Friday, 30 March 2012

What does all this mean?

If you've read all of my posts so far, you may be wondering where I am going with all this. In this post, I will attempt to briefly answer that question. The details, of course, are material for many future posts.

When I first heard of Peak Oil, around the turn of the century, the people talking about it were either petroleum geologists or survivalists types. The declining side of the oil consumption curve was seen to be very steep and our trip down it would end with a crash at the bottom. Prudent people would be prepared, which meant having lots of canned food and ammunition stored in a hole in your backyard. If you've seen the movie "Mad Max" and it's sequels, you get the picture. And of course there were technophiles responding to these concerns, who were sure we could invent our way out of the situation, and end up living in a "Star Trek" like future, no problem.

In the decade or so since then, a lot of subtlety has been added to the Peak Oil discussion. And a good thing, too.

I was originally torn between the "technology will save us" and the "we'd better prepare for the worst" camps, but now I have realized there are a range of possibilities between the two extremes that are much more likely than the extremes themselves. The unlikelihood of the extremes is worthy of quite a bit of discussion in itself, but I'm going to leave that for another day. Today, let's consider what are now seen as some of the more likely developments that lie ahead of us. We are now entering the "age of scarcity" and the general shape of what lies ahead is not that hard to see.

Since most of us are still living in the "business as usual" world and our main interface with reality is the economy, let's consider that first. Energy, especially crude oil, is the key resource that drives our economy and one would expect the economy to follow a curve somewhat like the oil use curve, since the amount of oil being used is a strong predictor of the level of economic activity. Specifically, in order for the economy to grow, the amount of oil being use must grow and the price of that oil must not increase significantly. Remember that our economy must grow in order to function properly. That is, if growth decreases, the economy becomes less effective at providing the necessities of life to the people who are relying upon it, businesses become less profitable and unemployment increases.

The classic curve that Peak Oil enthusiasts draw is smooth going up and smooth going down, which makes it easy to sketch if drawing on a blackboard, but glosses over some of the realities of the situation. More accurate depictions of this curve are very rough on the left hand (growth) side, since that part of the curve is based on history, and the history of this had lots of ups and downs. In the years since the second world war, there have been numerous recessions and most of them have been preceded by a spike in the price of oil and accompanied by a temporary reduction in the rate at which oil was being used. We are now at the peak of the curve which, it turns out, is more like a bumpy plateau. There is no reason to believe that the declining side of the curve will be any different. We will move down in fits and starts, with level spots and even minor recoveries in between.

It is interesting to look at the last few years to see how this works. We can start in the summer of 2008. The economic recovery that followed the .com crash and housing bubble in the US were still going strong and oil use was on the upswing. But for the first time demand really was outstripping supply. Conventional oil had peaked in 2005 and the non-conventional oil that was being added to the mix to keep up with demand was more expensive. The price of oil increased, reaching a peak of $147 per barrel late in the summer of 2008. What followed was a financial meltdown and the bursting of the American housing bubble. Conventional economists, politicians and most everyone in the media were taken by surprise and have since blamed problems in the financial system and lenders who where giving mortgages to people who really couldn't afford them. No doubt all that is to some extent true, but it would not have come to a head without the oil connection. Energy is the pump that enables market bubbles to grow. When the pump falters, the bubble bursts.

Since then, despite what the politicians would have us believe, we have been in an economic depression. There have been periods of partial recover, but as the economy starts to take off and the demand for energy goes up again, the price of oil goes up too, causing the economy to stall again. I am no rocket scientist, but it's not hard to imagine this pattern continuing and the depression deepening as the supply of oil continues to decline. Note that bringing more sources of expensive oil on line isn't going to help.

So, I am predicting a bumpy decline on the falling side of the oil supply curve. Economic activity and energy use will fall off until we are using somewhere between ten and twenty percent of the amount of energy we are using now, an amount that can be supplied by renewable sources. At which point we could, ideally, make a soft landing. But that's only if the fabric of our system can hold together under this continuing abuse and if nothing more unpleasant happens.

All this is a little abstract, perhaps, so lets talk in terms that area little more personal. When the price of energy increases, everyone's expenses go up. This makes businesses less profitable, even if demand for their products stays high. But it also means that individuals have less discretionary income (since we are paying more for energy too), so we spend less, especially on things that aren't necessities. And this means that demand goes down for most products. Business are faced with increased costs and falling sales. The weak ones close, the stronger ones downsize. People lose their jobs and spend even less money and demand goes down even more. Governments find themselves with lower tax revenues and increased demand on social support mechanisms. Government programs are cut back in response and government workers laid off. And so it goes in a downward spiral, with occasional pauses during temporary recoveries and bone jarring drops when those recoveries fail. As inevitable as all this may be, it is very difficult to predict when any specific event will happen, which makes it even more difficult to cope with the process.

Of course we have had deflationary spirals before, usually caused by overproduction and/or the bursting of speculative bubbles in the market. But for the past century or so oil was there as an enabling resource to get things going again, especially with a little help from governments who are willing to borrow/print money and spend it in ways that stimulate the economy. A whole lot of that is being done in an attempt to halt the current deflationary spiral, with disappointing results. Some economists are concerned that pouring all this money into the economy will result in inflation or perhaps even hyper inflation. But much of the money is being used to bail out banks who are suffering from all the loans that business and individuals are defaulting on. That government money never gets into the economy, since it is only used to bring the banks balance sheets back up to zero. I don't think we are going to have inflation in the classical sense of too much money (credit) chasing too few goods and causing prices and interest rates to go up. But inflation in the sense of price increases because of supply not being able to satisfy demand, will happen. And necessities like energy, and food and transportation which are largely based on energy, will definitely see price increases. While anything which is not a necessity will see falling demand and stagnant or falling prices.

We are also going to see a continued decline of other resources, particularly potable water, strategic metals, forests and fisheries. All with similar effects on the economy to those caused by the decline in energy supplies.

Our business as usually system uses "rationing by price" to cope with supply shortages. This works, but it is hard on those with less income. Since more people are experiencing falling incomes all the time, we'll see more protests along the line of the Occupy Wall Street movement. The 99% are going to get even more upset with the 1%, and no doubt there will be increased civil unrest, rioting and so forth as a result.

But perhaps that's enough about the economy. A few paragraphs back I used the phrase "if nothing more unpleasant happens". And there are a number of unpleasant things that fall in the "pretty darn likely" category.

As the economy goes downhill and tax revenues fall, we're going to we less and less spent on infrastructure. So we can expect to see problems with infrastructure and interruption that are more frequent and longer. Electricity and water supply, sewers, communications system, roads and bridges, railways -- all will suffer.

War another possibility. A great way to keep your munitions from going stale, it has little else to recommend it in my opinion. Many recent wars and some still ongoing, have to do with the US trying to maintain its empire and guarantee its access to resources, such as oil in the Middle East. As well, Middle Eastern countries have been having revolutions when their people get sick of corrupt governments and worsening conditions. The revolution in Libya (spring 2011) cut off that country's oil production, about 1.6 million barrels per day, which resulted in a big spike in the price of oil. This spring, concerns about conflict involving Iran have forced the price of oil up over $100 per barrel and kept it there. No doubt we'll see more of this.

Of course, as oil becomes more expensive and scarces, it's going to get harder to run a machine like the American military, especially when it doesn't seem to be achieving its goals. How long before there are serious cutbacks in the American military budget? Hopefully before they are forced shut down operations and leave personnel stranded overseas.

Then there are all problems due to climate change: erratic and extreme weather, reductions of glaciers and ice sheets, rising sea level, ocean acidification, growing deserts. Present agricultural practices be they industrial or organic, rely to a frightening extent on just the right type of weather. Many areas rely on water stored in glaciers or winter snow cover at high altitudes for their water supply. And so many people live within a few feet of sea level and will become refugees as sea level rises. And it doesn't take several feet of rise, just a few inches in many cases when you add in storm surges, to render large areas near sea level uninhabitable.

In the few years still left while air travel is accessible to the majority of the population, epidemics are a significant concern. Especially with declining public health budgets and weakened health care systems.

And then there are solar flares, volcanoes, earthquakes and tsunamis. None of these things are in our control, but they can do a lot of damage to a civilization that is growing ever more fragile.

A growing awareness of all this can be pretty frightening. Once you get past the initial temptation to deny it all, what I hope remains is a desire to prepare for the trouble ahead. The only question you ever really have to answer is "what he heck do we do next?" I'll address that question in my next post.

Friday, 9 March 2012

Economic Contraction

For a long time I struggled to understand economics. I read many different economists and none of them seemed to quite make sense. Only during the last few years, as part of my studies of Peak Oil, did I come to a more satisfying understanding of money, wealth and the economy.

Money is a symbol for wealth, a unit of exchange, a store of value. And it is certainly useful enough when playing those roles. But more important, in our credit based financial system, money is debt. Banks create money when they loan it out. People take out loans based on the belief that their earning power, their "future productivity" will allow them to pay the loan back and with interest. But this can only happen as long as the economy is growing.

In the past, money has often been based on rare precious metals like gold and silver. In order for the money supply to grow, more precious metals had to be dug out of the ground. Many people look back to that system as the good old days and would like to see a return to it, citing the many problems with our credit based system. But we changed to a credit based system because our economy was growing, the money supply needed to grow with it and basing money on rare metals doesn't allow for this.

Wealth is not the same thing as money. The possession of valuable things is often viewed as wealth: precious metals, land, stock and bonds, etc. But I would say that all of these things are only symbols for wealth. What wealth really consists of is having a claim on future productivity, yours or that of someone who has an obligation to you. It's easy to see how this might be so with money or financial instruments like stocks and bonds, which are obviously symbolic, and clearly consist of a claim on the future productivity of a company or country. But consider gold – it does have some industrial uses based on its high electrical conductivity and its resistance to corrosion. But you can't eat it, wear it or heat your house with it and if food or other essentials of life are in short supply, you may not be able to find anyone who is willing to trade their essentials for your gold. If you are stockpiling gold at the moment, it is probably because you have some doubts about the future state of the economy. But I would say that the economy has already ceased to grow, and is beginning to contract. At some point in the future, then there may not actually be goods available to trade for your gold, definitely not the quantity and variety of goods that we are currently accustomed to. The same with land – they aren't making any more and as long as the population and the economy are growing, the value of land should increase. But only if growth continues. In a shrinking economy even productive farmland is wealth only if you can actually farm it and there is someone to buy what you grow.

But what is this thing we call the economy, anyway?

I gather conventional economists would have you believe that the economy is something the people function inside of. Relations between people are mediated in economic terms – in term of money, in other words. Only the most basic relationship between husband and wife, between parent and child are not monetized. And when we come to alimony and child support, even that is not so. We buy our food, rather than grow it. We rent or buy our dwelling place instead of building it. We buy the fuel to heat it instead instead of gathering it. Even our contact with nature is monetized – we pay to travel to a place where nature has been preserved, pay a guide to show us through it, pay for souvenirs to take home with us.

In this view of things, the environment exists off to one side, a supply of energy and material resources and a convenient place to dump our garbage and pollution. And it is for all practical purposes infinite. Or if something does run out, a substitute can always be found to replace it. The critical resource is human ingenuity, applied through technology, which is without limits.

The picture of the economy that I would draw is quite different. The economy exists entirely within human society and is only one of many ways that people may choose to relate with one another. Human society exists entirely within the environment and is entirely dependent on it. And the environment is finite – we are for practical purposes limited to one small planet. The critical resource that has driven economic growth for the last few generations is energy, derived from fossil fuels, for which there is no workable substitute. If that growth is to continue, we must have an every increasing supply of fossil fuels, but we have already reached the maximum rate at which oil can be pumped out of the ground (Peak Oil) and our economy has stalled and will soon start to contract, if it is not already doing so.

The real problem with this is that no one seems to have any idea of how to run an economy that is contracting. No clue of how best to minimize the amount of pain and grief that it seems must ensue. I certainly don't but I expect there is going to be lots of opportunity to learn the hard way over the next few decades.

Growth and Depletion

Let me be clear about the kind of growth I am talking about here -- growth in the burden that a human society places on its environment. This increase may happen due to an increase in population or due to increases in the rate of consumption by the members of that population or a combination of both.

In our modern world it is very to easy lose sight of the fact, but all human societies are completely dependent on the natural environment for the necessities of life -- air, water, food, the raw materials from which we build our machines and the energy which runs them. That environment is finite in size and has a limited carrying capacity. Material resources in convenient forms exist in finite amounts and when "used up" they tend to be converted to forms that are no longer useful and in many cases are downright harmful to both us and the environment. Energy flows into ecosystems in the form of sunlight and is converted into wind, falling water and biomass, but the rate at which that energy flows is fixed. By tapping into various forms of stored energy we can temporarily access energy at rates greater than the rate of solar influx, but like any other material resource, when those resources are used up, they are gone. (Yes, I am ignoring deep geothermal and tidal energy but that's a discussion for another day).

It also seems that human societies have a tendency to grow until they come face to face with the limits of their environments. In pre-industrial societies food and firewood were frequently the limits first encountered, as forests were cut down and agricultural soils were depleted by erosion, salination or simple depletion of nutrients.

We know very little about pre-agricultural societies but it is a suspicious coincidence that many species of large animal went extinct around the same time that our ancestors became really good at hunting... Of course, hunter-gatherer populations were so small in relation to the environment as a whole, that in many cases when one area was depleted, they could simply move on to another.

Agricultural societies are for the most part sedentary and when they run into the limits of the land they occupy, the results tend to be more ugly. When agricultural societies are successful, they grow and eventually they do deplete the resources on which their success is based. Very rarely has an agricultural society lasted in one location for an extended period of time. Read books like Jared Diamond's Collapse, Joseph Tainter's Collapse of Complex Societies or Ronald Wright's A Short History of Progress, for more on this theme.

Why is this so? Why does resource depletion sneak up on growing societies and catch them unaware?

I think at least part of the answer is to be found in mathematics, in the shape of the curve that growth follows. The sort of growth we are talking about, growth in populations of living organism, is exponential. That is, a population grows as percentage of its current size. Growth starts out slow -- the curve stays almost level for a long time. Then it reaches a "knee" where it starts to turn more rapidly upward and soon it turns almost vertically upward, growing at a rate that no finite container can accommodate. So of course what happens is that as the resources that were sustaining the growth are depleted, growth decreases. Often the resources have been depleted to the point where they cannot support the current population. This situation is known as "overshoot", and sadly, it is followed by "dieoff", where some portion of the population does not survive and numbers decrease to the level which the depleted environment can support. This situation always seems to come as a surprise to those who are living it. Everything has been going along just fine and as we edge onto the knee of the graph, it seems to going even better. Growth in the population, and in the standard of living for at least some of its members, seems like an achievement, a goal that they have been striving for and more could only be better. Very shortly, this is proven to be wrong. It is the sudden change from times of plenty to collapse, as a result of resource depletion due to exponential growth in a finite system, that always seems to come as a surprise.

For the last couple of centuries our western society and more recently most of the world has been in a unique situation. We have tapped into the stored energy of fossil fuels, not just as a source of heat, but also a source of mechanical power to replace human and animal muscle power. This has enabled huge growth in our population and in our standard of living.

Peat and coal had been used to a small extent as heating fuels for many years, but came into greater prominence in the 18th and 19th centuries. In the twentieth century oil and natural gas took over as our primary sources of energy. Oil is a particularly unique resource. It is a concentrated source of energy, and as a liquid, quite easy to move around and to store. Early in the history of its use, oil was to be found near the surface and often under pressure, so getting it out of the ground was easy. The EROI (energy returned over energy invested was high -- as much as 100 barrels of oil could be had for an energy investment equivalent to only one barrel of oil. And early in its history the rate of discovery had no trouble keeping up to or exceeding the growing demand, so it was easy to think of oil as an essentially infinite resource. I don't think anyone really thought of the oil supply as literally infinite but the prospect of it running out was so far in the future that there was no point in worrying about it at the present. There was ample time for future generations to find a replacement. That kind of thinking has a way of catching up with us, though.

Even today one sees naive calculations that there is enough oil left to last us 20, 30, even 40 or more years. And for many people, that is equivalent to saying that there is lots left and someone in the future can worry about what to do when it runs out. But calculating when oil supply is going to be a problem is not as simple as dividing the known reserves by the rate of annual use and coming up with a number of years.

Say your car gets 40 miles to the gallon and your gas tank has 10 gallons in it. You should be able continue cruising merrily along, for the next 400 miles, right? This is because your car's fuel line and fuel pump have been designed to always be able to keep up with the rate at which the car's engine uses fuel. There is never any worry that you might not be able to get fuel to the engine fast enough, right up until the moment before the gas tank eventually runs dry. Unfortunately, oil wells don't work like that.

An oil well does not tap into some pressurized underground tank of oil, but rather drills down until it reaches porous rock that is saturated with oil, often under pressure because of the weight of rock above it. The output from a single oil well rises quickly once you "strike oil", then levels off at some maximum rate and finally begins to decline.

Add together the production rates of all the wells in an oil field, or country or in the world and you get the classic Hubbert curve. This diagram came from The Peak Oil Primer at the Energy Bulletin website. It's well worth reading that page, if for no other reason than I am not going to go over the basics of the subject here.

It is interesting to note the similarity of the Hubbert Curve to the exponential growth curve I was talking about. The same sort of surprise is built into it -- we're just beginning to get going really well, then we reach the top of the curve and the bottom falls out from under us. And note that, in the case of oil, this happens when roughly half of the oil is still in the ground. It is not the amount that's that left in the ground that counts, but the rate at which we can pump it out of the ground and how much it costs, both in terms of dollars and energy, to do so.

Our society's continued well being is based on economic growth. That growth is driven by the ready availability of cheap energy in convenient forms -- mainly oil. Around 85 million barrels a day of oil as things stand at the moment (February 2012). It is interesting to note that that number has not grown for the last five years. And during those years our economy has been essentially stalled. The oil supply has become "in-eleastic". That is, demand goes up, the price of oil increases, but the supply does not increase. In fact, when the price of oil increases, the economy actually slows down and demand decreases to match the available supply. If you delve a little deeper into Peak Oil theory, you will find that the peak of the curve is more like a "bumpy plateau". It's pretty clear that we have been travelling along that plateau for several years now. What remains to be seen is when we will start down the declining side of the curve. Very likely the smooth decline portrayed on the graph is a convenient fiction which makes the curve easier to draw. I expect the right hand side of the curve will be more like a set of uneven stair steps, periods of sudden decline mixed in with periods when things go along fairly smoothly for a while.

Most of us will feel the effect of declining energy supplies through the economy, which is our main interface with reality. But it is also interesting to consider the pervading role that fossil fuels play in our day to day lives.

If you're uncertain how much we rely on fossil fuels, then just reach out and pick up an object that's sitting in front of you. Now consider the role that fossil fuels played in bringing that object to you. If it wasn't made locally using local materials, then the odds are that it's story is saturated with oil, natural gas and/or coal.

I gather many people pretty much take for granted all the manufactured articles around them, and in a typical urban environment, that's pretty much everything around them. I've always had a keen interest in where things come from and how they are made, so the exercise suggested above really resonates for me. Let's just consider a few categories of things.

The first thing, I guess, and quite obviously, is transportation – moving things and people from one place to another. This is the obvious one. Our modes of transportation are almost all fueled by oil in one refined form or another, be it diesel oil, gasoline, jet fuel, bunker oil for ships. Transportation has become very important in two ways:

One: over the last few decades we have globalized and thing tend to be made far form where they are used. Looking around me at the moment I don't see anything that was made locally from local materials, even if you stretch "locally" to mean within a hundred miles. Much of the stuff in this room was made in the Far East, half way around the world, just about as far away as it is possible to go and stay on the planet.

Two: while I am retired and run a business out of my home, for most of my life I drove about 10 miles to work (one way). This is a very short commute. Most people drive much further to work each day.

With things arranged like this, it's hard to reduce our dependency on oil for transportation. The infrastructure needed to produce consumer goods has largely been moved out of Europe and North America. Setting it up again would be a big job. Our cities have been set up to separate work spaces and living spaces and we haven't even begun to change this. Telecommuting sounds like a great idea, but it's not available or practical for most jobs.

There are many other obvious ones: home heating fuel, lubricants, asphalt and plastics among them. But then there are some that aren't quite so obvious...

Fossil fuels play a major role in the production of our food today. This is not really evident to most of us, I think. Food comes form grocery stores, materializes on the shelves sometime in the middle of the night, right? Not. Most people in the world are fed by an industrial farming system that is critically dependent on fossil fuels. About seven calories of fossil fuel energy is needed to produce 1 calorie of food. Manual and animal labour has been replaced where ever possible by machines fueled by diesel oil or gasoline. The recycling of nutrients in plant, animal and human waste has been replaced by an open-ended system dependent on huge quantities of the three primary plant nutrients: nitrogen, phosphorous and potassium. The minerals phosphorous and potassium are mined and transported to the farm using fossil fuels. Nitrogen makes of 78% of our atmosphere, but to convert it into a form which is useful as a plant nutrient requires lots of pressure and heat, supplied by natural gas. The pesticides that are so integral to the process of industrial farming are also made from oil. And once the food leaves the farm it usually travels hundreds if not thousands of miles to get to us, in ships, trains, trucks and planes fuels by oil. Often, food is refrigerated the whole way from the field to your table, an incredible energy intensively process and mainly dependent of fossil fuels.

The manufacture of many goods requires large quantities of heat, which is provided by fossils fuels. Metals, concrete, glass, plaster and drywall are just a few that come quickly to mind, even though none of them seem particularly oily.

The internet, which is all about data, would seem to be exempt from this voracious appetite for energy, but nothing could be further from the truth. It is estimated to consume between 1 and 2% of all the energy used in the world.

No doubt I have missed a lot of important, even critical things, but I think this gives you the general idea. Our modern society is dependent on oil and there is no cheap and effective substitute anywhere in sight.

Saturday, 3 March 2012

Environmental Degradation

In my last post I talked about the effect a growing human society has on the natural resources which are vital to its survival. For some reason Blogger wants to list this post ahead of that one, but it will make a lot more sense if you read the post on Growth and Depletion first.

The other side of the coin when it comes to depletion of natural resources is the degradation of the environment that accompanies that depletion. To me, our industrial society seems like a highly successful scheme for converting natural resources into pollution. We are told that this is necessary in order to maintain our "lifestyle" which is, as some would have it, "not negotiable".

But in reality we are completely dependent on the natural environment for the necessities of life. As that environment degrades, our lives and the continued survival of our species is placed in jeopardy. The choice is not between us or the environment, but between us and the environment – or nothing. In North America, perhaps more than anywhere else today, most people are living in denial of this fact.

The environment is suffering in many ways, but for a person like me, who approached this subject via the idea of Peak Oil, the one at the top of the list has to be climate change. Unfortunately, opinions on climate change have become so polarized that it is almost impossible to have an intelligent discussion. Actually, I should say anthropogenic climate change -- climate change caused by human activities, primarily the burning of fossil fuels which releases huge quantities of carbon dioxide into the atmosphere. This is the heart of the argument -- that our highly "carbonized" lifestyle is causing climate change and we are already beginning to suffer some pretty serious consequences, with more to come. The obvious conclusion is that we need to change, to stop releasing so much CO2 into the atmosphere. Many are unwilling to even consider change and this includes some pretty powerful concerns with a vested interest in "business as usual". In my opinion all the arguments against anthropogenic climate change boil down to one simple statement: "if it's true, then we'd have to change". If change is unthinkable, that is a pretty powerful argument. And a lot of money has been spent to make that argument over the past decade.

On the other side of the argument are scientists, trying to have a scientific discussion with a populous that doesn't for the most part understand science. It has not been going well, nor do I expect that it will until the process of climate change has gone so far that it is impossible to ignore. At that point it will be getting very late to stop and reverse the process. But for anyone who is at all interested, there is an excellent article in Skeptic magazine: How We Know Global Warming is Real and Human Caused. Skeptic takes great delight in ridiculing pseudoscience. If they are supporting a theory, then maybe there is something to it after all.

Personally, I think there is a flaw in the idea that change is unthinkable. For at least the last few centuries, we've seen nothing but change – it has been the only constant. We've called it progress, and it has become our religion. Many of us, myself included sometimes, are tired of change, or at least of changes that don't really make things better. We are assuming that the changes it would take to wean us off fossil fuels would inevitably lead to a lower quality of life. I would suggest that the direction we are headed, by pursuing "business as usual" is anything but positive, that the changes we need to make to save the environment and stop Peak Oil from causing a complete disaster, may actually be positive changes and turn your world and mine into a better place to live. I'll have more to say on this a few posts down the road, but keep it in mind.