By Richard Heinberg: Saudis and Trump: Gambling Bigly

If you’re like me, you find the Middle East difficult to understand with its many tribal, religious, energy, and geopolitical themes.

This essay by Richard Heinberg does a nice job of explaining what’s going on in the Middle East today. Because our civilization depends on Middle East oil, it is an important topic worth understanding.

http://www.postcarbon.org/saudis-and-trump-gambling-bigly/

Imagine a hypothetical Middle Eastern monarchy in which:

  • Virtually all wealth comes from the extraction and sale of depleting, non-renewable, climate changing petroleum;
  • Domestic oil consumption is rising rapidly, which means that, as long as this trend continues and overall oil production doesn’t rise to compensate, the country’s net oil exports are destined to decline year by year;
  • The state has a history of supporting a radical version of Sunni Islam, but the people who live near its oilfields are mostly Shiite Muslims;
  • Power and income have been shared by direct descendants of the royal founder of the state for the past 80 years, but the thousands of princes on the take don’t always get along well;
  • Many of the princes have expatriated the wealth of the country overseas;
  • Population is growing at well over two percent annually (doubling in size every 30 years), and, as a result, 70 percent of the country is under age 30 with increasing numbers in need of a job;
  • Roughly 30 percent of the population consists of immigrants—many of whom are treated terribly—who have been brought into the country to perform labor that nationals don’t want to do;
  • A sizeable portion of the nation’s enormous wealth has been spent on elaborate weapons systems and on fighting foreign wars;
  • A powerful Shia Muslim nation located just a couple of hundred miles away has gained geopolitical advantage in recent years; and,
  • For the past three years oil prices have been too low to enable the kingdom to meet its obligations, so it has rapidly been spending down its cash reserves.

Now, ask yourself: What could possibly go wrong here?

We are, of course, discussing Saudi Arabia, which has been much in the news lately.

 

The centerpiece of “Vision 2030” is the proposal for a purpose-built city, Neom, that would be powered by solar panels and busied by cutting-edge industries like artificial intelligence, biotechnology, IoT, and robotics; its water would be supplied by desalination plants and its food grown hydroponically. Neom, if ever actually built, would most likely either be an enormous waste of billions of dollars and untold amounts of natural resources that can never be used for better purposes (as in hundreds of Chinese “ghost cities”), or would lead to an even uglier and more extreme version of haves vs. have-nots than already exists in Saudi Arabia. Add continued rapid population growth and the whole exercise becomes transparently futile.

A cheaper and more sensible plan (though likely not as popular) would be to end population growth, slash overall consumption, reduce economic inequality, make peace in the region, and aim for home-grown development of intermediate technology. Not as glamorous, not as attractive to an ambitious risk taker. But practical nonetheless.

However, even this plan comes with substantial risks, as climate change could foreclose on any progress by 2100 with deadly high temperatures that make much of the Middle East uninhabitable by humans. If the region still has a window for peaceful adaptation, it is small and quickly narrowing.

By Tim Morgan: Will things go bang soon?

Tim Morgan continues to impress.

Here he explains what caused the 2008 financial crisis, why it will happen again soon, why it will be much worse this time, and what will probably trigger it.

I challenge you to find a single example from mainstream journalism with such intelligent explanatory clarity.

It is so refreshing to find a mutant not in denial.

https://surplusenergyeconomics.wordpress.com/2017/11/13/112-will-things-go-bang-soon/

We may not be clear yet about when the next crash will come, but we understand a very great deal about the mechanism that will make it happen. Put another way, we have a narrative that puts all the pieces in the right places.

This narrative is telling us that a crash is highly likely – and that it may happen a lot sooner than we think.

Let’s start with the fundamentals. Contrary to conventional thinking, the economy isn’t really a monetary system at all, but a surplus energy dynamic. What drives the output of goods and services is the quantity of energy we can access, less the energy consumed in the access process. If the available quantity is constrained – or the energy cost of accessing it increases – the output of the economy will decrease.

Money, having no intrinsic worth, has value only as a “claim” on the output of the real economy, which means, ultimately, that money is a claim on surplus energy. Debt, as a ‘claim on future money’, is really a claim on future energy.

For more than two centuries, there has been sustained growth in available surplus energy. This has enabled total financial claims – the aggregate of money and credit – to increase as well, without toppling the financial system.

What we’ve been witnessing since the turn of the century, though, has been an increase in the energy cost of energy (ECoE), combined with emerging constraints on the quantity of accessible energy. This process makes the continued growth in aggregate money and credit dangerous, because we are creating claims that the real economy will not be able to meet.

Once understood, this process makes sense of what has been happening. Between 2000 and 2008, credit creation soared, but debt-financed growth drove up energy demand in a way that eventually brought the system to the brink of collapse. In 2001, when prices averaged $24/bbl, OECD consumers spent about $430bn on oil, of which around $240bn went on imports. By 2008, when oil averaged $97/bbl, these numbers had increased to $1,700bn and $1,050bn. Oil was now costing OECD customers $1,270bn more than it had just seven years earlier – and $810bn of that increase was being spent on the higher cost of imports.

Moreover, these huge liquidity drains are only those related to oil. Other forms of energy also soared in cost, as did energy-intensive commodities such as minerals and foodstuffs.

This was what brought the debt-financed party to an end.

Looking a little more closely at this, the increase in the cost of oil to the OECD quadrupled between 2001 and 2008. The increase in ECoE over the same period was much smaller than this. According to SEEDS, global ECoE for all energy sources rose from 4% in 2001 to 5.4% in 2008, a rise of one-third.

So the rise in market prices vastly over-cooked the underlying trend in ECoEs. In relation to this fundamental benchmark, oil was underpriced in 2001, and overpriced in 2008.

This tells us that something else was going on.

That ‘something else’ was supply constraint.

Just as westerners were bingeing on credit, emerging market economies (EMEs) were consuming more energy and other commodities, notably as exports ramped up. Rising energy demand was colliding with more pedestrian growth in supply. Investment in supply tracked market prices higher. When demand dropped after 2008, the ensuing fall in prices became inevitable.

In retrospect, we “got away with it” in 2008, for three main reasons.

First, governments’ balance sheets were strong enough for them to bail out the banks without forfeiting their own credibility, and that of their currencies.

Second, the authorities bought time by adding monetary adventurism to the established credit adventurism.

Third, the cooling of the economy took the heat out of energy markets.

To know when and if a second crash may happen, and what its results are likely to be, we need to test these three “get-outs” as they now are.

First, government balance sheets. On the basis of amounts owed (rather than the market value of bonds), the aggregate debt of advanced country governments was 67% of GDP in 2007. Now it is 102%, and still rising. Bailing out the banks now would be a lot harder than it was back in 2008. Not only are government balance sheets weaker, but bank exposure has increased as global debt has grown. To be sure, reserves ratios are higher now than they were back in 2007. But, because banks borrow short and lend long, no amount of reserving can render them immune from the consequences of a loss of faith.

Second, “monetary adventurism”. Back in 2008, typical rates were 5.25% in the United States and 4.3% in the European Union. Now, the equivalent numbers are around 1% and -0.25%. There’s no scope, then, for further monetary adventurism, unless central banks are prepared to go for deeply negative nominal rates, a policy which would be barking mad, even if it didn’t, very probably, necessitate helicopter money and the banning of cash.

So that leaves us with our third component, which is energy. Essentially, a big rise in oil prices would crash the system.

Is this likely? On balance, it is. Oil demand is growing at around 1.4 mmb/d each year. Supply has kept pace, mainly thanks to increased shale and other unconventional output, plus an increase in supply from OPEC. Neither may be sustainable. Shales are extremely capital intensive, because of the “drilling treadmill” caused by ultra-rapid decline rates. Few OPEC countries have much scope to deliver increased supplies. Underlying ECoE, SEEDS says, is 42% higher now than it was in 2007.

Put this higher ECoE together with the slump in investment caused by the fall in crude prices, and the implication is that crude prices could spike, and do so rather more quickly than is generally expected.

That, then, is what we should be watching for when looking out for another crash. All the other conditions are in place, including excessive debt, weak underlying growth (reflecting rising ECoEs), overstretched government balance sheets, and an inability to repeat the monetary adventurism of 2008-09.

All that we’re waiting for is an oil price spike, and a trigger equivalent to the “Lehman moment”.

Both may come sooner rather than later.

By JT Roberts: On Resources and How the World Really Works

I don’t know who JT Roberts is but he is very bright and is an excellent writer. I stumbled on some comments she made in a recent post by Tim Morgan and I thought they were so good I’ve copied them here.

https://surplusenergyeconomics.wordpress.com/2017/10/27/111-a-spike-to-puncture-the-bubble/

In the 70s just as US domestic oil production peaked Nixon made some unusual but very interesting moves.

  • Opened China for trade
  • Established the EPA
  • Created a Petro-Dollar deal with Saudi’s
  • Took the Dollar off Gold

I have a very difficult time believing that he, or his cabinet, or congress had any clue of the significance of those particular moves. I think that in particular they would not have understood the Limits to Growth reality, since they decided not to give ear to the findings by Meadows and Forester. US wealth had been built on abundant easily accessible energy and mineral resources. The US was the manufacturer to the world up until 1970 not because of innovation but because the world couldn’t compete on price. ( The Battle of Somme was the effective killing machine it was because of the cheap steel rails that had been supplied by the US, these latter became the light gauge system in the UK ) No other country had the combination of resources at the volumes that the US had. As these became depleted it hampered growth because of affordability. Had it only been a matter of raising the price to meet increased cost of production why didn’t that happen? Affordability is the real driver of growth not supply and demand.

By opening China it gave the US access to offshore its energy intensive industries like steel production, and mining. As well as labor intensive industries like clothing. ( A population living on rice is far less costly in energy terms then one living on hamburgers) Establishing the EPA created additional pressure to move manufacturing elsewhere. The suspension of Dollar-Gold convertibility was a necessity as there wasn’t enough gold to cover the dollars in circulation. It also hampered the ability to create currency. The risk was that dollar demand would collapse but that was countered with the Petro-Dollar arraignment effectively giving the currency a place to go rather than returning to the US to be inflated away. That move calmed the markets, because they felt that at least their dollars could now be converted to oil, which is of higher value than Gold.

Saddam Hussein, and Qaddafi threatened the stability of that system. Saddam had boycotted sales of crude to the US in 2002 and started selling his oil in Euros. For 30 days he stopped all exports in a show of force that he had control of their national petroleum system. What he didn’t understand was he was threatening to limit access to what the US needs most, energy and resources. The war was the answer to that threat. Now Iraqi oil is safely in the control of the international oil majors. Qaddafi had made a similar error since his interest wasn’t to allow the state owned system to be controlled by the oil majors. He also threatened the the Petro-Dollar by creating a competing gold currency that was being used in Africa. The French were particularly at risk as it was replacing the Franc still in use in there former colonies.

If we look closely at NAFTA we see that much of it revolves around access to resources. In exchange for easier economic trade with the US, both Canada and Mexico have agreed to unlimited access to their oil and other resources. When the USSR fell we saw the same pattern. Anglo-US corporations rushed in to gain access to whatever resources they could. Putin the patriot didn’t play ball like Yeltsin. So now he is vilified. Canada and Mexico have peaked in oil production, and now NAFTA is at risk. The UK joined the EU just as it had oil to sell and promptly left when it didn’t.

What we see is a common pattern that is larger then any political system.

Capitalism is a dissipative system out of equilibrium, as all dissipative system are. Like hurricanes Capitalism requires energy input to exist, anything that threatens that will collapse the system. It must grow or die. Within the structure, like hurricanes, there can be self organized subsystems. Tornado’s, Micro-bursts, and other elements that feed off the core. With Capitalism these are corporations and governments. In order for the core to survive the entire system must grow in aggregate. As the net energy driving the system declines the structure weakens, like a hurricane on land or cold water.

Not only is it impossible to return to a local agricultural existence. It is also impossible to decouple the elements of the system. We see that with Trump. His platform was isolation, and now its war. He has no choice he’ll make similar moves as Nixon did, but it can’t work because there is no more sweet spots to exploit.

Just as the shale play is a high cost desperate act of a dying industry. (Shale was well know in the 70s but as uneconomical as it remains today) The US will attempt to turn back time with it’s military machine as it has in the past. The problem is they can’t return affordability so the system will simply grind to a halt.

I guess Adam Smith was right about an Invisible Hand.

 

Without energy to drive real growth all you have left is moving money around. I think most mistake the symptom for the cause. The lax regulations are needed to increase debt which increases money supply. So strangely the corruption is part of the system.

For example it has been documented that the primary money laundering economies are US and U.K. So for all their show as the bastions of freedom and democracy the reality is they benefit from corrupt dictators that stuff their ill gotten gains in the western banking and real estate system.

With Trump it’s just irrelevant he’s neither good or bad. He is no different then any other elected president. He is limited to the resources at his disposal and won’t accomplish anything beyond that. Basically a symptom not a cause.

The Appolo success if we so call it really needs to be considered in context. If you compare the energy production of the US with the USSR it becomes clear that technology wasn’t the key to the space race. In actuality the Soviet rocket engines were 20% more efficient and more powerful. They dared to pipe oxygen rich exhaust from the turbos into the primary engine. But it was done because of necessity they couldn’t afford to waste the fuel. It also constrained their ability to test run the engines. Instead they choose to test them at launch.

The arrow all points in the same direction. Without the resources that the US had access to the USSR could not compete. But it had nothing to do with technology because they were winners with technology.

AK 47 is another example.

I sum it up this way. If you have wood you cook with wood. If you have coal you cook with coal. If you have oil you cook with oil. If you have gas you cook with gas. If you have a lot of it you have trains, planes, and automobiles. I might add rockets. With a little of it you cook.

Technology is a function of abundance not the cause of it.

It’s interesting to note the Roman Empire grew in wealth through military conquest. Then it started developing schools of higher learning in imitation of the Greeks.

Education has never preceded empire. So the thought that education or technology are the source of wealth is false. It has always been resources. It will always be. So in that regard it is no coincidence that the US military is larger then the next 10 militaries combined. So the military industrial complex was also a necessity.

Ironically the competitive economic system, communism thought that they could only find success within a highly educated society. Lenin targeted Germany for that reason. But educated people make poor soldiers. Ignorant religious zealots make far better soldiers. Which system promoted religious freedom and zealotry? For God and Country. God save the Queen. In God we trust. One nation under God.

So in many places Americans are hated because of their ignorance. But perhaps their ignorance has been their strength all along. In this regard we might want to watch closely the current US administration.

War is Peace
Freedom is Slavery
Ignorance is Strength

By James Hansen: Scientific Reticence

Here is the latest (draft) paper from James Hansen, the world’s best climate scientist.

In summary, the situation is much worse than you’re being led to believe.

We argue that global warming of 2°C, or even 1.5°C, is dangerous, because these levels are far above Holocene temperatures and even warmer than best estimates for the Eemian, when sea level reached 6-9 meters (20-30 feet) higher than today. Earth’s history shows that sea level adjusts to changes in global temperature. We conclude that eventual sea level rise of several meters could be locked in, if rapid emission reductions do not begin soon, and could occur within 50-150 years with the extraordinary climate forcing of continued “business-as-usual” fossil fuel emissions.

The 2 C goal set by our governments is not an appropriate goal because it is clearly dangerous, and despite this, we are almost certainly not going to achieve the goal.

It’s not like we tried and failed. We’ve done nothing except talk and deny the science.

Hansen laments here that even scientists are denying the science.

Where are the adults?

Clipboard-20171026

 

http://www.columbia.edu/~jeh1/mailings/2017/20171026_ScientificReticence.pdf

 

By Gail Tverberg: The Approaching US Energy-Economic Crisis

Gail Tverberg refines her story on the relationship between energy and the economy, which is the most important issue that our leaders and media never discuss.

With each new version Gail is clearer and more comprehensive which reflects well on her effort to explain a complex and poorly understood topic.

This essay is a good place to start for someone seeking to understand what is going on in the world.

https://ourfiniteworld.com/2017/10/18/the-approaching-us-energy-economic-crisis/

6-seven-ways-a-us-energy-economic-crisis-can-arise

By Tim Morgan: SEEDS goes public

Another must read by Tim Morgan…

As you will know if you are a regular visitor, surplus energy economics is an interpretation which says that the economy is, fundamentally, an energy system, not a financial one. More specifically, it is a surplus energy system, because, whenever energy is accessed, some energy is always consumed in the access process. Our prosperity is the surplus, or difference, between the amount of energy accessed and the quantity used up in getting it.

Where the surplus energy approach differs most fundamentally from ‘conventional’ economics is in its recognition that there are two economies, not one.

The first of these is the ‘real’ economy of goods and services, labour and resources, and this is an energy system.

In parallel with it is a second or ‘financial’ economy of money and credit.

Conventional economics goes wrong in thinking that this ‘financial’ economy is the entirety of our economic system. In fact, it is in a subservient relationship with the energy economy. This ought to be obvious. After all, money has no intrinsic worth. It commands value only as a “claim” on the output of the real economy.

Back in 2013, when Life After Growth was first published, I was uncomfortably aware that it would be hard to put numbers on this relationship. This is where the SEEDS project – the Surplus Energy Economics Data System – began. One of the biggest challenges has been to use monetary units to calibrate the ‘real’ economy which is the substance behind the ‘financial’ economy with which we are all familiar. This is one of the reasons why developing SEEDS has taken so long.

During this period, I have become ever more aware of a striking and dangerous reality in our situation. This is the way in which the ‘financial’ economy has become estranged from the ‘real’ economy which it is supposed to represent.

The real economy began to decelerate in or around 2000, but we have been unable or unwilling to accept this. Instead, we’ve sought to fake a “normality” of growth by ‘mortgaging the future’.

At first, we did this by creating an ever larger mountain of debt. This led to the global financial crisis (GFC) of 2008.

So large had debt become by then that the only way in which we could co-exist with it was to make it cheap to service. This is where “monetary adventurism” began.

We have toyed with some extremely silly ideas since then, such as ‘helicopter drops’ of money, negative interest rates, and the banning of cash.

The powers that be haven’t been sufficiently irresponsible to adopt some of the more extreme expedients. But what they have done has been bad enough. Ultimately, we have adopted a policy of ultra-cheap money, slashing policy interest rates to all-but-zero, and using vast amounts of newly-created money to drive asset values up, and yields down.

Only now are we becoming aware of quite how disastrous this policy of ultra-cheap money really is. Naturally, it has accelerated the pace at which we borrow – after all, why would you not borrow, when you are being paid to do so by interest rates which are negative (they are less than inflation)? And why would you save, when the real value of your savings falls year on year?

But the downsides of monetary adventurism don’t end there. I’ll pick just one of these downsides for special mention here. It is pensions. By driving returns on capital down into negative territory, we have destroyed returns on capital and, with them, our ability to provide for retirement. For all but a tiny minority of the very wealthiest, it has become impossible to save enough to give us a decent income in retirement.

The naïve answer to this is that we needn’t worry about pensions, or other future issues like paying back debts, because we have the comfort of the hugely inflated values of assets such as stocks, bonds and property.

This ‘comfort blanket’ is foolish in the extreme – because the only way we can turn these assets into money is by selling them to each other.

In politics and society, there are two things which we must hope that the general public never finds out. The first is what has happened to their ability to provide for retirement. The second is that selling houses to each other cannot get them out of this predicament.

The SEEDS system – in its SEEDS Snapshots version, freely available to the public – can now be downloaded from the resources page. The SEEDS Professional version will be announced at a later date.

We will doubtless have many discussions here about what SEEDS does, how it does it, and what it can tell us.

For now, though, such discussions can wait. Please download the very first published version – and enjoy it.

 

https://surplusenergyeconomics.wordpress.com/2017/10/08/108-seeds-goes-public/

By Richard Heinberg: Energy and Authoritarianism

Arab Spring, Greece, Brexit, Trump, Venezuela, and many more to follow.

Pay attention to what our leaders and experts say. Not one has a clue what is going on.

Hidden from view = No Clue = Denial

 

It is highly likely that, as events unfold, the causal criticality of energy decline will be hidden from the view of most observers, whose attention will be fixed instead on shocking but comparatively superficial and secondary political and social events. A more widespread understanding of the role of energy in society, and of the likely limits to future energy supplies, could be extremely beneficial in helping the general populace adapt to scarcity and avoid needless scapegoating and violence. Perhaps this essay can help in some small way to deepen that understanding.

 

One important wild card is the role of debt: it enables us to consume now while promising to pay later. Debt can therefore push consumption forward in time and (for a while, at least) make up for declining energy productivity. It would appear that the “fracking” boom of the past decade, which probably delayed the world oil production peak by about a decade, depended on the power of debt. But when debt defaults cascade, an economy may decline much faster than would otherwise be the case (default-led financial crashes have occurred repeatedly in modern history). And debt defaults can cripple the financial and thus the economic system of a nation with plenty of energy resources (as happened in the U.S. in the 1930s).

 

http://www.resilience.org/stories/2017-09-26/energy-and-authoritarianism/