
Not realizing that oil was central to the conflict is what doomed the Axis strategy to failure.
Actually, the Japanese knew it quite well. They just hoped to grab enough oil early on to make it for a while, and hoped they could intimidate the US with some early victories.
They miscalculated on the psychology of the US, not oil.
Similarly, the Germans hoped to knock out Europe and the UK quickly, and then do something similar to Russia, before the US got in.
The Germans miscalculated the UK and (especially) Russian psychology, as well as the willingness of the US to get involved. You'd think they would have learned from Napoleon's experience in Russia.
one of the causes of high unemployment during the 1930's depression was the dramatic increase in productivity caused by electrification, farm mechanization and the elimination of work animals. It took many years to develop low cost consumer goods and services markets to employ the surplus labor.
I took a look at that source, but I don't see a really good, quantitative discussion of this point. It seems pretty vague and undetailed. Have you seen anything better?
I've looked at the investment and solar electricity (the most expensive renewable) costs about $0.20/kWh. The truth is that it's more expensive than fossil fuels (currently). I don't think our qualities of lives go down because we pay a $100 electricity bill (for renewable electricity) instead of $50.
Not here in Europe or in Northern America. However, for much of the developing countries a price of $0.20/kWh is not affordable.
It would, however, encourage efficiency. In some developing countries, almost halve the power output from their generating plants is converted to heat in the transmission network.
There's of course no reason for "developing" countries to pay as much for electricity as in Europe or North America.
The price of the globally-traded fuels is only a small part of the price of electricity.
Hi Anti-Elvis and all;
"But how much oil could we really remove from the economy if we had to..and still have a decent life? I don't have any concrete numbers, but I'd bet 1/4 of all the energy consumed in North America is "just because"...because we want to drive to the next city to go to the mall..or because we buy a pizza made in Germany and shipped to our grocer..or because we feel it's OK to drive 60 kms to work because we want to live outside of town in a house rather than in a townhouse in the city ?
I once saw a program on TV that showed fish caught in Canada that were caught here, shipped to China and then returned to Canada to be sold. How much oil was used in this process? How about if we did it here?"
Two good points here to understand our predicament. Firstly, there is too much scope for wasteful discretionary spending. I don't think I need to elaborate on this, except to say that advertising and marketing of non-essential items has to go. Secondly, globalisation has got to go.
How to voluntarily wind back on discretionary spending is a big question that no doubt will require action on the mass psychology of the human race. Orwell comes to mind here and the excesses of totalitarianism that could result. The ballpark is so big, we have become lost after going out for that burger.
Globalisation has been designed to use as much energy as possible to facilitate the most rapid upward transfer of money to those at the top. The financial crisis we are now experiencing is the first torpedo shaking the bridge of the good ship International Plunder.
I think that more national economies will, with the contraction of international trade, encourage consumption of nationally made products and services. This is currently happening already in China. I read a segment on BBC World recently where appliance salesmen were heading off into the rural areas. The photo showed innocent smiles from a farmer couple as they showed off their new washing machine. Who knows where they were going to get the water to feed that thing! They said they wanted to be like the city people. It was so tragic I laughed.
In Thailand, they recently gave 2000 baht (around 25% of a typical public servant's monthly salary) to government workers to bolster consumption. Further to that, the government is mooted to be giving national holidays to encourage people to travel within the country and buy locally made goods and services. TIT (This is Thailand). Those of you who live here will believe this for sure.
As far as I can measure it, my family consumes about half the energy of the average family in the UK, without significant impact on our lifestyle. It is simply a matter of a little research, planning and attention to detail. We could probably cut our use in half again, and still retain a pleasant, but a lot less convenient lifestyle.
However, that is simply our direct energy consumption. It does not include the energy used in the making of physical commodities that we buy (apart from food, which we have some control over) or the energy spent on our behalf maintaining the national infrastructure, industry, social provision, education etc.
As the available energy declines (as it must in the UK for local reasons, faster than global depletion) it is the infrastructure and social provision that will suffer fastest, because they are too large to micromanage to a low energy form.
It looks like average UK primary consumption is around 112 KWh/person/day (without evem considering the embedded energy in our unbalanced imports!) You would maybe expect personal direct primary consumption to be about half of that since Government consumption is ~half of GDP.
If you think that a human can produce around 100 watts of continuous useful work, say 1Kwh/day, we each of us have around 100 slaves working on our behalf day in, day out - we live better than Kings of former times, all of us! How will we replace most of those slaves in maybe as little as 10 years?
Indeed ... but this is true for all of us in the industrialized world. The UK is certainly no exception to the rule. For various local reasons, the UK may get hit a bit sooner by energy shortages than some other nations, but the end effect will be the same.
I tried out the pedalpowerometer at the Centre for Alternative Technology and I'd be amazed if most people could do even a day average of 20 watts, or even 10. So more like 500+ slaves.
By the way, this massively conflicts with the notion above that people will have lots of leisure time. Then again Wyoming's(/Airdales?) post a while back explained how he had to use all hours of the day.
What, exactly, is wrong with "left wing hippies?" Most of the great ideas of the 60's have been incorporated into mainstream practice. It just takes the average person a while to catch up.
I'm not certain this is something to praise. What's there to love about bankers in bell bottoms or scruffy-looking debt-collectors for the powers that be?
Good old-fashioned hippies are fine with me, but not the way they've been incorporated by the BAU model.
What your post (and this methodology) do an excellent job of highligting is the problem with using a measure such as the dollar (or any fiat currency) to gain an accurate measure of the worth of oil. The post-peak "price" (empirical value in whatever fiat currency you choose to consider) of oil will, in my opinion, be a better reflection of the strain on national treasuries (and the strength of the Nation-State system, and the ongoing perception of the strength of that nation, resulting rates of inflation/deflation/currency exchange, etc.) as caused by peak oil much more than an accurate reflection of oil's changing value.
I do accept your statement that oil will increase in value post-peak. I just think we need to use a different measure for "value." I'm sure there are many excellent candidates, but to me the most meaningful measure of value is relative value: how much oil (and oil derived products) can the median person buy in Country X (or globally)? My proposed figure for the "value" of oil is ($barrel)/($median income). Pick whatever fiat currency you like (though the choice will certainly have an impact). The resulting value will control (as well as possible) for true inflation/deflation, as well as for the unforseeable types of economic restructuring that peak oil will bring to financial markets. I also look to the median income, not the mean income, as I think that will better represent the impact of peak oil spread accross society.
What are other thoughts for better measurement methodologies?
Just a thought. Maybe it's time to put together a historical chart of this approach...
I hear you, and I agree with you. The above analysis provides a very incomplete picture of the entire oil situation.
First, it doesn't consider availability. It only considers price. If the shelves in my local bakery are empty, the price of bread doesn't matter much, as I can't get it anyway.
Second, the prices in Dollars given are measured relative to their 2008 buying power. The analysis ignores inflation and it ignores the exchange rate between different currencies. Maybe some of the seeming wealth of the Swiss is an artifact of the over-valuation of the Swiss Franc relative to other currencies?
Third, there is no room in this analysis for the effects of EROEI. An increasing percentage of the energy is being used to procure energy.
I also agree with you on your remark about median income versus mean income. For this reason, I also computed the per-nation averages, assuming that each nation represents a more or less homogeneous society.
Yet, I consider the analysis useful, because it is simple and because it does provide a theoretical upper limit for the price of crude.
It must be possible to reconcile this monetary analysis with that of the 'energy cliff' proposed by Euan Mearns et al. The curve (E-1)/E for E declining to 1 is perceived as having a shoulder at around 10>E>8. The implication was that primitives (hunter gatherers) had EROEI less than say 8 and moderns were above 8.
This could arguably mean that moderns cannot afford to expend more than say 10% of their total energy flow (food, services, shelter) on front end sources like fuels and electricity. Does that mean people on $80 a day (8h @ $10/h) should spend less than $8? The implications are baffling.
Better measurement methodologies? I have previously tried here to advance a concept that is just as crucial as EROEI, and that is EROHI, standing for Energy Return On Human Input. Thing is that it's not just a matter of whether we have to spend all our (hitech) energy on producing the energy, or whether we have to spend all our money on it.
We also have to consider the point of EROHI=x, where we have to spend all our human resources (time, physical stamina, mental endurance) on the energy-production. For instance there might (unlikely) be immense reserves of energy available from picking over waste sites to winkle out all the dumped peanuts and other scraps of food, but our human limits might (would) make it impossible even though the costs in money or energy would be minimal.
[I've also tried to replace EROEI with the less confusing EGOEI (energy gain on energy input) but people are such stick-in-the-muds. Of course EGOEI can be negative if you do something really daft like transporting low-grade coal from the moon to use as a fuel source; otherwise the crucial point is when EGOEI hits zero.]
You could possibly consolidate EROHI and EROEI by considering the direct and indirect consumption of energy workers (which would of course include raising a family as well as the kids' education as labor has to reproduce itself).
But oil isn't the only kind of energy we consume. If you add up the spending on coal and natural gaz, you should get a higher portion of the GDP spent on energy, although perhaps not much different spending per kilowatt. It would be interesting to see how close to the GDP we got with everything put together.
I looked at total energy, not oil. I then converted the total energy to an equivalent oil price, because oil is currently the most abundant source of energy in use.
And it gets more complicated than that. For an economy consuming an expensive fuel, it matters greatly where the money spent on the fuel goes. If it is retained in the local economy, i.e. it is profits for the locally owned oil industry (think Norway), the effect is much less severe than if it is imported fuel (think the US state of Hawaii). In the former case, much of the expenditure gets recycled into the local economy, in the later case, it goes to some combination of foreigners, and international investors. Of course for the system as a whole, that portion of the cost of a commodity -say oil that is in excess of production cost (what we would expect a lot of post peak) is really wealth transfer, not wealth destruction. And of course some of the production cost is redistributed in the form of wages, and profits for suppliers. I think a correct accounting would be a daunting challenge.
True. The effects of rising energy cost are vastly different for net energy exporters and for net energy importers. The higher the percentage of energy that a country needs to import, the more it gets hit by rising energy cost.
I think whats missing here is what I call the infrastructure problem. Switzerland by most measures has a fantastic public transportation system and serious constraints on sprawl and its population does not change much.
For the US I've found that the per capita energy usage is amazingly consistent across the nation even though median incomes vary by almost 2X across the country and the distributions about the median differs even more.
What this signals is that the infrastructure was built out with certain expectations and these are not easy to change. Its one reason I expect US energy consumption to remain stagnant at close to its current levels despite large variations in energy prices.
If its a infrastructure problem then at some point there is no simple answer its taken about 50 years to build out most of the current infrastructure in the US using very cheap oil along the way. Its effectively irreplaceable. And the majority of it is a huge malinvestment if you consider moving to a train centric village city model. Very little of it has any value in and expensive oil world.
So you have the catch 22 the current infrastructure is priceless because it can't be replaced and yet it locks us into a transportation pattern and demographic pattern that would result in it having zero value if we changed to a different more compact one. Building the new infrastructure in a high priced oil environment is at the minimum unpleasant.
Given the social political and economic situation in the US which has developed a wide gulf in incomes and some seriously misguided social norms if you look at the social aspects of change its even more disheartening. Here again the Swiss stand out for a European centric culture having a national identity closer to Japan then their European neighbors.
In the end it seems your left with a situation not unlike dealing with the rebellious teenager you simply have to wait until they grow up and learn the truth. I've finally noticed that more and more posts across a gamut of websites I read have begun to recognize that regardless of what we do the future will be painful. Its like facing a man with and axe and being given the option of choosing which body part will be chopped off.
Something will be chopped no question about it and for the US I fear it will be the head.
I am afraid you are correct. The inertia in the system together with the unwillingness of the people to accepting and adopting change makes it unlikely that we'll agree to anything more than cosmetic surgery.
We shall live sustainably - our planet will see to it, but we may get there kicking and screaming rather than thinking ahead and planning.
Francois and Memmel,
Surely two big energy savings are additional home insulation and improve fuel economy?. Both could reduce home heat and fuel by 50%. Add improved appliances should also reduce appliance energy use by 50%. these are all fairly easy and not too expensive but require government or utility programs to make then happen.
Yes, of course. I discussed this extensively in my recent article Is the 2000 Watt Society Sustainable in Switzerland?
Neil1947
As far as I know the Romans only needed to muster a few legions remind its citizens of the grandeur of Rome and go and defeat a few flea bitten barbarians and it would be bread and circus's forever.
Government programs regardless of their intent are not a cure they depend on the wealth or excess of the underlying economy. Take your statement and apply it to any African country and its as true there as anywhere. Even in the case of the imperial dollar there are limits.
Britain knows the pain of having the former reserve currency.
The problem is of course as the real economy declines the value of money declines along with it. Nothing you can do about it. Future debts cannot be paid it simply does not matter if your the government or the people or the wealthy etc consider the condition of the US when it finally acknowledges the problem and goes to try and institute these policies.
And of course they would have to compete with every other needy cause and political pork belly project for money.
And the most basic problem is fairly simple why have we not gone to fuel efficient cars and well insulated houses and even electric trains already ?
The vast majority of solutions to the energy crisis have been available for decades I'd argue that even PV has been technically feasible for at least ten years if you factor in economies of scale bring costs down. Certainly the technology improves with time but our ability to change our energy use patterns has been possible for a long time. The peak of US oil production in the 1970's was I'd argue sufficient and ample warning to change. And you can add in the problems in the Middle East on top of that.
So we had and excellent set of reasons to change and the ability to change.
Yet we have not changed.
Why ?
Well because we did not have to change thats why. I won't go into why we did not have to but simply use the heuristic that we obviously did not have to change because we did not change.
Why do you think that Americans will one day realize as a group that we must change ?
At what point does the truth become self evident and a national consensus develop that ensures we change. And even if there is a growing movement for change how can you ensure its not subverted by to use the biblical approach false prophets. In the US at least most of the people promoting change seem to be closely aligned with solutions that line their own pockets and offer the American people the "truth" that they need suffer only a minor inconvenience of say plugging in their PEV. And even your suggestion all we need to do is insulate our homes and drive more fuel efficient cars and we get a 50% reduction in energy usage and nothing else need be done ? Maybe the need for some government support.
Well that sounds fairly painless does not really have a huge impact on American society and is doable. Yet on the opposite side the problem we face implies immense pain if we choose to not make this fairly small sacrifice. Almost all the scenarios of following BAU end with some sort of collapse or dysfunctional system. This suggests that something is intrinsically wrong with my argument.
One has to conclude that well the fear of doom and gloom is misplaced and things really won't get all that bad so all we need to do is conserve. But this leads to the problem of why change until we have to. And how much pain will we have to suffer before we change ?
Obviously it can't be all that much otherwise this solution is not a solution since other problems would be surfacing such as why insulate a house that has fallen 75% in value ?
How do you buy a fuel efficient car with no money ?
Your proposal seem to assume that somehow everything will work out to ensure we have just the right amount of pain to cause us to change but not so much that our ability to change has become curtailed. Despite the addition of a requirement of government support its really just a variant on letting the market work. I.e and efficient true free market can solve any problem. Adding the requirement for government support only cloaks the argument to obscure the fact its not even possible in a free market. You remove this attempt to hide what your really saying and all your saying and trust me your not alone is that the solutions exist when the market is ready we can implement them.
This effectively means carry on as usual nothing to worry about when we decide it makes sense to change we need only insulate our houses and increase the fuel efficiency of our cars.
I'm fully aware that you don't believe your actually saying this but I'd argue its because you don't understand the real problem that has to be solved. Its trivial to spot these fake solutions since all of them imply we need not change our infrastructure or can migrate slowly. Our current investments are sound everything we have built will retain its value. I think any archeologist's would have no problem showing you example after example where this proved false. A drive through just about any city in America will show block after block of infrastructure investment thats been massively devalued.
I hate to go biblical and use the hell fire and brimstone approach that I was subjected to as a child but once every few centuries when the fundamentals are incorrect fundamentalism is the answer.
Believe it or not I'm a doomer not because of the problems we face but because of the solutions that have been offered. We will fail because we will seize these sorts of easy out solutions. We probably will create a home insulation program thats federally funded and ends up insulating one thousand homes for 50 million dollars. We will create draconian fuel efficiency requirement laws probably with federal dollars to offset the cost. And these laws will have loopholes you can drive a Hummer through. So your solution will be warped degraded and eventually of little value. The reason is it integrates well with a corrupt system and can readily be absorbed into the BAU approach. I'm fully confident that many people will make a lot of money as these sorts of partial almost painless solutions are proposed and adopted and I'm just as confident that once the graft machine is done with them that very little real change will occur. Look at the credit system for pollution thats developed in answer to global warming or the corn ethanol farce for examples.
This is why I like electric rail it forces a fundamental change to the system thats difficult to devalue esp if its coupled with dropping highway funding. Force the people to ride the electric trains or walk. Thats real change. As this infrastructure change forces demographic changes then you can look into refurbishing the structures that are now valuable along the new rail network and secondary transportation needs around the rail network. But you have to make this switch not only to electric rail/trolleys but also to moving the funding for the highway system to zero. Its not because less drastic solutions if correctly implemented are not possible its because they are not possible in the corrupted social environment that exists today.
You should be able to see that my solution (Alans) also causes major changes in the value of our current infrastructure for the most part it forces the value to zero for at least 50-80% of the infrastructure developed since WWII. This is the real agenda yes the trains act as the catalyst for new growth but the primary goal is to kick Americans in the face and force them to create a new more efficient society by taking away their toy McMansions and SUV's and bought politicians by force.
Quite realistic, I must say.
memmel,
"And even your suggestion all we need to do is insulate our homes and drive more fuel efficient cars and we get a 50% reduction in energy usage and nothing else need be done ? Maybe the need for some government support."
I didn't say "nothing else need be done" I said a 50% reduction would be easy, and has been done before in US, due to higher gas prices and CAFE standards average mpg went form 12mpg in 1980 to 18mpg in 1990. Look no further than across the 49th parallel to see how little energy a well insulated home can use in -30C winters. I used a Canadian insulation(loan) grant to halve my NG energy bill in 1985! and payed it back out of energy savings. It's not rocket science, it's not communism, it's not un-American.
There are cars being sold now that get 50mpg, why not set future CAFE levels at 45mpg??(including SUV's and light trucks). Is 45mpg CAFE standard draconian? We don't all have to make a life changing conversion, we just have to replace >90% FF over the next 50 years with renewable energy, improve energy use efficiency and eat a little less red meat.
Memmel, I always like your posts. But it struck me that toward the beginning of this one you opined "Government programs regardless of their intent are not a cure they depend on the wealth or excess of the underlying economy." But then toward the end you were praising electric trains as an important development to promote.
Are you envisioning a privately run electric train transportation system? Are there many of these in operations? And if not, do you mean something different by "government program" than these kinds of public transit projects.
One could turn you dictum on its head and say the economy depends on a wider range of "government programs"--from highways, to defense, to schools...
Many agree that it really took the war to get us out of the Great Depression. But a war economy is not exactly a capitalist economy. It is essentially a command economy--an enormous "government program." That it took this to stop a depression is essentially a confession that capitalism doesn't work, or at least doesn't work any where near as well or as independently as its most ardent supporters would have us believe. The space program also would likely not have gotten us to the moon in so short a time if it were a purely capitalist enterprise. And of course our current failure of capitalism finds "nanny government" coming in to pick up the pieces where "wealth and the underlying economy" collapse so fantastically.
Why not give private electric rail a chance ?
The only forcing rule needed is to require the rail lines to be electric and require a growing renewable electric source.
The common good is served by requiring electric rail use ever increasing amounts of renewable electricity.
This is what laws are for.
As far as right of way to build the rail we can release all the right of ways occupied by our streets for rail in other words you only need one more law that if someone wants to build electric rail or trolley lines their imminent domain claims trump the public use for roads.
Then you need do nothing more but remove all the subsidies for roads raise the gas tax to 2-3 dollars a gallon and use that money to pay down debt our national debt. You should not give the money to subsidize renewables or electric rail. But you should remove the burden caused by misguided expansion by eliminating the national debt. You can certainly make our road systems into toll roads if you wish to maintain them.
Simply reversing the subsidies and also removing the unfunded debt and thus reducing taxes outside of those on unsustainable uses is all thats needed. Same for coal fired and ng fired plants tax the living hell out of them to reverse the environmental damage they have caused including of course wast of electricity. Its precious.
Basically give renewables a level playing field. As the debt as paid off and non-renewables dwindle obviously you can reduce government expenditures substantially allowing more expensive transportation to be possible.
I a believer in pure capitalism with the one exception that its the peoples duty and the law to ensure that the commons are not damaged by private companies. Outside of protecting the commons including allocating some land for common good enterprises like rail and accepting the environmental taxes and yes even for renewable powered rail its not a free lunch. I don't see why the government need be involved.
I see the government as having two basic functions in the future.
1.) Safeguarding freedom of speech and limiting personal choices where it impacts others ( basically the ten commandments). Abortion will continue to be a thorny issue but this would now be entangled with limiting the number of children people have so its a even tougher issue. We have technologies already to control reproduction and they can be refined.
2.) Safeguarding the environment the goal is zero impact but obviously this is not fully obtainable in the short term. Certainly limiting population is tied in deeply with environmental impacts but so is of course our lifestyles. Certainly this includes research into environmentally friendlier ways of living but it does not include selling the results.
Results from public labs belong to the public. You can see how this rule is tightly intertwined with the first rule.
I don't see that it need to anything else its job is to preserve our planet for future generations and basically prevent people from killing people but also from having to many people.
Now back to electric rail long term do we even really need it ? I'd argue that if we got our population low enough we could simply use the natural waterways. Solar powered blimps could extend our range and even solar powered planes. Are more likely plain old horses.
Areas not readily reachable via water craft become nature reserves. I'd guess we might also allow roman style roads for horse and solar car traffic this might even include using very light rail. Or eventually maybe not even that. If you wish to go beyond the local waterways its by horseback into the wilderness or blimp.
Now this does not preclude a decision to continue to explore space I suspect that with effort we can create environmentally friendly launch systems. We can assume technology would continue to advance thus micro satellites would probably become the norm. Robotics would continue to advance removing some of the manual labor tasks etc. Turning most of the earth into a nature preserve still allows us plenty of resources to continue to advance technology.
I know this response sounds like some sort of mangled sci-fi treehugger dream :)
But why not ?
This would leave most of the earth as a ever present place to explore and see and record.
People interested in the earths natural beauty and differences would have most of it to watch and study. New species could be watched and eventually nurtured. Whole ecosystems would evolve with humans rarely becoming involved.
We would also I hope continue to explore or solar system and beyond.
Now if you find this end goal reasonable you need only work your way back one step at a time to the present. Once your back to today you should I hope see the first thing that has to happen is we must rapidly wind down non-renewable approaches this does not mean we help the better approaches except to ensure that they are given a level playing field. In time even renewable electric rail would be viewed as to damaging to the environment. Its not the answer but its a step in the right direction. Dismantle the roads and replace them with electric rail then reduce the need for that etc. Also obviously the global population must be reduced. This process of reducing our population and the amount of ecological damage we allow will have to work together. I think my end goal that I outlined above is a very sensible first goal for mankind and I think if we tried to approach it we would understand what our real goals should be but I'd suspect they would simply be a refinement of this idea. Then we do it.
This suggests that the real problem with humanity is we have not decided what we want to be when we grow up. I'd argue that my career goal for humanity is the right choice.
The rationale for public rail is that rail is often a natural monopoly (depending on the density).
The efficiency gains from cooperation and standardization are also unusually large for rail.
Private enterprise works best when there's competition.
Interesting idea letting all the rail enterpreneurs have at the roads. I can see it now twelve rail configurations in races to monopolize the most promising routes, many being ripped out before they are finished because the companies were speculating on the cheap just to get the routes and were bought out by a company using another much better rail design. Not a pretty picture during a time of resource constraints.
I'm guessing government might have to be more involved than saying 'go to it boys were just going tax gas enough to force everyone to you.' Yahoo!
Shouldn't we use the tried and true model, have the government build the system then basicly give it away to parties with excellent connections claiming the private owners taxes will more than make up for the give away prices. Of course before that happens all kind of special tax breaks are added so that in the end tax money subsidises the railroads that the tax payers built and gave to the enterpreneur who charges them to ride it. That is the U.S. version of capitalism at work in the real world. Pure capitalism, never happened never will. Commerce is what exists and it always has been an interplay of public and private under which the ground is forever shifting.
Toll roads not a bad idea, but they are bought and sold commodities if held privately, any multinational could own critical bridges and routes. Not the most secure situation in the world we live.
And of course the ten commandment thing and reducing the population have been in conflict for some time. See the pope on birth control. Why use the old testament commandments? Wouldn't it be simpler to use the two commmandments in the new testament--both love based. Oh I guess that could be a problem. Well if the two laws won't due ten won't either we might as well jump to 282 and go with Hammurabi.
Sorry memmel there will be nothing simple about solving this mess if we can manage to muddle through at all. Nice thoughts though.
" you only need one more law that if someone wants to build electric rail or trolley lines their imminent domain claims trump the public use for roads.
Then you need do nothing more but remove all the subsidies for roads raise the gas tax to 2-3 dollars a gallon "
None of that sounds the least bit controversial and I'm sure all of your pure capitalist friends will be wildly supportive of huge tax hikes...not.
I like many of the other details of your ideas, but I remain dubious about the idea that limitless greed (or pure capitalism, or whatever you want to call it) is likely to be crucial in the struggle to save the earth and save its resources and the integrity of its living systems for posterity.
I'm interested that you like using government for controlling use of the commons, but if nearly all other powers of the government are stripped, it is unlikely (to put it mildly) that such a limited government will be able to stand up to rapacious private interests.
Given what we have just gone through, I can only conclude that those who think that pure capitalism works are either in collusion with or identical to the moneyed powers that most benefit from it, or are naive in the extreme about how power works.
I am distrustful of government power, but I am also distrustful of corporate power. Any concentrated, extreme power can lead to corruption and destruction. I can never quite get why those who are so paranoid about gov. power seem so myopic about the dangers of corporate power. Again I suspect that many who take this position (not necessarily anyone on this thread) are specifically working for corporate interests.
Exactly if you can't figure out how to do this then you can't save the planet.
To reply to your posts and to the others obviously I'm not suggesting maximum efficiency.
As far as rail being a natural monopoly I'd suggest that only the best routes are a natural monopoly in the sense that they are desirable.
You nailed it with your post yes I'm suggesting that the problem we have to solve is to turn mans natural greed via a very small number of rules such that it works to save the planet.
The only suggestion is we start with a level playing field. If people think that taxing the roads won't work then I suggest that the government demolish the bridges and bomb the road beds and tear up the existing roads to ensure a level playing field. And shut the car factories.
I'd argue you just as well burn up the subdivisions and tear up the roads to create a customer base for renewable powered electric rail. The existing infrastructure has no value it simply keeps your customers from paying for the new infrastructure.
I know this sounds radical :)
But seriously most of our current investment have no real value in a renewable future all people are arguing about is how fast they will be devalued and making some probably incorrect assumptions that they can actually control the rate.
I'd argue that the value of our current infrastructure is going to zero within ten years regardless of what we do or don't do.
And I think if we have to we can build out electric rail and trolleys with men and horses so I'm not all that worried about that side.
So I really don't see that its all that important how we transition into a renewable society the transition period from the big picture is short at most we are probably talking 20-30 years while the final renewable society should last for hundreds if not thousands of years.
It does not matter if we destroy everything and rebuild effectively from scratch since so little of our current system has any value to a renewable society it would all be replaced fairly quickly anyway. If we manage a less painful transition fine. But we must redirect human greed such that it works to enhance the environment.
For those that think this is impossible many parks and reserves are actually owned or donated by the very wealthy they are not adverse to saving the environment. You just need to ensure that lowering your environmental impact is the most profitable choice if so human greed will go that way. Let the wealthy flout how many thousands of acres of biodiverse reserves they support.
Did you know I'm now supporting one hundred square miles of rain forest ?
Ohh thats nice dear but a few of my friends and I got together to create a thousand square mile preserve you really should not go at it alone.
How we get there does not matter all that much but what matters is we get there.
Mid 19th century London may have had as close to pure capitalism as any place before of since. The omnibus was had arrived in London from France in 1829. A man by the name of Shillibeer had brought the concept over and started out with two high quality omnibusses that each did very well filled to the max with 22 passengers each trip. It didn't take long for competion to spring up, and the situation to get near chaotic in the London streets, with wild races and all sorts of other disorderly conduct. Shillibeer was driven out of business in London before the government stepped in to regulate the traffic. A lucrative licensing program was instituted and all learned to live with it while the Londoner's gained efficient and reliable bus service. At this point new entries into the business had to pay their dues (buy their routes) to the established businesses or they would fail as the existing owners would put a bus or two in front and behind each of the new entry's busses and thus destroy his custom.
If we are to go for big time light rail it would seem some lessons from the past could be learned. Government entities who controlled the roads would auction routes (much like FCC bandwidth sales) and rigorously liscense all rolling stock as well. Rules that forced competition could be implemented at the outset. Government revenues from these sources could be directed to reshaping and connecting commons spaces in the new denser cities. This just a quick and dirty look at what I think is more likely to work and be achievable.
Been working my way through Henry Mayhew's 'London Labour and the London Poor.' It is instructional and not all that bad a read.
"The only suggestion is we start with a level playing field"
Nice idea in theory, but capitalism always involves haves and have nots, and the haves have among other things political clout control the laws and keep it from ever being a level playing field.
I would say that this is an even more fundamental aspect of human nature than greed. Greed is just one component of the human psyche, but economists reduce all of human character and inclinations down to this one. Having taken control of global society, they have set up a system that tends to reduce all of us to this one element of our being. In the process they are quite successfully dehumanizing humans and denaturing nature.
Correct but I argue that this and its closely related problem of overpopulation which is really just a form of greed is the problem we must solve.
Obviously redirection of greed into less harmful pursuits is part of the solution.
And obvious example assuming desire for glory is a form of greed is sports vs war.
And of course desire if you will is a member of the branch of human emotions related
to greed. I'd say my desire for a sustainable society is itself a form of greed if
what I wish comes to pass then others will be deprived of wealth in the form of never
exploiting non renewable energy. Its certainly a greedy concept. In this particular case
maybe its noble since we would be saving for future generations but good or bad its
still greed. Greed obviously need not result in bad outcomes.
In many ways religion and science replace respect as a reward vs material goods.
Greed in the bad sense is just a misdirection of a group of human emotions or ways of thinking that often are considered good.
And that certainly gets down to how on earth do people allow others to control them its certainly not because of a few digits stored on some hard drive somewhere but because these digits can be exchanged for goods and services with one service being killing people who disagree with the concept.
Greed in the bad sense is thus closely liked with being your school yard bully on steroids.
Certainly this is a hard problem to solve if you read my writings then you know I'm looking at something that will eventually require us to evolve into a new species that does not fall into this trap of killing others for personal gain. I'd argue that once we solve this we would probably not be human but some post human species. Maybe we do it by keeping our technology and eventually modifying our own genome maybe its thousands or millions of years of raping the planet and fighting over a ever smaller set of resources in an ever more polluted world. Or maybe its simply starting by mentally beating the problem of greed with slow natural genetics eventually weeding out the the whatever genetic aspects give rise to it.
Who knows but just because its a really hard problem to solve does not mean we should not get started working on it asap. I'd argue that letting it follow its natural course and ignoring the problem will lead to the worst way to solve the problem as we fight for life on a ever sicker planet.
Its a battle that must be fought and it may take uncountable generations to win but I'd argue that in a lot of ways the excesses of the 20th century have shown the horror of not fighting.
For me at least probably one of the most fundamental changes that has occurred in my thinking since I started reading the oildrum was to being thinking in terms of generations both in the past and in the future. To consider trying to make changes that may not bear fruit for hundreds of years if ever. Its like planting a tree that probably will live long after you die. I've always loved the art of Bonsai and its probably on of the few works that people undertake as individuals that passes through many generations. A painting created by many painters with time passing unheeded.
http://www.linkroll.com/bonsai-trees/what-is-the-oldest-bonsai-tree.php
http://www.bonsaigardener.org/oldest-bonsai-tree.html
The point is we can do things that are far greater than ourselves. This case was one of simply keeping small trees alive no small feat over hundreds of years and we almost failed and could well fail eventually.
Even here if you simply agree that I'm correct and its a multi-generational problem that effectively open ended you can look at proposed solutions in a new light. The EV crowds claims quickly becomes suspect. You start asking how we are going to maintain our networks of roads under renewable conditions. And you take a look at the roads at least in the US and you recognize that a enormous amount of effort is needed just to keep them patched much less the fact that most of the infrastructure is rapidly approaching the end of its service life.
Within thirty years very little of what people claim to be saving will even be functional.
You look at the way the houses are constructed their energy efficiency maintenance costs etc. Just the use of short lived asphalt shingles for roofs quickly becomes a serious long term problem. You quickly begin to realize even if we are successful at dodging the bullet of peak oil it may well only gain us 10-15 years at most before simple decay becomes impossible to stop. Matt Simmons sees this in the oil industry but its rife through our society we are really in the duct tape stage of empire well past the golden or even gilded age.
The fact that you can take this way of thinking and work your way back to the present and ask the right questions and see the real problems make it even more probable that its the right way. In fact if you dig just a little bit deeper and ask why we let our infrastructure get in such a mess often because of poor construction or ignoring maintenance we find very quickly that it was greed that invariably lies at the heart of the problem. Indeed the greed we are trying to protect with partial solutions quickly and obviously becomes the reason they will fail as your simply trying to build on the misguided greed of previous generations and we have reached the end of the line and its not just in resources but across our entire civilization. Simple greed in the bad sense is no longer capable of preventing a collapse as a result of greed. Trying to build the right answer on top is obviously a waste of time. Better to throw as much of this society away as fast as you can.
Now with that said I see no reason to head to Alaska and live in the woods your not throwing away our real knowledge but the old web of lies and of course you have to consider who still owns the bullets. But you can start making the right decisions and thinking the right way and slowly but surely or if needed decisively and rapidly as the problem requires change first yourself then your neighbor.
My first serious move is to get the hell out of Los Angeles I've warned for a while that this sucker is going down I'd suggest that the news agrees. It does not take a genius to realize what happens when you take a large population of disgruntled poor people and a few wealthy people who have not problems arrogantly displaying their wealth and cut the police and medical care. What a lot of people don't realize what all the spending in California was really bread and circuses to keep the rabble occupied take it away at your peril.
All its going to take is one poor Mexican refused care for his child and it dies and all hell break loose. This place is a tinderbox literally with the drought and soon socially.
And its overdue for a major quake. And this time around the middle class is upside down on their mortgage facing foreclosure. All I can hope is it does not blow in the next two months. I think I still have time but I don't feel comfortable putting my own life at risk based on attempts to time the collapse of complex systems :)
Now once I'm out of this soon to be hell hole I'll personally work on other longer term issues :)
Memmel, the ever loquacious, thank you for your thoughtful (as always) response and best of luck in getting yourself out of LA.
I applaud you multi-generational approach; I've heard it referred to as generational justice. It seems to me to be pretty much the opposite of the usual idea of capitalist and consumerist instant gratification and self aggrandizement (greed), so I'm still not sure how this squares with your other positions. Not that I am free from contradictions--chalk full of them, in fact, if I'm honest with myself.
LOL
I fancy myself as the worlds first true futurstorian :)
I'm just recording the death throws of the Duct Tape Empire in hopes these bits may make it into the future.
http://www.ducttapeguys.com/howto/
I've got no real position on the matter I'm going to focus on growing tomatoes and playing around in physics/chemistry/software I happen to have managed to become ok at three fields and and expert in programming computers.
I'm sorry I have to try and semi-share something. One of the top car manufactures in the world turned me down for designing the next generation car computers and recently I've been asked to put in a proposal for designing the next generation car computer systems for some unnamed manufacture.
Trust me I laughed my ass off when I realized that they had come back to me :)
I find it really funny to be honest the world has six friggin billion people but when we hit a problem level that I work at is so small that problems actually make it right back in my lap. This means to me that the number of people that actually do innovative shit and think and try to create stuff is vanishingly small.
I'm not saying I will actually get to do it this time but I'd not be surprised in the least to see this problem roll back into my lap one more time if the guy that does get it does not think.
But this is yet another reason why complex systems fail the number of people actually capable of stepping out and taking "positions" that may well shift drops off dramatically.
All kinds of pathways tend to cyrstallize and eventually shatter.
And of course if I get this gig its probably going to bankroll my post automobile plans and trust me I find that the most ironic part. If things work out well I'll be able to leverage building the most advanced car you can imagine into the money I need to create a business based on a post car world.
Turns out that greed can be dealt with with a mental version of judo. I've got no idea if things will fall my way but you can see that if your thinking is correct you can do amazing things given the opportunity.
I'd say I don't really have a position the wealthy will buy these cars well after the common folk can no longer afford them so they are not a bad idea in the sense that they have a market but my position if any is to couple if you will things that are not important but which people are willing to pay for to things that are important but people might not have the money for. The mistake that this world makes is it does not do this coupling.
Chanel designers would never create a bag for Wall Mart shoppers.
Why Not ?
Why not a brand called Chanel Common with a very small number of designs with cheap but decent manufacturing sold at Wall Mart released say every three years (instant collector item) ?
No doubt in my mind that way way way to many of the six billion people in the world are boxed in by taking "positions". I don't to my knowledge have one.
Memm- can you do us (and the planet) a favour and design those car systems with a bug so they self-destruct after ~4 years!
You do appear to be boxed into a position of making your posts insufficiently concise but others here seem to have the time/energy to read them all through so mine is maybe a minority view.
Nice examples its the routes like the 3G spectrum licenses ( hopefully people wont' pay stupid amounts).
The main thrust is KISS (Keep it simple stupid) If you keep government involvement very very simple and clear its difficult to engineer the relationship. For example if the government is selling routes to the highest bidder this really cuts down on the room for corruption vs giving money to the lowest bidder.
Excellent depiction memmel. Without you skills I've left to having make rather blunt statements regarding various "fantasy solutions" as I can them. We cannot re-train the burger flippers into solar engineers. You utilization of the general infrastructure problem is the best offering I’ve seen of THE obstacle to reacting to our situation in a constructive manner. But so far all we hear from our political leaders (both reds and blues) is that we shouldn't worry: the new infrastructure is just around the corner. All we need do is have the gov’t spend some more $'s.
The fact that the Democrats and Republicans are united in what the "correct" solution is should be very telling.
From my understanding of politics and the end of empires when the government becomes unified and emboldened to peruse incorrect and illegal solutions the collapse of the system is not far away.
I urge you to go look and I think you will find that just before many empires collapsed the governments did not fracture instead they did the opposite and became focused on supporting the status quo at all costs. In modern times the system falls within ten years of this event.
Look at Germany and Japan and the Soviet Union and Argentina and even Venezuela and Mexico.
Or Pakistan and Eygpt. Thats not to say the ten year rule is absolute. For Egypt for example I put the beginning of the end of Egypt as the death of Anwar Sadat. They probably have lasted longer since their correct path was cut down early. I argue that the eventual collapse of Egypt was sealed with the death of Sadat.
I'm using Egypt as and example because I'd argue right now what I'm saying about Egypt's future is far from obvious and if you understand Egypt then you will realize that the US is a bloated variant of the Egyptian problem. Or own Sadat may have been JFK or Carter but we murdered both in reality and metaphorically the leaders that had the chance to change the path America was on when change was possible. We had the right people at the right time and rejected them. And no it does not matter who killed JFK what matters is he was not replaced with a similarly charismatic leader.
In any case both countries have now reached the point that the status quo is nearing the end of the road and both will be increasingly united on doing anything right or wrong to preserve the current system. And both will fail in the near future. And whats interesting is both rejected the correct road early and gained many decades of a slow death spiral in return.
memmel, one sentence you wrote: ..."just before many empires collapsed the govts did not fracture instead they did the opposite and became focused on supporting the status quo at all costs" is something I've been thinking about for systems facing collapse in general. Just before collapse, the system races into overdrive and there's a "boom". I think its like an engine that's broken but still functions somehow, frantically running until it doesn't.
Toyota: one year before collapse they had record sales, built more factories than ever
Housing mkt in US: one year before subprime, the biggest year ever for the builders and developers
Credit markets: credit card issuance up and up until poof
Dow Jones: climbing and climbing like a meteor with all the M&A activity until crash
Chrysler---a "boom" in negotiations, lawyers retained, creditors demands, paperwork activity...then bankrupcty
Can we say this is now starting to happen with the US Treasury market....all that activity last fall and winter then a crash...happening...now?
How about when cash turns bit by bit into worthless paper: people will be rushing on a last huge spending binge to turn it into something with some value, a watch, a pair of socks, a bag of beans....then the Age of Malls is really over. What is this called, a currency crisis is that right? (....only 287 shopping days left until.....!!!!)
My question...for anyone out there who knows math....is there some kind of mathematical model that puts this prediction into some sort of formula? It has to do with compensating while straining to mainatin the status quo.
Unfortunately ---or fortunately--this means that you can tell when your own field of work is facing imminent collapse! First you will have a strange "boom" in activity. ( for example (5 times normal) number of students applying to public and community colleges.......noone can afford private colleges......SO in a few years I'm guessing no students will be applying to these colleges. Could this be correct?))
Well if you think about it in EROEI terms or maximum energy then right before a system collapses it reaches its maximum complexity in the sense that it has to do the most work to maintain net EROEI. Everyone is working their butts off cutting down trees to keep their houses warm.
Or my example for small town America you have 100% employment with everyone working in the housing industry.
For simpler systems right before collapse the herd is fully exploiting its feeding region and the predator population has one more year to expand its population. So prey reaches its maximum heard size then the predator population reaches its maximum. The next year further expansion weakens the herd as they get less food per capita and the predator population is larger and preying on a weaker prey population.
Now whats missing is right before you reach the maximum the herd has fully searched its food region i.e it is utilizing all the resources and its EROEI has already begun to decline this is covered at first because the herd can simply search a larger area for a net gain.
Intrinsically it seems to me that EROEI can decline steadily for some time as long as you can grow the search region it looks like growth is continuing but slowing. But when you hit the limits of growth you hit a wall.
In terms of oil you have a fundamental shift in the equations when you have fully developed most of the oil bearing basins on earth. Production decline rates steepen dramatically as you lose your replacement production the bulk of which came from expansion of production in known fields. What this implies of course is that most of the reserve growth thats been claimed over the last 20 or so years is not that at all but simply aggressive expansion in known areas. Its simply ever higher depletion rates.
In fact I'd argue that depletion rate is a sort of higher version of EROEI.
For a finite resource its really a equation of the Depletion Rate (DR)*EROEI*(New field)
Net Production Rate = (Depletion Rate)(EROEI)(New production)
Some undefined equation of the three.
At first the depletion rate can be increased rapidly with only a small change in the EROEI and new field production works to hide the fact that the time to replace a field is dropping.
Average field lifetimes starts falling but its not a big deal because you simply bring fields on faster. The overall system grows and EROEI increases but only slowly.
As new fields can no longer be found the EROEI of new production goes to infinity and it simply no longer contributes.
Increasing the depletion rate of existing fields now both causes the EROEI to decline and shortens the lifetime of the fields.
Eventually EROEI constraints on both existing and new fields make it simply not worth while to try and maintain the current production rate.
However the depletion rate is now at its extreme probably greater than the replacement rate.
I.e we are draining fields in five years that take ten years to bring into production.
Production nosedives in the desert.
Some of the possible production rate changes are simply breathtaking you could have 10% of your producing wells shutting down or dropping production by 50-90% every year. Thousands and thousands of wells esp horizontal ones water out and are shut down or go into final recover mode. Assuming we hit a 20% depletion rate at peak and peak was in 2005 the absolutely worst case I could come up with is 100% production decline 5 years later.
Given the square wave like production profile 70% of this decline would be in the last two years. Of course in the real world this is not true it will be something less all our wells are not at 20% depletion and all where not drilled and started production five years ago.
And of course underlying this you have dispersive discovery. But the problem with dispersive discovery and the shock model is I think its difficult to come up with the right depletion number. If I'm correct and most of the reserve additions are actually incorrect and are really simply ever increasing depletion rates then given the size of the reserve additions we are in deep deep doo doo. This can be seen by the fact that reserve addition represent at least 50% if not more of our claimed oil reserves.
And understand in the symetric case 50% of the oil is produced during the decline phase with about 25% of that in a long tail at low production rates.
Basically if I'm right and my math is right the world is 75%+ depleted in oil that it can produce at greater than 50% of the current production rate.
By my estimate we are on our last 100GB of oil that can be produced at rates even close to todays rates. Or basically about 3 years. But our interest is only in the first few years when production rates fall by about 10mbd and if you include export land effects if my ideas are reasonably correct and oil production peaked in 2005 and depletions rates are indeed close to 20% then the math is simple.
3-5 years post peak TSHTF.
All I need is a reasonable guess at depletion rates and a good global peak estimate.
The probability of events like a new peak in 2008 are zero. Once the system peaks its done its absolute over finished. Increasing depletion rates and having discovery well in the past ensure this.
So EROEI is what really kills you in the end but what sets the stage for EROEI to be such a destructive force is increasing the depletion rate of a finite resource. This ensures a finite asymetric production profile with the decline in EROEI accelerating at some crazy rate in the end.
We actually have a real world model in the UNG shale plays. They are effectively a fast version of my model. Production started about 10 years ago expanded as new discoveries and production expansion grew as long as the rate new production was added was faster than decline rates then you get net growth. Then prices dropped expansion has for all intents and purposes stopped and thus given a 50% annual decline rate if I'm right production should rapidly head to a low level within 6-12 months as most of the wells go into steep decline.
You don't have to watch oil but can watch North American NG production which is a speeded up version of what I'm suggesting. If it does collapse and you agree that depletion rates are high for oil then oil should collapse.
And just to finish the most important factor seems to be that the system transitions sharply from one thats effectively unbounded to one thats bounded it literally hits the wall.
Do you have data on this? Being in California, I note our carbon emissions per capita are roughly half of the US average. Carbon of course is not a one to one proxy for energy consumption (we use a lot of hydro and natural gas), but I certainly think the per capita (or per GDP) energy consumption here is considerably lower than the average.
I wish I didn't think this is likely, but collectively we are just too hard headed, and prone to follow those who spout political propaganda.
So you have the catch 22 the current infrastructure is priceless because it can't be replaced and yet it locks us into a transportation pattern and demographic pattern that would result in it having zero value if we changed to a different more compact one. Building the new infrastructure in a high priced oil environment is at the minimum unpleasant.
Hard put to phrase it any better, memmel.
having zero value is probably somewhat extreme, though when looking at our sprawl it doesn't seem so.
Very interesting analysis, Francois!
I also think that the question of the highest supportable price of natural resources is paramount and that it should be sorted out as soon as possible.
This also seems to be the main underlying difference between the "pessimists'" and the "optimists'" view concerning the future supply of oil, coal etc.: The optimists think that there much more oil can be produced (e.g. from oil sands) because more resources become economically available as soon as the price rises. Whereas the pessimists think that the world economy cannot afford a much higher oil price.
There is an extensive German research project under way to assess the effects of higher oil prices and I hope that this will also give some evidence about the maximum supportable price level.
From its predecessors and the interim results I learned that (at least for Germany) the oil price roof is expected to be much higher than US$130.
However some parts of the economy and society are much more affected than others. For example many economy sectors aren't directly affected as they can pass through the higher price to the consumers (they'll only suffer by the overall declining purchase power). And the poor parts of the population is more affected than the richer people (didn't this trigger the current US recession: banks giving credits to increasingly impoverished poor people?).
So due to this complexity it is also possible that although the "average" economy could support a much higher oil price the system will crash much earlier due to some overlooked cracks in the basement.
Hopefully not. This is what we have social services for. An individual country, such as Germany, will hopefully decide to support its financially weakest members so that they can cope with an increasingly difficult situation. As the cost of these social services will rise over time, the tax burden on the wealthier segments of the population will have to increase also.
More bothersome is the question of what will happen across borders. The risk of resource wars being fought is real and present.
This seems critical to me. I see it all coming down to "How much suffering of fellow citizens is a society willing to tolerate?" As much as the well-off are willing to watch the poor starve in plain view will be the determining factor in how high prices for scarce commodities can possibly rise. Just reading an account of a poor family in Ireland in the 1930's and from that it appears to me that civilized people can find lots of reasons to ignore neighbors starving to death.
Bingo you hit the real core of the problem.
There is no limit to how much pain and suffering that can exist. Everyone will always walk past the poor and wonder why these people don't just go get a job.
Look at that guy with his starving wife and kids why on earth did he go off and have kids if he could not afford to feed them. The nerve.
Mohamed eat all your chocolate cake there are poor starving kids in America they would love to eat it.
This is another and powerful reason why you won't see our economy transition to renewabales there simply is no collective we to make the transition. Those that could benefit have nothing to offer those that are not hurt have nothing to gain.
If you read about the Great Depression you will notice that you did not see people with steady jobs offering to share them with others to reduce their own work load and help out the collective us or we. Sure to some extent people will take pay cuts rather than face the gamble of a layoff but that only goes so far.
Whereas in reality those resources were already available at that price, just the undercutting competition has disappeared.
World economy? Rich people will afford the higher price (therefore 'optimists'). But the poor will be unable to get to work, run their tractors etc. Now in the midst of those two is there something rightly called the "world economy" (in general or a system) which entirely collapses in the face of too high a price?
I don't see any "world economy", what I see is instead 3 or 4 international economies. There's the top 5% worldwide economy, people who produce nothing tangible and live on investment, with a higher concentration in "developed" nations but representation everywhere. Below them are a wealthy merchant/professional economy of perhaps another 15%, no real worries. Then the working poor economy, a third group, and the abjectly poor economy, the fourth, making up the remainder. Some cross-fertilization geographically, but still identifiable. Any one nation's outcome in the coming scramble will likely depend largely on how large the proportion of people who self-identify in the fourth, the lowest level economy, group they have in their overall population.
Not sure of this, just pitching it out there.
Len: You're right to be not sure, as I think you've pitched wide of the mark.
The working person in most developed lands has major dealings with all the other groups. Gets his banking and insurance and loans from level 1, buys services from level 2, has to shell out to support level 4. So they're not separate economies.
On the other hand, I do recognise a concept which is related to your conclusion. Money, wealth and ownership are mere beliefs in people's minds, and when the day comes that a critical mass of people no longer find those beliefs to be useful, then something catastrophic happens, as the last Czar of Russia and the last King of France found out.
I believe we are not far off a new such a catastrophe, but one that dwarfs the French and Russian revolutions this time.
There's the top 5% worldwide economy, people who produce nothing tangible and live on investment,
Do you have any data on this? From what I've observed in the US, most of the very wealthiest work as hard or harder as anyone else. They consume a lot more, but that's a separate question.
big philosophical debate on the tangible part, we might not want to go there here.
hhhmmm. Well, my observation is that they expend quite a bit of effort, and work pretty long hours. Now, perhaps one might not think their work is valuable, but setting that aside, would you agree that the image of the leisure class sitting around at the pool-side is out of date?
I'm really asking, as I haven't seen stats.
its an overachievers world...huge part of the problem from my biased perspective
The timing of this article couldn't be more perfect, because today I was wondering, now we are post peak, if the world economy will never get out of this recession due to the higher cost of energy. If every time the economy gains enough momentum to grow, the price of oil rises due to greater demand causing a recessionary effect, then will we ever get out of this recession? Maybe a permanent recession is simply a function of post peak.
That is what I am thinking exactly. This point was brought up in the discussion of my previous article Europe Forum Lucerne: Energy – A Conflict Area, Trends and Horizons. Xeroid suggested that peak oil is an economic phenomenon more than a resource issue.
I am slowly coming around to his way of thinking. If the price of crude oil cannot rise beyond a given value, then the production of oil will end as soon as all of the oil has been produced that can be extracted from the ground economically at that price, irrespective of how much more is left in the ground that could be produced if the price of the commodity could be raised further.
Although the price of oil will not ever climb to $1000/barrel, the price will invariably rise to the point of breaking, i.e., it will always hurt, which is another way of saying that there will be a permanent recession and contraction.
In part. While I suspect that we will have periods of recovery and recession that are tied to oil prices, the sectors of the economy that will recover the most quickly will be the ones that are less dependent upon oil. The parts of the economy that are more dependent upon oil will be the ones that might not reach recovery before the next downturn.
If its cyclic process like lynx and snowshoe hare populations instead of a crash, maybe there can be some adaptation.
Economis is the science that studies the allocation of resources by mankind. Of course peak oil is an economic phenomenon.
Been wondering this myself last couple of weeks. But nah, too simple, too obvious.
Though, I am an Average Joe.
And I'm good at simple! :)
That we may never get out of the recession because of declining resource availability (on a per-capita basis) is exactly my thinking. We used to obtain growth by a combination of using more resources and using them at higher efficiency. The resource quality is declining and we have reached thermodynamic limits on conversion of energy to work and products such as commodity chemicals.
We are in the initial stages of the long predicted decline. I expected it to materialize as a financial crisis in the beginning.
Our leaders wasted the necesary time to make an orderly transition, so now I fear that it will be disorderly. History hold some frightening examples.
In real terms we could very well be heading for years or decades of recession. However it will not take the money masters long to learn how to fudge the GDP in response to a post peak scenario. They'll just print money until GDP shows an increase. And they will further doctor the CPI to more effectively eliminate the cost of energy and food (and anything else "real") from their calculations. And with a controlled media, the general public will never understand the sheer criminality of what their "leaders" are doing, even when 50 million Americans are living in tent cities. The tv will tell everyone that we had to move into the tent cities to be safe from al qaeda or whatever. On a positive note, the tent cities will have cheap big screen tvs with endless American Idol type content.
As best as I can determine you computed the per capita energy consumption for each country as the total energy consumed from all sources, not just crude oil. Is this correct?
For the U.S. I get:
21 Mb/d of crude oil consumption
310 million people
GDP: $13 trillion
365 days/year
7.4 b/toe
11,630 kW·hr / toe
((21 Mb/d * 365 d/yr / 310,000,000 people) / 7.4 b/toe) * 11,630 kW·hr/toe
= 39,000 kW·hr/person/yr for crude oil
Your graph shows the U.S. consuming about 90,000 kW·hr/person/yr. Since the price of electricity does not rise much in the U.S. when the price of crude oil rises, assuming change in the price of crude oil corresponds to the same price change for all other energy sources is not right. The price of crude oil for the U.S. would have to rise to about $1,700 / barrel to consume 100% of U.S. GDP. $200 / barrel for crude oil would consume 12% of U.S. GDP assuming demand does not decline in response to the price.
I think you lumped too many other energy sources in with crude oil. This kind of price rise would cause demand destruction in countries with a lower GDP to energy use ratio thus reducing the amount they would spend on crude oil. The U.S. would not consume 100% of its GDP until the price rose to $1.08 / kW·hr. This ratio on a country by country basis looks like it would be good for estimating the order in which countries would be harmed by rising price.
I think Francois is correct in his assumption to take the corresponding price changes for all other forms of energy. First, an increase in oil price will increase the demand of electricity (substitution) which will increase the price of electricity (since that capacity is also limited - or you ration it to x kWh per person to maintain the price level). Second all coal etc. used for the majority of electricity generation will require transportation mainly by oil driven transport.
Electricity prododuction is expanding fairly rapidly in Sweden but it is alomst all nuclear and renewabels. The price of the electricity controls who get the benefits of the production but the cost in resources and workhours controls the overall usefullness for the economy. The price might get high but it is not obvious to me that expensive or hard to get oil must make nuclear powerplants and wind turbines expensive to build and run.
Yes, as Francois freely admits, there are limits to this analysis, though it does point out some surprising possible problems some countries may be facing. I was especially surprised the UAE may be facing problems.
One weakness is a kind of implicit assumption that well being of a the people in the country is completely determined by their cash economy. I think the analysis is most relevant for advanced industrial countries.
If the citizens of your country are mostly goal herders with no cars, electricity...to begin with, how much are they going to miss a reduction in the vanishingly small amounts of ff energy they use. Any such reduction is likely to effect most heavily the small numbers of the economic and political elites in these countries.
We have discussed this issue a number of times before here at TOD.
Cubans may suffer relatively little, because they live on a tropical island where they can grow food year round without need to use energy for storing their food during the winter months. Also, Cuba is already now (thanks to the U.S. (!)) "deglobalized," i.e., they don't import much energy at all.
An Indian tribe somewhere in the middle of the Amazon rain forest with little to no contact with the rest of the world won't even know that peak oil took place. If at all, it may benefit them, because the big forestry machines will stay away that used to compete with them for their habitat.
Yet, these are exceptions to the rule.
Good point. I of course meant "goat herders."
I think another point in Cuba's favor is that they have not been imbued in the ideology of "me first" capitalism. A habit of cooperation and sacrifice for the common good will doubtless be of great help in collective survival.
(And, no, I'm not claiming that Cuba is any kind of paradise or populated by saints. Industrial Socialism is only slight less destructive than the capitalist variety mostly because it is less effective at globally exploiting resources. As you say, much of their ecological and sustainability "virtue" today is the result of the US embargo and the Soviet collapse. But I still think that at least the negative advantage of not having the extreme individualism and consumerism of western capitalism drummed into them may be a benefit, whether or not communist ethics have any such benefit or have been successfully instilled in the population.)
The way the majors policies have shaped the countries around the world sometimes almost looks like a big science experiment trying out lots of designs, with Cuba being the control group.
I think we need to differentiate between price and cost. The price is usually higher than the cost, with the profit going to the seller. If we are simply talking about a rise in price, then the only effect is to transfer wealth from the buyer to the seller. The seller could just sit on the money, but in practice they recycle it back into the buyer's economy by buying whatever they have of value to sell. The problem is when the buyer has nothing to trade. Total global wealth is maintained, although global economic instability is probable (has happened)
What we are really worried about is the cost to the producer - which means in practice the EROEI. When that starts rising (EROEI falls) then we get global loss of wealth. Hence it is as noted by Jeff, the price relative to median buying power that is important.
Yes.
Every country needs to be looked at individually. I used oil equivalence in the same way that BP and IEA do it. Oil is currently the most widely used and most versatile form of energy, and therefore, it makes sense to convert to oil equivalence.
According to the data that I used (from BP), the U.S. would consume 100% of its GDP at an energy price of $0.48/kWh.
Francois,
It's only valid to link other energy prices to oil where they can be easily inter converted. For example heating oil replaced by NG, or electricity. If all the oil used for heating and transportation was replaced by battery electric vehicles the actual consumption of electricity would only rise by about 25-30%. Electricity prices would not rise to $0.48/kWh, because new wind solar,and nuclear electricity capacity can be added for much less than this, even if NG generated peak electricity rose to $0.48/kWh.
I can accept that some of the costs of new electricity capacity would rise with higher oil but oil price only directly impacts gas prices through drill rig costs. For example of the EI for wind only 5% is for transportation, most of the rest is for steel and cement(coal prices), and this can be recycled so it's a once only cost, just like the steel and cement in hydro dams lasts for centuries.
Surely you also have to consider the effect of prices on longer term conservation by people choosing higher mpg vehicles driving the better mpg car on longer trips. These take more than a few months so were not observed in 2008, but were observed from 1980 to 1992 because prices stayed higher longer than a few months.
Interesting approach to maximum energy prices. As a rough first order approximation I plan to remember $0.37/KWH and $0.48/KWH.
You could go into this in much more detail breaking out types of energy (oil, coal, natural gas, hydropower, nuclear,etc.) but if you do I suspect the benefits of accuracy would begin to be swamped by secondary effects. As energy prices rise economic structures change, currency values change, and things like this begin to distort ratios. In my opinion this is valuable at this level but unlikely to return much benefits from refinement.
You might want to look at what I did with the Ayres Warr model of economic production (see http://math.univ-tlse1.fr/userfiles/schindler/Articles/ayres-warr-1/Ayre...). According to Ayres Warr the important quantity to look at is exergy production. What I found is that the more efficient we are in using energy, the higher the price can go. Your editors have promised me a slot to advertise this link in the near future.
schinzy,
Surely this conclusion has to emphasis ...higher the price "can go", if the energy supply is not limited, for example solar or wind energy, the price will be held by marginal cost of production. This of course will limit to some extent efficiency gains. We saw this with the introduction of electricity, prices continued to drop for 50 years even though electricity use became more efficient, because production became a lot more efficient( and consumption rose dramatically) improving the distribution efficiency, which lowered the price and increased consumption. The process stopped when all low cost hydro electric sites were developed or coal became more expensive to mine or transport or burn.
You could argue that solar and wind energy resources are much larger than hydro and will continue to decrease in costs with improved technology.
With electricity and most internal combustion engines we have done a remarkable job of approaching thermodynamic limits, therefore, there is not much room for further efficiency gains. Along with declining resource quality, these factors explain the slowdown in economic growth of past decades. (The USA once had the second largest oil reserves of any nation!)
We have also done an amazing job of improving life expectancy, wo we now have a large retiree population to support (also high health care costs).
Making wonderful electronic gadgets and making them more affordable will not do much for the economy when costs of basics like food and energy go up.
David Murphy and Charles Hall wrote a paper examining this very topic, via the lens of EROI. They came to the conclusion that that maximum price was about $250 per barrel. The main reason for the reduction is that you need a lot of infrastructure to use the energy (cars, roads, etc) and that infrastructure has to be paid for.
Here is a link to the paper:
http://web.mac.com/biophysicalecon/iWeb/Site/Downloads_files/EROI_Min.pdf
Nice article!
But comparing countries by nominal GDP per capita is like comparing mining towns by nominal salaries. Purchasing power matters. And while we are at it, why not measure both axis in barrels of oil equivalent? Using data from your sources and PPP data from Wikipedia, I calculated a ratio of boe "produced" to boe consumed for a few countries:
Switzerland 20.1
Germany 16.5
Japan 15.6
India 14.9
USA 11.2
China 7.1
Canada 7.0
Saudi Arabia 6.6
Russia 5.7
UAE 5.5
Kazakhstan 5.3
Uzbekistan 2.6
These numbers suggest that China and India are in different classes. And UAE is not as bad as you say. Although Uzbekistan still at the bottom.
Interesting point, it may shift the 'dots' significantly.
Also, I wonder how this chart would change if the Human Development Index (US is 15th on the list) or Genuine Progress Indicator were used instead of GDP.
Very good suggestions. If and when I have more time, I'll try to rerun the same graph replacing GDP by some other variables. It will be interesting to see whether I get the same clusters of countries or whether the picture changes significantly if one wealth metric is replaced by another. Right now I cannot do it. I have 8 thick research proposals that I must digest for a panel review.
'Sixteen tons' was a big Tennessee Earnie Ford hit when I was a kid.
That song was about late 19th early 20th century American coal towns, the source of energy for our industialization. In many company towns the coal miners could never clear their debt to the company store and they died young (black lung got my great grandfather in PA).
Welcome to the world of severe resource on constraints. It looks a lot like the world we stood on to build this one which has so quickly drained the resources.
Kind of reminds me of the old joke: a guy takes a tour of all the rooms in hell and is given a choice of which he wants to spend eternity in. He pipes up with no hesitation "I'll take the one where they are standing around drinking coffee with raw sewage up to their nipples. They are talking and laughing and the coffee is good. The sewage must not be too bad after a while." Just as soon as he gets into the room he has chosen to spend eternity in the overseer grabs all the cups and orders "Everyone back down on your hands and knees, COFFEE BREAK'S OVER!"
We may have a few choices before we reach that point but time doesn't look to be on our side.
"16 Tons" was my favorite song for a long time too
Luke,
When the first peoples arrived in N America they didn't have access hydro, oil or coal "resources", your grandfathers generation didn't have wind solar or nuclear resources available, just as our generation doesn't have fusion energy so hydrogen in water is just as unavailable as oil energy was to native Americans. My guess is more wind energy was developed in the last year than the energy produced in the first 20 years of the oil industry. Just think what people had in 1880, one kerosene lamp for light equivalent to a 40 watt incandescent bulb or a 8w compact fluorescent, for 6 hours a day,each person now uses 30 kWh a day, 600 times the useful energy. We are not going to go back to 8watts even when all the oil and coal and gas is exhausted, wind power now provides 30watts/person and hydro 100 watts/person, and wind is growing at 10watts/person/year.
Neil,
I didn't mean we were going back to my great grandfathers energy consumption levels. But for your numbers to be able to compare with great grandpa's you have to find what the total energy embedded in his company store bill and the total energy embedded in yours assuming the situation falls that far. Our gigantic just in time delivery system sucks up a godawful lot of juice. I'm betting someone here has a best guess at the energy content of 1880 Forty Fort PA loaf of bread and that of a similar 2009 one. That difference should be staggering.
Just heard that old TEF hit on the radio the other day Luke. Always been a favorite of mine. I also understand the "company store" trap. But this has me thinking about the current gov't response to our economic problems. Haven't the US tax payers (including the unborn) just signed up big time to the store ledger? The gov't is THE company and all our industries are the mine. And we're buying the preservation of our unsustainable lifestyle from the company store daily to the tune of billions of $'s. And just like your grandpa: no hope of ever making enough to pay it off. You work till you die and then your offspring inherit the debt and follow the same cycle…all the way to the grave. I’ve never bought into the theory of the US eventually defaulting on its massive debt. But I can picture your grandpa sitting around a coal oil lamp chatting with the other miners and fantasizing about the company store catching fire and that ledger going up in smoke. A fresh start for everyone.
This is a poor analogy.
An independent nation isn't run like a mining town unless the government chooses to. Such a government can more easily be overthrown because it has no out-of-town police or military to call onto should the populace get restive (as it often does in exploitative mining towns).
Ledgers are occasionally put on fire, sometimes literally.
But you're right: a default is not likely.
Inflation is probably what will downsize the debt.
A poor analogy HFat? You send your check off to the company store last April 15? Maybe not since you don't have to worry about the company sending "out-of-town police or military to call" upon you and demand payment. I suppose it's as they say: freedom is a state of mind and not a state of reality.
I don't think H lives in the U.S. so April 15 might not have much significance. But to emphasize your point ROCK everytime the U.S. spend/borrows $3 trillion (a number about in the middle of what gets tossed about these days) every man woman and child is on the hook for $10,000. That is $40,000 for a family of four. The tab at the company store is climbing fast.
Correct. In spite of my gringo handle, I am subject to a different schedule.
We're used to being mistaken for gringos, even on pages labeled TOD:Europe. I even try to play a gringo in order to be understood (I would not be mention Haymarket around my folks for instance).
But there are things I can't seem to get used to such as the trouble so many of you have thinking rationally about taxes.
The US was born as a tax revolt. We haven't gotten over that bit yet.
:-)
Was it from this the movie "Fight Club" got it's inspiration?
It certainly had the same underlying tension.
By the way up thread
it was my GREAT GRANDPA
I'm not that old.
Most interesting well-presented article. Reading your appended comment makes me wonder though. You say the poorer countries will become bankrupt sooner. But (as others have already hinted) the question arises of how important that energy input is to the poor country anyway. How much does it, or can it, rely on cowpower, horsepower and manpower which your analysis appears to overlook? And how much of the poor country's economy is non-commercial, hidden from the GDP stats?
From these considerations the possibility arises that the poorer countries might not really be so much closer to bankruptcy, and or be less resilient in face of losing their energy consumption options. Can anyone here followup anything to these questions?
Then there's of course the power of the sun captured through photosynthesis or simple heating.
This vague notion of bankruptcy is problematic.
I think a better question is how could a poor country sustainably pay for its energy imports? Generally, the answer is going to be: with its exports. Countries will almost always find something to export, even if it's only raw materials, mercenaries and slaves. Better-run countries can provide cheap labor for industry and compete on price.
In many cases, a significant share of energy imports are tied into production for export actually so energy requirements might not be as big as they look.
I am more concerned with the price and availability of imported food than energy for most poor countries. Though you might consider food a form of energy, it's easier to make do with less energy in lean times.
Financing energy imports for efficient food production is unlikely to be a problem as long as peace and stability are maintained because some crops can be exported to pay for that.
Good point. If I am reading this right Francois was only including energy that was sold on the energy market and not that which was captured in photosynthesis or any other unmetered process. The more of this metered (billed for) energy a country's food has embedded in it the more vulnerable it is to energy price increases.
Correct. The statistics only include metered energy, not energy produced locally on the roof of your house.
I don't find that a problem. If this sort of analysis could be extended out to show all metered embedded energy in the system that would be sufficient to get maximum energy price numbers. It would necessarily be a percentage less than 100% of GDP as Jolly so aptly pointed out (basic econ is a long time ago for some of us here).
I don't think one can generalize. Different societies will react differently. I commented on this already earlier in this thread.
- Societies that are already now deglobalized, i.e., import little, such as Cuba, may be less affected.
- Societies located in the tropics that can grow food year round and don't need energy for storing it during winter months may be less affected.
- Societies that rely heavily on bartering may be less affected.
Yet, these are not the norm. Most of the former European colonies have essentially adopted the governmental systems of their former colonial masters, but many of them are now very poor. Zimbabwe comes to mind as a really bad example. Such countries will suffer very much and very fast as a consequence of declining energy resources.
Interesting post.
I often refer to oil/energy consumption as GDP multiplicators. Without these inputs most GDP's would just be a shadow of what they are to day.
For this reason I also believe that energy prices also are restricted by GDP boundaries.
I am inclined to believe that the methodology used whereby oil is converted to kWh (using the conversion proposed by BP), no differentiation between the quality of energy sources (thus prices) and no adjustments for thermal efficiencies will not yield results whereby "apples are compared to apples".
It could be interesting to see the same analysis done by converting all energy to Joule or useful energy from each energy source made available to society.
This is a crude simplification as the post have lumped together all energy consumption and thus it is not fair to only point to the oil companies. What about electricity, nat gas, coal etc. suppliers?
People who has no prospect of repaying their debt will find it increasingly harder to indebt themselves.
What was experienced during the last run up in oil prices was that this drove consumption down. People adjusted their oil consumption to what they could afford.
In UK they use an expression; "energy poverty" for those who can not afford energy consumption for a decent life.
Yes. I should have written "energy producers" rather than "oil companies." Oil is simply today the dominant form of energy worldwide.
I don't think that the BP approach leads to incorrect results. This would be the case if different societies would operate in vastly different ways, e.g. if one country would use all electric cars, whereas another would use cars with combustion engines. Yet this is not the case. All cars in all countries look essentially the same. Argentina drives mostly on natgas ("nafta"), but that doesn't change the equation sufficiently to falsify the picture. All countries use similar percentages of energy for private homes, industry, and transportation. All exhibit similar percentages of oil vs. electricity.
In particular, oil appears to be the most expensive fossil fuel, and so treating all energy as oil energy will overstate prices.
Based on EIA data, coal is 3-4x cheaper per btu than oil, and natural gas currently about 2x cheaper. Those two together provide more of the world's primary energy (~25% and 20%, resp) than oil (about 40%), meaning that the weighted average cost of a fossil fuel btu is only about 70% the cost of an oil btu.
Accordingly, assuming all prices rise in lockstep, the "100% gdp" price should be about 50% higher, or about US$900/bbl. (Note that Hall's table indicates a similar level, although by looking at consumer-level prices he's also overstating energy costs by including power plant services and the like.)
(Of course, a rise in oil price caused by peak oil cannot be assumed to have an identical effect on coal and natural gas prices, much less non-fossil prices. More importantly, high prices would lead to reduced consumption. Both of these effects would result in a significantly higher effective "maximum" price.)
There are also many ways of interpreting the data. For example, one can take the numbers for GNP as being reflective of the value added by the respective countries. This is certainly done by defenders of conspicuous consumption. Another is to look at the wealth directed towards Switzerland et al and question whether banking really contributes that much added value to the world's well being. It's hard to reflect over the past year and believe that the proportion of wealth directed towards finance is warranted. Certainly, GDP represents consumption by the country, as relatively little is simply given away.
Inter-country comparisons are complicated by the fact that some are mainly energy producers (like Saudi Arabia), some produce very little energy (Japan, Switzerland), some do a lot of heavy industry (China), etc. Yet everybody is connected economically. Switzerland only exists as such because China makes things that the Swiss want but don't want to make themselves. With regards to Norway, something is of course missing. Do Norwegians really use more energy on a personal level than Swedes? Or rather, is it that the energy used to extract or refine oil that is exported included in per capita consumption? Rune above also notes the use of hydroelectric to refine aluminum. The US state of Texas has a higher than average per-capita usage, and some of that is driving pickup trucks around, but it's mostly due to the petroleum industry.
In an energy-constrained world, it's hard to see how the "service economies" can keep making money selling their "services" to the countries who make things that people can no longer afford.
Yes, yes, and yes.
Good article Francois, and your openess to suggestions has been stellar. I'm guessing this a spare time thing, somebody needs to get funding to really build this out in all its complexity. There is a lot of good stuff to be mined here, extremely useful stuff.
Thanks, Luke.
Yes of course, this is a spare-time thing. It all grew out of a short report on one single comment made at a meeting that I attended last week. I am a control engineer by training, not an economist!
Yet, I am glad that I did it. This discussion is very valuable to me. It demonstrates the best of what TOD has to offer. It is true that most of our articles are relatively well researched and decently written, but that you also find elsewhere on the Interwebs. What makes TOD really precious is the depth and quality of the discussions that follow the individual articles. This is truly outstanding and unique.
THANXAHELUVALOT, guys!
I'm with you there 100%. Thanks for the post to get it all going Francois. Last pass through (for now), I must get something done around here.
"If the price of crude oil should rise even higher, we have only two options left. We can either simplify our life style, or we can indebt ourselves. At that moment, we have all become slaves of the oil companies."
This the Peak Oiler's classic limited options thesis. It is false.
We have other options. Oil is finite but energy is not. When energy is expressed in terms of oil there is de facto comparison of a finite form, oil, with an abstraction which is not finite: energy.
The rules of logic will not let you do that. It is illogical.
A new supply of energy arrives everyday so long as the sun shines. The trick is to capture it. It is being done, albeit slowly and with a lot or resistance even from those who know about the Peak Oil dilemma.
The third option is to capture solar energy though wind, agriculture and photovoltaics. Of course conservation is also very important. These systems may not be as simple as drilling a hole in the ground and refining oil, but they will work. Oil will not all deplete over night. It takes time and as the oil price rises, economic pressure will be put on the system to change. And it will change.
Either or thinking is generally wrong. It is also wrong in this case.
Hi
I agree the system will change as the "economic pressure" increase. What I miss in your post,
is your take on what will change, at what time, how, what will people do then, 2015, 2025 etc?
Choose a topic and detail your view of the future, and I and others would be interested to read.
Regards
x: It is called a false dilemma. But in this case the unmentioned alternatives are not rated very highly by some notable people, and I'm inclined that way myself so I don't consider this dilemma to be particularly false (unless you add the further alternative of killing off significant numbers of the consumers/debtors).
We do try to work through the possibilties in these discussions without resorting to 'the further alternative' though its shadow is always near, nearer than any miracle cures it seems. That is the scariest part. The highwire act is juuuust beginning.
It seems to me an underlying problem in such an analysis is accounting for "embodied energy" crossing borders in the form of imports and exports. For example, if the Swiss import considerably more food than say Canada, the positions of the two countries on the plot are relatively closer. If the Swiss import considerably more goods containing aluminum than does Norway, the same phenomenon occurs. Also, I suspect statisticians might have a problem with the fit of this particular model.
Indeed. We should include gray energy, but we cannot do so easily, because these numbers aren't easy to come by. BP doesn't provide them, and neither do IEA or EIA.
The analysis has two prerequisites:
a) GDP and Inflation remain constant
b) Energy Usage remains constant
If you earn 4000 Dollars per month and spend 400 Dollars for energy you certainly cannot afford to pay ten times the price for energy and still consume the same. Instead if energy gets ten times more expensive you will have to use less energy.
Concerning GDP not every Dollar of GDP requires the same amount of energy. If the energy for a Dollar of GDP becomes more expensive and may be even more than one Dollar either
a) the product gets more expensive and together with the price of energy the GDP increases as well
b) a different product is made that requires less energy (efficiency gain) - this leads to reduced demand for energy
c) no product is made at its place - this leads to demand destruction
During the last two years we had a lot of a) followed by c)
Correct.
This article obviously provides an oversimplified analysis. There's a role for such analyses but I think this one is simplified in ways that make it nearly useless.
A number of problems have been highlighted by posters such as RalphW but allow me to pile on.
I'm not going to address the oil/energy distinction because that's an obvious simplification and not necessarily a bad one.
My impression is that the core mistake was to assume that the world economy works a bit like a household budget (or a miner's budget in this case). This is a common enough mistake but that hardly excuses it.
I think it's useful to ask the question: why would the price of oil rise even to 50% of the 590$ produced by this analysis? Let's put the inflation issue aside for a moment because I don't think this is what we are interested in.
I think that such a price is only conceivable with a much more vibrant economy (higher GDPs) or with lower oil consumption (due to a supply crunch and/or green taxes). In both cases, the share of oil spending in the "global GDP" would be lower than if we simply adjusted the current share for the price increase.
So this analysis isn't really about the price of oil but about the share of "global GDP" spent on oil. You can't translate that to the price of oil directly. And all it says is that this share can't surpass 100%, which is hardly news (though it's not actually impossible depending on how price and GDP are accounted).
Now, as to the bizarre conclusion already critiqued by Rune Likvern...
It's important to understand that the producers, whether they be states or proper corporations, are part of the world economy as well. Whether the price is explained mainly by cost of production or rent, the income from oil sales will only flow through producers back into the economy.
Oil income may pay workers, supplies, dividends, bondholders, equity buybacks, social programs, princely salaries or some such. In any case, this isn't all that different from what's happening now with much of the "global GDP". What difference does it make if one's money goes into the pockets of Bill Gates or some Saudi prince, XON's shareholders instead of F's shareholders? The indebtedness an hypothetical household would have to go into to pay >590$ for oil would not only be formally (if at all) owed to any company. The actual effect at a macro level would be to alter the Gini coefficient or the size of some government budget relative to the economy.
In any case, if one holds some of the assumptions that lie behind this analysis (that GDP and oil supply is constant, that all oil sales are made at a certain price and that they all contribute to some GDP), it follows that the price of oil simply can not rise above the 590$ threshold irrespective of the amount of debt incurred by consumers. If oil was any dearer, "global GDP" would rise, violating one of the analysis' assumptions.
Unrealistic hypotheticals aside, I think it's likely that a large increase in the price of oil (say +200% from the current price) would actually end up causing a net increase "global GDP". This is because I believe the world economy is in a deflationary bind. A rising oil price would increase all prices (though by a lesser amount) and employment and incomes would follow.
As long as most of the world resources (and labor in particular) are not tied into energy production, the limiting factor to the energy prices isn't going to be the share of energy in "global GDP". What really matters is the cost of production of energy rather than its price so I would favor dropping GDP and any such notions from this kind of analysis and work out EROEI instead as well as questions such as how many can realistically be directly or indirectly employed in the energy sector.
EDIT: jorn made the most important point as I was writing this.
HFat: Interesting line of thought but I think it errs at:
Could not the price of oil greatly rise due to becoming very much scarcer (not this month of course)? Or even if it was not a lot scarcer, if the supply decreased a little without corresponding demand decrease, then the price is as always set by the highest marginal bidder, say President Putin wanting some for his fleet of Z**s. Then everyone else has to pay that marginal price or get stuffed. We already saw a whopping rise last year due to demand crashing against an inflexible supply.
Furthermore this is seriously wrong:
In reality the rising oil cost would put many businesses, professions, and households out of business (as happened last year), and thereby cause "recession" (as happened last year).
That apart, some of your critiques of Francois's post appear to be valid, albeit mentally-challenging.
Sorry for being obscure.
By lower consumption, I did not mean a lower appetite for consuming oil but very much what you're saying: consumption would fall because oil became scarcer. Consumption isn't going to fall of its own accord.
Be aware that there is not much difference between oil demand and supply according to the standard definitions. Some authoritative organizations indeed use the words interchangeably.
I don't agree with you regarding the cause of the "recession"... and I'm not alone in being "seriously wrong". Perhaps you should reconsider that belief because it doesn't quite match the record.
The consequences of an hypothetic oil price increase at this point would be complex and I could easily be wrong. You know what they say about predictions...
I think the "recession" was caused by oil production hitting a practical limit from 2004 onwards. In line with Gail's post of that view. Perhaps you could clarify what you think was the cause?
Well, my explanation would be quite idiosyncratic... and off-topic.
In a nutshell, I don't think it's all that different from pre-WWII crises in spite of the different environment. In this instance the old structural pitfalls (reckless cost-cutting, capital glut and malinvestment essentially) were worked around for a while with the US deficits and insane indebtedness. From bubbles and mounting imbalances you went to a falling dollar, bank failures and a credit freeze. There was no halfway decent policy response until very late in the game (here, the price of oil might have made a difference as argued in a TOD post about monetary policy) and the rest is history.
Sorry if this seems unintelligible but I'm loathe to elaborate here.
Instead of looking into my fringe theories, why don't you start with the explanations of mainstream economists? I don't trust them very far generally but I think it's a perspective worth getting.
For more cogent, if somewhat less mainstream explanations, you've got Doug Noland and the rest of the Minskyites (such as Roubini). These have the distinction of having seen it coming though some have been early to say the least. Steve Keen acknowledges peak oil if you require that from economists.
Your personal explanation looks to me to be unnecessarily complicated compared to energy realities impacting on the endless growth presumption. As for mainstream econ, (how mainstream?-- I was told that "we now know hot to prevent depressions"), again with a neat enough explanation already I don't rate reading their ideas a best use of time. But maybe I'm wrong. Thanks for those refs though.
Good analysis. Thanks, HFat.
Your post points out better than others before the problematic nature of using the GDP as a metric of wealth.
It is obvious that rising energy prices will lead to inflation. We saw this already last spring, when inflation took off dramatically everywhere. Energy is at the bottom of everything. It is the primary driver of our economy. Thus, if the cost of energy rises, everything else will become more expensive, too. In particular, this also includes all staple food items.
What is less clear is that inflation will translate into an increase of GDP. Essentially, you are saying that inflation is not for real, at least not, as far as income is concerned. Inflation may cause a devaluation of my assets, but my salary is protected against it.
It is true that some countries, such as Switzerland, offer currently an automatic salary adjustment based on the inflation index. Yet, this is not sustainable. In fact if maintained, it is a road to disaster (hyperinflation).
If I own a home that I rent out, the rent will rise due to increased heating cost (inflation). Yet, I won't get more net income from renting out my house. I can only compensate for the increase in my own expenses, and in fact, when the price of oil decreases, I should also reduce the rent again.
The only sector of the economy that is truly inflation proof is the energy sector itself. Hence whether or not inflation will lead to an increase in GDP or a contraction of the economy depends on where that money flows to.
In countries like Russia or Norway that are net energy exporters, an increase in energy prices will lead to an increase in GDP, but in countries that are net energy importers, it may rather lead to economic contraction.
The actual claim I made is not about inflation in general but about inflation *in a deflationary environment*. Deflation tends to be a major drag on GDP.
There is some literature about the relationship between inflation and GDP and I have been told the consensus is that moderate inflation is healthy.
In any case, inflation is quite sustainable in practice.
Inflation not really real in that it is a theoretical concept. Every change in prices is unique and has unique consequences.
Which prices will or won't rise is not preordained. No sector is inflation-proof as large increases in energy sector costs following the oil boom have shown.
What's beneficial about inflation is that it will allow relative prices to reach more appropriate values. In many cases, prices are said to be "sticky" and have trouble falling so an increase in other prices makes it easier for relative prices to adapt to changing circumstances. In particular, interest rates never fall much below zero and this is a serious problem if you don't happen to have inflation when negative real interest rates would be required.
In some case such as with oil, you are indeed going to have international income redistribution as rent increases faster than the price.
You might be surprised by who ends up benefiting though. Someone's cost is someone else's income and incomes get spent or invested. This is something that bears repeating because it's one of these things which hardly matters for a household budget but is crucial for the functioning of an economy. And oil rents get spent disproportionally in Switzerland where insanely expensive goods, services and real estate are provided to the very wealthy.
Let me say again "primary " energy from renewables in the form of electricity is about equal to 1/3rd of primary energy from fossil fuels and nuclear used to generate electricity. The big fossil fuel users will mitigate the problem by shifting to renewables as fossil fuel energy becomes too expensive. Also ic transportation is horribly fuel inefficient, with energy to the wheels being about 12 to 15% of energy in the fuel in the ground, and then a lot of that moving 2 tons of metal to move one person. Automotive energy consumption per capita can easily be cut by factor 5. Other waste, at least in the USA is also extremely high. We will be forced to change by rising prices, but there is no likelihood of becoming energy slaves. Murray
We shall all have to learn to live on less energy.
Those aren't the only numbers to pay attention to. We are in a race to get off fossil fuels before we lose the ability to get off fossil fuels so the rate at which the technology enters the market is the number to watch.
Actually, I assert that we've already lost that race because we are rapidly losing the buying power to purchase the alternatives you mention. The fleet turnover period is on its way to doubling, renewable energy investment is down over half and capital investment is slowing dramatically as business people hope to ride out this "dip." Businesses and individuals are husbanding their cash if they aren't hemorrhaging money. Exactly when was all this inefficient equipment going to be replaced with the alternatives? When the price of oil provided the incentive? As someone else pointed out, a funny thing happened with high oil prices: they damaged the economy, probably permanently at this point.
I go through the full logic here:
You've Bought Your Last Car
In a nutshell, I think we've entered the Period of Receding Horizons — the point at which we can no longer hope to maintain our current civilization at anywhere near our current level. I use recent trends, like the fleet turnover period, as evidence but in my view the end of this game was determined a century ago.
I think that's one of the key points there André.
Light vehicle sales did fall by 40%. Hybrid sales dropped less (except for the Prius lately, which is at the end of it's model cycle) - the Honda Insight is selling like hotcakes in the US, and is the top selling car in Japan.
renewable energy investment is down over half
Well, you previously posted an article about Venture Capital, but that's very different. Wind doesn't need VC anymore, and solar needs it less every day.
capital investment is slowing dramatically as business people hope to ride out this "dip."
Sure - that always happens in a bank panic - like 1893, 1907, 1920, 1929. Bank panics are nothing new - we'd just thought we'd gotten past them - we were wrong. That's what happens when you go 50 years without a bank panic, got cocky, and dismantle the regulations that prevented them. Paradoxically, the mixture of hiqh-quality & low quality mortgage securities that was supposed to prevent a crisis, actually made it much worse.
Automotive turnover of 15 years is a bit high: light vehicles less than 6 years old account for 50% of vehicle miles travelled, so the effective number is about 12 years.
Of course, you have to keep in mind that there hasn't been much new in light vehicles since they invented the automatic transmission: sales have really been driven by fashion for many decades, so its easy to anticipate that something really new, like the Chevy Volt, might really drive sales (see hybrids, above).
Hi Francois.
Your post is interesting but you have to re-read the Vail's comment: he is a smart guy with a good perspective long in the future, sometime too much long than we can follow ...
I want to put some light on your Swiss (and other state) GDP considerations.
First of all money is not GOLD nor OIL, as you will see in the next months if some of "your" banks will go belly up. The swiss GDP sill disappear like the snow in the full light of the sun.
GDP don't evaluate externalities as the "dirty money" flow into swiss banks. pecunia non olet, but is brown coloured.
Money will not save the value, nor houses (at least in US, UK or Spain): the land could, but the wolfs are at the door ...
money will retain the exchange value function, but there are clear signs that not being truly convertible (in everything you want) it's valute is at dispute in the future. All transition models first of all generate a local debt-free money, it's easy to do, just print, like amerikans do.
Change your perspective: we are not purchasing oil, paying it with US$, but it's the oil exporting countries that buy US$ paying them with oil. As far as the money market would be clean, US$ has no value: what are they doing of all that money (valueless pieces of paper/numbers in computers) they are gathering?
Are they purchasing treasuries, like the silly chineses? who is able to repay the debt? no one, it'clear.
Comparing the value of states or commodities in different monetary systems is a good path to make a lot of confusion, and to build some paper castle ... like you did.
Please, retry, you'll be lukier ... good ideas but wrong numbers!
best regards.
Must you people really trot out this monetary nonsense in every topic?
There's a wealth of TOD articles where this stuff is on-topic and where you can talk amongst yourselves.
The "silly" PRC is buying IOUs from a government which can tax numerous bright and/or very prosperous citizens. It oversees a wealth in natural resources (including some of the best farmland in the world). Its corporations have unrivaled networks, IP and expertise. Last but nor least, it has the ultimate instrument of control: the US armed forces.
Should it choose not to tax its base, the US government can also "print" to repay its debt. Not that its creditors will ask it to do so anytime soon.
US treasuries are and will remain the surest store of dollars and the dollar is still for the time being the premier world currency. It may disturb goldbugs greatly but that's just the way it is.
The future value of everything (including gold) is in dispute. If you've got a crystal ball, you're welcome to trade futures.
As you state, it is a very good thing the USA government is not choosing to "tax its base" to cover all spending, because if it did, within a very short time frame there would be no "base" to tax.
Alas you are correct.
At the time of Heinrich Pestalozzi (at the onset of the French revolution), the Swiss led their children out onto the meadows so that they could eat grass to have something in their stomachs. Switzerland used to be bitterly poor, and it may become so once again after the collapse.
Switzerland is hopelessly overpopulated (it is the worst of all European nations with respect to its ability to feed its own population from local crop), and it is resource-poor.
What made the Swiss rich is the service economy (yes, banking is a service). If the service sector should collapse in the general contraction following peak oil, the Swiss will suddenly re-discover that money cannot be eaten.
The Swiss do have a fairly good industrial production sector also that may survive the contraction better than the service sector, but a good percentage of our overall wealth is likely to melt away like the snow under the sun of March.
We know from work by Oswald and Hamilton that even fairly low oil prices can cause recessions. (low compared to last years historic highs). I modified Rune's excellent graph from a few days ago to show at what price that oil demand leveled off and began to shrink. (Falling demand may be a trailing indicator).
I believe that prices do not have to be high at all to contract the economy, given the low value in 2001 needed to cause contraction (the US was also undergoing a natural gas price spike at the same time so that may have lowered the oil price needed to cause contraction).
I think growth between 2001 and 2007 was caused by the saving rate going negative as people started taking money out of homes. That flood of money supported a higher oil price before contraction started.
Clearly $30 or $70 is far, far lower than the $500 estimate by this paper, or the $250 estimate reached by Hall and Murphy. So why?
I am not sure. But part of the reason is that as energy prices go up our industries are forced to move to locations that still have cheap energy to stay competitive. And another is that US consumers have no alternative fuels of any size they can substitute (and little effective mass transit) so discretionary spending must take the losses.
Jon -- Perhaps it was just that simple: the combination of decreased funds for discretionary spending and fear leading to improved savings rate. (I would also offer that the ever increasing availability of credit during 2001 -07 perhaps played a big role in expansion. And we can certainly forget about such easy credit for a while.). I haven't seen actually numbers but many anecdotal stories about folks setting more money aside. And the drop in discretionary spending for all those "unnecessary toys etc" also led to increased unemployment which led to even low consumerism from the newly non-working segment. And thus you have that vicious cycle seen in many recessions. Lower energy costs might be helping the consumers now but businesses are still suffering and thus the not ready to higher. Here the meltdown of the financial sector has to be credited with tossing gasoline into the fire ignited by the energy price spike. And the way it looks now maybe by the time the trillions of $’s of economic stimulus starts to kick in, higher energy price may return just in time to toss another bucket of diesel onto the smoldering embers.
You know, this is starting to get really depressing. Getting much to close to the weekend for such dark thoughts.
Just a note ROCKMAN the US savings rate that people are pointing at is not cash stuffed into a savings account its also lower debt loads.
http://seekingalpha.com/article/36867-us-savings-rate-based-on-outdated-...
You save a LOT of money defaulting on your house loan and credit cards.
Obviously this example works wonderfully on the loss side too.
Instead of savings it probably better to say Americans are maximizing their cash flow.
This includes current cash flow and to some extent future cash flows. The most obvious mechanism in action is default and reduced expenditures.
Most of use expect fixed expenditures such as food and energy that will increasingly require cash payments to increase over time thus Americans will continue to maximize their cash flows.
Once they have defaulted on the mortgage and credit cards the next step is to lower their rental rates.
I expect the real savings rate to increase steadily to probably 20% of income overtime.
This will be from reduced income resulting in lower tax rates and lower expenditures and complete rejection of credit. Only after it hits this rate will it be slowly squeezed down by ever spiraling food and energy costs.
Once you have no credit and are forced to save less than 20% of your income because of expenses your subject to a high probability that and unforeseen event will destroy your remaining quality of life.
However given that true savings does not really start until mortgage, auto loan and credit card debt have been effectively purged from the system we have a long way to go.
Its at least 2-3 years before we even hit the point that we have minimized debt and maximized savings and then you need the squeeze down stage where even this finally fails.
And of course along the way housing values are reduced by 75-90%.
Whats really interesting is how the massive amount of debt that has been and will be defaulted on works. For several years ever more debt defaults serve to maximize cash flow but on the other hand they work to prevent most from really saving. People are really starting over on a new track of saving for goods and services and it takes at least ten years of savings to really be able to operate as your own bank off your savings.
So the credit defaults serve to keep the system from collapsing but the restarting of the economy based on savings takes a long time to occur.
Meanwhile relentless increases in commodities prices are putting ever more pressure on the saver eventually causing the saver economy to fail. Obviously the only way out is to reduce expenditures on food and energy which means riding a bike and growing a garden.
Certainly political issues or government defaults can short circuit this longer term trend but in general because of the huge debt load that needs to be defaulted we have a long way to go before the system will actually fail but also on the same hand it means the saver economy we need to stabilize is really starting fresh and probably will be unable to avert the decline. During the Great Depression I'd argue the economy started going down hill at a level we have even yet to reach it will be some time before we even reach the economic level similar to that before the Great Depression. The lifestyles during the Roaring 20's would look awful to us today with most of the money concentrated in the hands of the wealthy and people working menial jobs for low pay. Mexico in the 1970's is probably a closer example to the US in the 1920's. We have to roll back to this level before we can finally fail.
Great post. Thanks, Memmel!
Very difficult to compare the pre great depression U.S. to the current one. So much Keynesian public sector spending is now embedded in our system that did not exist in 1932. Three big examples: social security, medicare/medicaid and unemployment benefits. Now unemployment benefits expire in a relatively short time but they can be extended for as long as Congress sees fit. Just these three constant borrowed infusions of cash into the economy make it a whole world different than the one that existed in 1932. That doesn't mean it can't collapse but rather we just don't have a good model the sequencing of it.
If savings at the consumer end starts happening at earlier higher economic level than you propose but governments deficits are financing the savings while themselves growing at near constant or worse rate the scenario plays out quite a bit differently. This is new territory.
These benefits aren't worth as much as they used to, especially compared to the size of the economy.
My understanding is that many don't even qualify nowadays.
Do not assume that everyone here shares your tunnel vision. This article's author just wrote:
"The oil price broke down primarily because the economy turned sour. The deterioration of the economy may in part have been caused by the high oil price, but not exclusively. There were other factors involved as well, and probably, these other factors were even dominant."
I very much agree with that.
The simplest explanation for discrepancy between $30/$70 and $250 is that they're unrelated.
You'd expect to see a bit less gross waste of energy if the limit was reached.
This article's 500$ figure wasn't presented as a limit that prices would ever approach by the way. It's more of a reductio ad absurdum against >$500 oil.
Indeed.
Jon:
You can interpret this data also differently. The reduction in demand preceded the collapse of the price, i.e., the price was still climbing higher, although the demand had already stagnated and was even receding.
It is difficult to conclude from this data that the rising oil prices were responsible for demand destruction. They probably had something to do with it, but there were other factors involved also.
Interestingly enough, the oil price is now climbing again, although the demand is still contracting. What does this tell us? It tells us that there are other factors involved.
You probably get a better correlation by looking at oil reserves rather than at oil demand. At the time when the oil price was rising like mad, the reserves had shrunk from 4% to 2%. This was the primary cause for the rise in the oil price. As production was increased and demand shrank, the reserves started to get replenished, and then the prices broke in. As the prices dropped too low, production got reduced quite a bit, and consequently, the reserves are starting to shrink again in spite of the still contracting demand, and so the oil price starts to climb again.
In an oil production context, "reserves" means "produceable oil still in the ground". You may mean "spare capacity".
Why do you conclude that? Price rises -> demand falls -> price falls; is that not practically textbook supply-and-demand response?
Not much, considering that historically demand contracts in Q2 every year (EIA data), and price seems to go up as often as down (EIA).
You may be reading more into this than is warranted.
I'd say he is indeed.
But you may be picking textbook cherries.
No, I meant "reserves" as in "strategic reserves," for example.
Those are referred to as stocks; reserves is not the correct term.
In either case, though, the evidence does not support the claims you've made. As you can see from the EIA link above, OECD stocks did not fall by 50% as you suggest; they didn't even vary by 5% over the course of 2007-2008, staying between 4,070 and 4,220 Mbbl every month for both of those years.
You claimed:
Where are you getting these numbers? They don't seem to have any relation to anything that actually happened in the petroleum world in 2007-2008.
Maybe he was thinking about spare capacity. That's how I first interpreted this sentence.
I don't take capacity numbers very seriously so I couldn't quote an official figure offhand but 2-4% sounds plausible.
I got these numbers from a presentation by Christof Rühl, chief echonomist of BP, that I recently attended. His talk is not on-line, i.e., I cannot provide a link.
That's the first thing I thought, too, and the first thing I suggested. It's also the first thing he specifically said no to, though, so now I have no idea what numbers he's actually referring to.
The most sensible interpretation of those numbers - to me, at least - is indeed spare capacity, and I think it's a good point to look carefully at the relationship between spare capacity and price. Spare capacity was also quite tight in (IIRC) 2004, though - whenever it was Saudi Arabia ramped up - so it can't be the whole story.
We may all be talking about the same thing. I may have misused the term "reserve," although I believe that this is the term that Rühl used in his presentation, but maybe, my memory simply is wrong. Also, the talk was given in German, i.e., it may be a translation problem between German and English. Remember, I am not an economist by trade.
I did not mean to say that it was not "spare capacity" I was talking about. I had been told by one of you guys that "reserve," in the context of oil, means not yet produced crude that is still in the ground, and I pointed out that this is not the only way in which the term "reserve" is being used in the context of oil. People talk e.g. about the "strategic petroleum reserve." The SPR certainly doesn't refer to not yet produced oil still in the ground.
I have no problem seeing oil go north of USD 120 or even USD 600 (measured in 2009 USD).
You only need that (say) half of the population cannot afford oil at all (aka the 3rd and 4th worlds) and the remaing consumers can pay a lot more. GDP per capita would remain the same if only 50% of today's workforce had a job, after all. distribution would change. Those with jos can have twice as much, those without... see Africa.
So while I think this article presents a reasonable scenario, I would not rule out oil costing (significantly) more than this calculation of yours suggests as sustainable.
What's not sustainable is this many people consuming this much at (say) USD 300 per barrel. But I have a feeling we are moving towards major unimployment with GDP per capita not taking as big a hit. The rich will get richer (on relative terms, anyway).
In your scenario, less oil is consumed as the price increases.
This is of course realistic but it violates one of the article's (unspoken) assumptions: that quantity consumed remains the same. See jorn's comment above.
Your 300$ limit for "this many consuming this much" is a bit high in my opinion, but quite reasonable.
Quantity remaing the same as today is highly improbable, I think. If anything, I see quantity be halved in 20-30 years. The good question is: what percentage will be able to / willing to / need to buy oil then. If (say) less than a billion people use oil in 2030, the price can go a lot higher.
Of course it raises the question of any alternatives as far as energy is concerned, but I wouldn't go there for the time being.
Many such as myself are using oil products indirectly while abstaining from liquid fuels. I think that matters more than the amount of people using oil-fueled personal transportation and such.
In particular, I expect a great deal more than a billion will be eating food produced and transported with oil-power. But none of us has a crystal ball of course.
As is typical of most of the "economic" analysis on these boards, there is no underlying economic model, and apparently no understanding of the concept of GDP. GDP is a value-added measure and depends on an underlying price vector, which includes energy prices. Change energy prices and you change GDP. The figure given in the article is meaningless.
And by "change GDP," I'm thinking of both the composition of goods produced and the underlying price of those goods.
Just for starters, ignoring composition, suppose that a country imports all it's energy, and one unit of energy produced a single final good, the price of which is normalized to one dollar. The price of unit of energy is p and M is total energy imports. Then GDP, which is a value added measure is
GDP = M - pM = (1-p)M
As an example of some added structure, suppose that current technology limits energy use to one unit per person. Then per capita GDP is simply (1-p) and rising energy prices reduce per capita income for an energy importer. This is coming from (i) what economists' refer to as a terms of trade effect (increasing price of imported good), along with (ii) the assumption that there is no domestically available alternative (substitute). The point here is that even with a simple model, GDP itself depends on the price of energy.
For an energy exporter, energy exports are treated as a final good and contribute to GDP. For a country that produces only energy, all of which is exported, GDP is given by
GDP = pX
where X is the volume of exports. The punchline of this simple story is not much different from the one outlined above. However, the upper bound on p is established not by GDP, which is a value added concept, but rather by the total value of output.
For a more general model, the argument above fails as well, because it amounts to arguing that energy becomes the only source of value --- other factors other than energy, such as labour, literally have no value.. The margin between the value of the final product and the cost of energy could be quite low, but there's no reason to believe it must necessarily be zero. If there is no value added beyond that of the energy source (i.e. the price of goods equals the energy cost) then there would be no point in using the energy in the first place.
I'm not modeling a global energy shortage here. I'm simply illustrating that the above article is based on a faulty premise of what GDP represents.
Well, you lost me with the first equation:
If GDP and p have units of $, then this equation doesn't make sense, units-wise.
For clarity, I should have added a coefficient to the first M, indicating that one dollar of the final good is produced per unit of energy imported. Thus (1-p) is the value added (in dollars) per unit of energy used.
All major theories of value (Marxist, neoclassical, neo-Ricardian) start with the premise that the price of a good covers material, capital and labour costs. Whatever is left over is profit. Once an attempt is made to determine how the various components are determined/related, one has a theory of value. From that starting premise, any good where the material costs alone equal or exceed the price will not be produced without a subsidy. More to the point, for any good that continues to be produced, an increase in material costs (energy) will lead to some combination of an increase in the price of the good or a decrease in the compensation of the factors involved in it's production (at least relative to the good in question).
Hi Jolly,
Could you clarify your complaint a little further?
The only figure in the article has GDP per person on one axis and Kwh per person on the other axis.
Are you arguing that the increase in GDP is explained completely by the increased sum of energy price? How can that be true if energy is just 8-10% of the economy?
TOD is a forum, not a unified school of thought. If you have a perspective on economics that you think would benefit those reading, why don't you write it up and post it somewhere.
There have been several studies relating GDP to energy usage (clearly not everyone considers the concept "meaningless"). Here are several:
GDP = f(C, L, E) where energy is typically exergy. But there are complaints about that idea because it negates Quality of the energy (we turn BTUs of coal into fewer BTUs of electricity for good reasons and those should be reflected in equation somehow).
http://www.esf.edu/efb/hall/documents/20090217111713443.pdf
Ayers has also written a bunch of papers on this topic, trying to incorporate technological change into the equation.
http://www.iea.org/Textbase/work/2004/eewp/Ayres-paper1.pdf
There are also some purely energy based equations that have been shown to have very tight fits over nearly a century of data. They look something like:
GDP = f(coal, oil, gas, electricity, home_usage, industrial_intensity)
http://www.esf.edu/efb/hall/.%5Cpdfs%5Cenergy_US_economy.pdf
They all have some merit.
It's actually not inconceivable for rising energy prices explain over 100% of an increase in GDP over an arbitrary (but relatively short) time period. This is of course more likely for, say, Venezuela than the USA.
But this wasn't Jolly's point. I think she was simply saying that "change energy prices and you change GDP". The point is well taken I think.
The equations then showcased an extreme, implausible form this relationship could take. If you look past the equations, I think you'll find she stated it straightforwardly.
What Jolly said was "meaningless" was the "figure", not the "concept".
I don't think GDP is a good metric for this kind of exercise and, given the number of irrelevant parameters that go into GDP, I would wonder if any fit over a long period of time isn't spurious.
I also concur with Jolly regarding the level of economic discourse on TOD.
I don't think it is a forum where all ideas are welcome. A blog isn't conducive to all forms of thinking and conversation. I think the format works much better when there is a certain amount of overlap between the participants' basic outlook.
There are biases that seem so entrenched and arguments that make so little sense to me that my impression is that attempting discussion on the basics would be pointless.
HFat, I think you'll find that most of the people here do not have any great personal agenda for particular economic/political dogmas/theories.
Most are openmindedly seeking enlightenment by confrontation of alternative ideas.
But ideas which are unsound (or which are not adequately presented to show their soundness) rightly encounter criticism/uninterest here.
There's an invitation. Don't spurn it without good reason and yet still accuse this forum of narrowmindedness!
The most dangerous "agendas" are those one isn't aware of. And personal "agendas" aren't nearly as dangerous as groupthink.
I think have good reason to say TOD is narrow-minded (though I don't believe I put it quite that way).
Peak oil a short-term concern has been essentially tabled by this crisis just as it was getting interesting. It's only to be expected that the doomers who don't snatch on crude financial/monetary doomerism are going to pretend this crisis is actually about peak oil. Then you've got those who are actually in denial. Lots of grasping at straws here.
Editors have posted and commented approvingly on many articles about economic issues (broadly speaking) which were close to worthless. On the occasion that they post something worthwhile, it's usually prefaced by critical comments. I usually avoid the nonsense but on the occasion I've been drawn to a loony post by a misleading title, I've been told by TOD staff that criticism wasn't welcome.
I posted here because this article looked to me like an honest mistake by someone who seems generally reasonable and relatively open-minded.
Illogical arguments, whimsical dismissals and puerile analogies abound. Watch your own recent comments: you're saying you evaluate theories based on how simple they are (tough to beat "the will of God" on that one!) and you dismiss a whole field based on a pithy illogical argument (people are still afflicted by may preventable diseases... what does that say about medicine?).
I don't want to single-out TOD though. Crass ignorance about economics is widespread and it's no accident. Witness the difference in how people generally talk about astronomy (not political) and climate science (political) for instance.
No. I'm arguing that for an energy importer, an increase in the price of oil will reduce GDP.
If you want to use a production function, there is an issue of distinguishing between a gross output function and a value added function. When all intermediate goods (produced goods that are used to produced final goods) are all produced domestically, there is no distinction. When such inputs are imported, the two concepts are different, since part of the value added is produced abroad and must be paid for with a share of the final product. If you want to talk meaningfully about energy importers and exporters, this difference must be accounted for.
Suppose output is produced using only oil, O, and labor, L. In this case, the output function is Y=F(O,L). Under the usual assumptions, all income is paid out to the inputs, so if w is the wage and p is the price of oil, then Y=wL+pO. If a country imports all of its oil to produce final goods, then the value added (GDP) is now Y(O,L) - pO = wL. In other words, you have to net out the value of the imported good to figure out the value added. Intuitively, this just means that national income is whatever is left after paying for imported inputs.
The problem is not so much that the graph is meaningless, as that it is being used inappropriately. GDP figures will already be taking into account payment for currently imported energy and do not reflect the "ability to pay," as the author is inferring. With that said, others have mentioned elsewhere on the thread reasons why one must be cautious about interpreting cross country comparisons (industrial composition, climate, energy importer/exporter, etc.).
BTW, the "figure" I was referring to in the earlier post was the $0.37/kwh as an upper bound to energy prices.
Jolly, I suspect that what you are saying is important and probably a crucial critique of this article. But that I'm not the only person who is unable to follow it because we lack familiarity with most of your terminology and concepts. It could be a great enhancement if you could point us to some introductory primer(s) to bring us up to the required baseline.
On the one hand I think we here rightly criticise economists for their blindness to the impact of physics and geology on their fields. Conversely, few people here are very expert in economics but that is not so much due to closed minds as to uninformed ones! If you could bridge our gaps that would be great.
RobinPC:
Any first year college textbook in macroeconomics will have a chapter on national income (GDP) providing a stylized description of what is being measured by the statistic. The texts also provide varying degrees of detail on how the measurement is actually constructed by statistical agencies.
GDP is a value added concept. Here's a first year example: a farmer grows a bushel of wheat, which is sold to a miller for $2. The miller grinds the wheat into flour, which is sold to the baker for $10. The baker uses the flour to make bread, which sells for $20. The net contribution to GDP is $20. The value added is as follows: $2 by the farmer, $8 by the miller, and $10 by the baker, which equals their incomes from their activities (I'm simplifying and assuming their labour is in the only input). Note in each stage the value added is the difference between the cost of the raw input and the price of the final output. This presumes all activities happen within a given national boundary.
If the wheat was shipped abroad to be milled (exported) and the flour was imported by the baker to make bread, the value added for the country in which the farmer and baker live is now only $2+$10=$12, even though the final value of the bread is $20. $8 is going to miller and is counted
towards her country's GDP.
Similarly, in the article above, energy production will count towards the GDP of an exporter and will be netted out of the GDP of an importer.
Note that I haven't even become talking about any kind of price theory, which I would need to start tracing out how the prices of the various intermediary goods (wheat, flour) and the price of the final good (bread) are determined or how the change in one would affect the others and ultimately GDP.
I take your point that economists often ignore the physical sciences, instead creating ad hoc production models which are unrealistic and flawed. However, the flip side is that those same physical scientists will often talk about economic measurements and concepts without understanding what they actually are or having a model of how they are related.
Francois,
The book Energy & Resource Quality: The Ecology of the Economic Process by Hall, Cleveland, and Kaufman, 1986 has a similar study to yours. It is out of print, but I scanned in two charts from the text. (you can click to view and download higher res versions). I hope these are helpful and not just clutter.
Cheers,
-Jon
The first chart shows the 1978 version of your graph. Energy varies quite a lot by nation.
The study found there were several major factors (many of which were covered in the comments above):
Size of the country (increase transport fuel use).
Household energy use (because burning fuel directly uses alot of BTU without many $ changing hands).
Amount of heavy industry.
Quality of the fuel used (not all BTU are created equal).
Those factors explained most of the variation between countries. Here is a plot of the predicted against actual values for energy per GDP (note: This is NOT the same graph as above) to allow visual inspection of the small residual remaining.
The book is out of print, but I think the technique is covered in this paper by Kaufmann. He has a chart here where he not only compares several very different countries, but also compares them through time.
A biophysical analysis of the energy/real GDP ratio: implications for substitution and technical change
Robert K. Kaufmann
Ecological Economics, 6 (1992) 35-56 Elsevier Science Publishers B.V.. Amsterdam 35
Thanks, Jon. I hadn't been aware of this book. I had never seen it before. I already ordered it through our library. The library of ETH is wonderful. They have one of everything.
Taking your graph and making GNP the dependant variable and judging the curve by eye, it seems that we can expect a very steep rise in per-capita energy consumption from the less developed countries if their economies ever take off.
You mean making GDP the independent variable.
Yes, and we see this already. Essentially what you are saying is that developing countries are less efficient in their use of energy than developed countries. This is indeed true, and this is also one of the concerns relating to rising CO2 emissions from developing countries. This is also one of the arguments for solving CO2 emission problem in the third world rather than in Europe. It takes considerably less resources (GDP) for more effect, i.e., you can get more CO2 emission reductions faster and cheaper if you invest in clean technology in developing countries than here in Europe or in the U.S.
Francois, I believe it is slightly off topic but still may deserve a reply. Your argument is quite logical but only if the reduction in the developing country is a real one. You certainly know about the additionality issue that hampers reduction of emissions, if this is the goal seriously.
pk
Yes, of course, I know about the problems with the CO2 certificates. The catholic church tried this approach for centuries, which even led to the creation of protestantism in the end.
So yes, I mean real reduction.
It takes considerably less resources (GDP) for more effect, i.e., you can get more CO2 emission reductions faster and cheaper if you invest in clean technology in developing countries than here in Europe or in the U.S.
Again, particularly for a country like Switzerland this is unfortunately a very ignorant argument.
Keep in mind: Switzerland could export Swiss technology in renewable energies and efficiency. However, Switzerland can never export foreign coal, Switzerland can never export foreign oil and Switzerland can never export foreign gas and Switzerland can never export foreign uranium.
Denmark and Germany export well over 80% of their wind turbines with huge profits and created over 100'000 jobs in this market, not because they told China and India to do so, but because their government put well over a decade ago a framework in place which helped the Danish and German wind industry to grow.
Also based on your same argument, one could say: Ok, let's have everybody work in the financial market, because this is the market where one can generate the highest profits (highest GDP) with the least effort (lowest energy use). And if it goes wrong - well there's the tax payer to bail us out. In addition, since banks do not produce, they are also very clean. So let's all work in the financial industry and save the world. What do we need engineers for? After all engineers generate less GDP than bankers. And while we are at it: We should also close engineering schools and thus save on taxes, because bankers generate more GDP than engineers...
No, but Switzerland can export power plant technology.
It would be better if Switzerland actually supported renewable energy and efficiency to such a level that these technologies grow in Switzerland as well and Switzerland can eventually export these technologies too.
It would be a pity if Switzerland not only imports foreign oil and foreign gas, but also ends up importing renewable technology from China.
Because this will undoubtedly happen, if wealthy countries like Switzerland keep on pointing the finger on developing countries instead of investing in their local market.
Then as I said before: China is not sleeping eventhough the wealthy countries like to claim otherwise and eventhough China has massive own coal reserves (as opposed to Switzerland which has none):
Worldwide solar hot water capacity added 2006:
China: 75.3%
EU: 11.6%
USA: 0.4%
www.ren21.net/pdf/RE2007_Global_Status_Report.pdf
China had 52 GW of new renewable energy in 2006 already (small hydro, wind, PV, biomass, geothermal and without large hydro power plants).
http://www.ren21.net/pdf/RE2007_Global_Status_Report.pdf
The Chinese PV manufacturer Suntech already reached an annual output of 1 GW.
http://earth2tech.com/2009/01/08/suntech-reaches-1gw-of-solar-manufactur...
China installed 6.3 GW of new wind energy last year and intends to double it this year.
http://www.guardian.co.uk/environment/2009/feb/03/wind-power-eu
How much renewable energy did Switzerland install last year? Comparing the GDPs per capita of Switzerland with China, Switzerland should have installed much more per capita then China - but it didn't because it might have been too busy blaming China...
The problem I see here is statics versus dynamics. You (and presumably the person whose remark got you started) seem to see the social system as a static entity that as a whole then responds in one of two ways--simplification or debt. The remark in question should have added the proviso: assuming the existing system remains as it is. But the socio-economic system is a dynamic one that responds in small increments to perceived or real changes. When the price of gas was at $4 or so last year, people cut back, but now it's back to normal.
If the price of oil starts going up and stays up, then people will adapt and change in response, maybe to simplification, maybe not. If the economic system makes credit freely available, they will go into debt, otherwise not.
It is not inconceivable that as the price goes up and demand goes down that people will then walk more, ride bicycles or horses, limit their car use to essential activities, and so on. Maybe a large portion of the population will give up the personal car and use public transit--and the rich will spend whatever is required to use their cars as much as they can afford. Certainly 50 years ago that was the case in my own experience. The cooks walked to market to buy food, while the master used the car sparingly for trips to town on business; other people in the household used the horses or bicycles. If gas rose to $1000 a gallon, I'm sure there are people out there who would buy it up (the bankers, maybe?) while the rest of us looked on from our bikes or horses or feet, as in the days of old.
All of these analyses are useful as scenarios for consideration, but I doubt that they have any predictive power.
Back in 2007, many high-ranking economists issued studies about the very lucky change observed in macro-economy: Using vector autoregression method (VAR), they compared the macro-economic effects of the oil price spike that was supposed to have ended by 2006, with earlier events. And they happily found how much better today’s economy can deal with oil price increases, sompared to the 1970s and 1980s. W. Nordhaus even found that this - by then - newest oil price spike did have virtually no influence at all. One year later, these experts seem to have become rather quiet.
Recently one more study has been published by James Hamilton
(http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2...),
with the 2008 spike included. This paper, certainly worth reading, is somewhat strange for an econometric study because it offers two alternative explanations for the 2008 price spike without deciding which one applies. Using fundamentals and estimated demand price elasticities, he concludes that these data would already suffice to explain the price increase from 55$ to 147$. In a later paragraph, a substantial role of speculation is also conceded. As to the development of the financial crisis, he observes a positive correlation between suburb distance from urban centers with foreclosure rates and the like, suggesting a possible link between costs of driving and economic downturn.
Looking at the sheer countless unanswered questions raised in this high-grade opus, it appears that economists are just simply unable to assess possible developments of the commodity prices such as oil, and even more its feedback on the overall economy.
Probably the Hotelling theorem would give some idea what could be, but unfortunately not a single one of the premises for the Hotelling rule are fulfilled in real life – it’s the same situation as with the ideal market or the ideal consumer.
So, what about 120$/bl, or 1000$/bl ? I think there’s no chance to avoid the formation of the next bubble, I can’t see why it should not form, and implode once more. In the long run (but before we’re all dead) the price will rise, and more and more consumers will be unable to afford oil products and related services. Of course the distribution of demand destruction will depend on the distribution of wealth, and partly also on the degree of necessity of those goods. Discretionary spending in poorer environments will disappear first etc. etc.
Regards
peterkarl
A commodity that is prone to bubbles could rise to virtually any price. An article such as this one would be pointless.
One of the (unspoken) assumptions of this article is that the price of oil reflects the value added during production. This precludes a bubble. It is a reasonable assumption because, unlike houses, oil is destroyed when it's used and you can't sell it to a bigger fool once the deed is done. In order to flip oil, one needs to store it. As it happens, storage capacity is quite limited and most of it is tied up in SPR-like schemes.
An oil fields bubble is conceivable but I don't know that there's any evidence for that. My understanding is that privately-owned fields are generally exploited as soon as it becomes profitable to do so. I would of course welcome evidence of some kind of OIP bubble from any reader involved in the industry.
Sorry for belaboring basic notions but many are evidently confused.
I am not sure if I understand you correctly. Why should a barrel for sale in July have three times the value 'added in production' compared to a barrel for sale in January same year. There's nothing different in production, so why should production have added more value 6 months later, as the production didn't change at all?
According to Hamilton, it was the shift in demand curve that raised the price (theory 1), or else the speculators' expectation of even higher prices (theory 2), or probably a bit of both.
Are you some kind of marxist? ;-)
People who own scarce resources produce value added by sitting on their asses. The scarcer the resource, the higher the rent, the more value created out of thin air. This is how value is accounted for in the free world.
The production changed in 6 months actually but that's not the issue.
In a market, a commodity is only worth as much as people are willing to pay for it on the upside and prices will fall until producers cut production on the downside. Oil demand drops during an economic crisis as surely as electric demand drops at night. This is not in any way surprising or mysterious.
Lots of mystification about speculators out there... but let's get real: this isn't real estate.
Speculators can only raise the price for more than a few weeks by putting oil in storage. Production supposedly hit a record in July so it's hard to argue anyone but Saudi was producing much under capacity. According to the OECD data reported by the EIA, storage was only a bit higher than normal during the last couple of months of the run up in prices so, while I wouldn't want to dismiss the effect of speculation entirely, I'm comfortable telling you it wasn't a bubble by any stretch of the imagination. Storage only ballooned as the prices were dropping and that's when one could really argue speculators supported the price. Look at what happened in December and January if you want to know what rabid speculation looks like. But calling even that episode a bubble would be a stretch.
Outside of the OECD, there was talk of the likes of China and Iran stockpiling oil last spring and summer. But you wouldn't call a sovereign government a speculator, right?
It's very likely that the net effect of speculation was to dampen the price spike. Without speculators short-selling oil, a buying panic could have brought the price much higher. Volatility can feed on itself as consumers figure out they would take fewer chances with their own little stockpile or with a few future contracts...
Some most interesting inferencing about speculation. Your analysis concurs with Matt Simmons saying that speculators were shorting rather than driving that upspike.
Speculators can only raise the price for more than a few weeks by putting oil in storage.
If someone buys a year long futures contract, they've added demand for futures, and raised prices a year out. If a lot of people do so, they've added a lot of demand, and raised them quite a bit. That demand won't go away for a year (or longer, if the contracts are further out). And, arguably, they can roll over their contracts and keep that price bump in the market. If more buyers arrive for contracts, you can get a hyper-exponential bubble going pretty easily.
It kind've looks to me like that's what happened between about $100 and $147/bbl.
Now, you could argue that the only arbitrage link between current prices and futures prices is storage, but that's not clear to me. First, is that true? And 2nd, do we really have enough data on worldwide storage to be sure of what's going on?
Your discussion of the futures market makes no sense to me. But let's not get into that. Instead, do tell what's your evidence if you have any.
What I saw during the run up in prices was backwardation. I assume you saw the same thing. This tells me the year-out future was not driving the price upwards. I guess one could argue that the relative flatness of the curves discouraged dumping of inventories in the face of the spike... but this comes far short of what you seem to be saying. If you have an alternative reasoning that relies on known mechanisms and logic, please put it forward as explicitly as you can.
Storage as an arbitrage link has been demonstrated extensively in recent months. You'll find lots of discussion about that in the press.
The crude market has to clear so the only plausible links so far as I can see are spare capacity and storage (which is of course not limited to crude). So far as I know, there's little evidence that speculators have much bearing, directly or indirectly, on spare capacity.
Sure, we can hypothesize all we want about what's going on under the radar... but, without evidence, it amounts to poor conspiracy theories.
Do you have evidence for another link and/or unreported arbitrage?
Now that the price of gas is dropping, there is some relief at the pump. However, the rest of the economy is so bad that people aren't going back to their previous gas-guzzling ways, and that is nothing but good for the country and the planet. Hell, GM may even stop making Hummers! I drive a Prius and can now fill my tank for less than $20 here in California. That gets me about 400 miles a tank and I'm happy as hell. But beyond the fuel economy, I realize that Toyota, much like other foreign car manufacturers, builds a lot of its cars here in the US and they don't seem to be going bankrupt. That means jobs for US workers making cars that outperform the USAI right here at home! Amazing. And I keep coming back to the question: why did our Auto industry fight for so long against raising CAFE standards? And why didn't our Government put the right tax relief in place to make it easy and profitable for them to use every technological advance to make the best cars on the planet? Because raising CAFE standards means using less gas, which is not good for the bottom line of "the biggest U.S. corporation this year by revenue" and their close associates. And that includes their friends in Congress. The buck may stop at the top but it passes through a lot of hands on the way. So come on, Big Oil~ bailout your "friends" at GM, Ford and Chrysler so they can save those millions of American jobs! I'd say it's the least you can do, but we've seen less from you. And in the end, we both know that Chinese cars will still run on gas and make your profits sizzle. And that is what matters most to your shareholders and your bottom line. You don't care if we think you're a big bunch of dicks as long as we still pony up at the pump and are enslaved to oil. It is my sincere hope that President Obama ushers in a new era of Small Oil so we have a choice (besides bicycles and foot power) to get off gasoline for good. Bring on alternative fuels!
Hi guys,
Looks like I'm late to this party :( and would like to mention the free book by David MacKay: "Sustainable Energy - without the hot air" (downloadable from http://www.withouthotair.com/) which takes a hard physics view and is packed with data, covering hosts of technologies, the ways they work and the science behind them - very informative.
Alas I'm a reluctant doomer. Simply as I see our present economics as "capitalism without a conscience". Basically, there is no ethic or ethos beyond profit.
Thus I see our fate as in-consequential to indifferent business needs. The oil industry will continue in the same way and will even press for outcomes which result in the system crashing - because there is no overarching guide except profit. There is no view of the future, care for the future or care for others. And this is animated by literally billions of people trained / corralled / programmed to think thus.
This cannot change - nor does it want to, till the edge is reached and peoples tip over. But "the system" is always in the hands of owners who strive to be isolated from all badnesses. To them, bad things happen to someone else. Why care? Why change? There is still more profit to be made, if we can just keep going a bit longer...
Our form of capitalism is unsustainable and is at the root of the problem. Alas, I suspect that those who seek to change the way the system works will be recognised as "enemies" of the system, a system which commands Nations and the armies of Nations. The system will fight and win because it has the strength to.
There will be no soft landing, no mass-alternative energy fix, no remediation. This will not happen because such things diminish the profits of the present system, which is forbidden.
I bet the guy who chopped Easter Island's last tree down was filled with glee, thinking of the extra profits to make :)
I've reviewed Mackay's book, and it's really quite unrealistic. He skews things against wind & solar at every turn.
We can get a clue to his attitude towards renewables from the second quote at the beginning of the chapter on wind, where he quotes Lovelock: "Wind farms will devastate the countryside pointlessly".
Here's an example - he says "if we covered the windiest 10% of the country with windmills (delivering 2W/m2), we would be able to generate 20 kWh/d per person, which is half of the power used by driving an average fossil-fuel car 50 km per day."
Well, that's just goofy. We're not going to power FF cars with electricity, we're going to power electric cars. Further, the average km/day/person in the UK is only 30, so we'd only need 4 KWHs (20% of the figure given) to drive that far.
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Neil1947 on May 6, 2009 - 2:59pm
MacKay has made a serious error in his calculations of on-shore wind energy resources. In the interests of simplicity he has taken the average wind speed (6m/sec at 10 meters height). In fact the better locations in Scotland and off-shore islands have much higher wind speeds at the 100m hub height of wind turbines(10-12m/sec). This means MacKay has underestimated the potential of these regions by X5-X10. These regions are also distant to villages and more likely to be used in future wind farms once transmission lines are built.
Some of the wind farms initially built were in poorer locations but close to electric transmission lines, so his calculations are not good examples of what is possible in UK.
there's more discussion, later....
http://europe.theoildrum.com/node/5354#more