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 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 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/

By Tim Morgan: Why Mr. Trump can’t raise American prosperity

A must read by the brilliant Tim Morgan.

https://surplusenergyeconomics.wordpress.com/2017/09/05/104-why-mr-trump-cant-raise-american-prosperity/

Essentially, two things are happening to the average American. First, his or her income is rising less rapidly than the cost of essentials, squeezing the “discretionary” income which is the real definition of prosperity. Second, increases in income are being far exceeded by increases in debt, and also by growing shortfalls in pension provision. So the citizen feels both less prosperous and less secure.

As SEEDS measures it, per capita prosperity was 10% lower in 2016 than it was back in 2000. Neither is this trend likely to reverse – by 2025, the average American is likely to have seen his or her prosperity decline by a further 8% in comparison with 2016. At the same time, per capita debt has increased by almost $54,000, in real terms, since 2000, a problem now being compounded by a rapidly-growing systemic shortfall in pension provision.

‘Conventional’ economics cannot capture any of this. A perspective which ignores both “borrowed consumption” and the trend cost of energy is baffled by popular discontent, in America and elsewhere. Moreover, ‘conventional’ analysis tends to be misled by the apparently-buoyant values of stocks, bonds and property. These values are misleading, because they cannot be monetized – the only buyers for homes, for example, are the same people to whom they already belong.

For as long as these issues are overlooked, popular anger is likely to go on taking ‘the experts’ by surprise.

 

The concept of prosperity needs to be understood clearly. Prosperity is not simply the size of someone’s income. Rather, it is the sum left over after essentials have been paid for. This means that prosperity equates to “discretionary” income, which is the sum that he or she can choose how to spend.

The fundamentally energy-based nature of all output creates a natural distinction between “two economies” – the real economy of goods and services, and the financial economy of money and credit. Used properly, the financial system can deliver many benefits. Equally, though, it can be harmful, if it diverges too far from the real economy.

The potential for harm is simple. Money functions only as a “claim” on goods and services, which really makes it a claim on surplus energy. Likewise, since credit is a claim on future money, it is really a claim on future energy.

Financial “claims” – money and credit – can be manufactured out of thin air, and we can create as many of these claims as we like. But, if we create claims that exceed what the real economy can deliver, the excess cannot be honoured. Therefore, it must be destroyed. Inflation is one way of doing this, though default is another.

 

America is by no means unique in experiencing downwards pressure on prosperity – the same is happening in many other countries, often more severely than in the United States.

The problems posed for America are twofold. First, the deterioration in prosperity makes it impossible for the President to improve the material prosperity of the average American – in attempting to do so, he is about as powerless as was King Canute when he tried to turn back the tide.

Second, the use of cheap money to ‘manufacture’ nominal economic growth is already creating an escalating level of forward risk. Just as Americans are getting less prosperous, they are also becoming ever more indebted, and face ever greater insecurity as provision for pensions deteriorates.

The time cannot be too far off, for America as for the world more generally, where the future (represented by the collective balance sheet) overwhelms the present.

By Alice Friedemann: German Military Study on Peak Oil

German Military - Peak Oil Study - 2010

Alice Friedemann summarizes here a 2010 study on peak oil conducted by the German military.

http://energyskeptic.com/2017/german-military-peak-oil-summary/

The original full report can be found here.

And what was the German government’s response to this excellent report on peak oil by their own military?

They increased their population with immigration.

Denial is amazing!

 

Today approximately 90% of all industrially manufactured products depend on the availability of oil. Oil is not only the source material for producing fuels and lubricants but is also used as hydrocarbon for most plastic. It is one of the most important raw materials in the production of many different products such as pharmaceuticals, dyes and textiles. As the source material for various types of fuels, oil is a basic prerequisite for the transportation of large quantities of goods over long distances. Alongside information technology, container ships, trucks and aircraft form the backbone of globalization. Oil-based mobility also significantly influences our lifestyle, both regionally and locally. For example, living in suburbs several miles from their workplace would be impossible for many people without a car.

 

Societal risks of peak oil

  1. Economic collapse
  2. Transportation restricted
  3. Erosion of confidence in state institutions

There are not sufficient alternatives to oil for transportation, so when oil grows short, there are likely to be extreme restrictions for private vehicles, especially in suburbs, resulting in a “mobility crisis” that would make the economic crisis much worse.

Scarce or expensive oil would drive up the cost of all goods. Our current international movement of goods has largely been made possible by the technological progress in the field of freight traffic (container ships, trucks, cooling systems), which are based on fossil fuels.  So trying to switch all modes of transport to alternative energy sources is much more complex with today’s common means of transportation and technology. Mobility on the basis of fossil fuels is likely to remain a long time.   Oil shortages could lead to bottlenecks in delivering food and other life-sustaining essential goods.

After peak oil, there would be significant differences from past food shortages:

  • The crisis would concern all food traded over long distances, not just single regions or products. Regions that are structurally already at risk today would however be particularly affected (see figure 6).
  • Crop yields also depend on oil. Lack of machines or oil-based fertilizers and other chemicals to increase crop yield would therefore have a negative effect on crop production
  • The increase in food prices would be long-term
  • Competition between the use of farmland for food production and for producing biofuels could worsen food shortages and crises.

 

After oil shortages people will experience a lowering of living standards due to an increase in unemployment and the cost of oil for their vehicles. Studies reveal that only continuous improvement of individual living conditions provide the basis for tolerant and open societies. Setbacks in economic growth can lead to an increase in the number of votes for extremist and nationalistic parties.

 

Other likely consequences

Banks left with no commercial basis. Banks would not be able to pay interest on deposits as they would not be able to find creditworthy companies, institutions or individuals. As a result, they would lose the basis for their business.

Loss of confidence in currencies. Belief in the value-preserving function of money would dwindle. This would initially result in hyperinflation and black markets, followed by a barter economy at the local level.

Collapse of value chains. The division of labor and its processes are based on the possibility of trade in intermediate products. It would be extremely difficult to conclude the necessary transactions lacking a monetary system.

Collapse of unpegged currency systems. If currencies lose their value in their country of origin, they can no longer be exchanged for foreign currencies. International value-added chains would collapse as well.

Mass unemployment. Modern societies are organized on a division-of-labor basis and have become increasingly differentiated in the course of their histories. Many professions are solely concerned with managing this high level of complexity and no longer have anything to do with the immediate production of consumer goods. The reduction in the complexity of economies that is implied here would result in a dramatic increase in unemployment in all modern societies.

National bankruptcies. In the situation described, state revenues would evaporate. (New) debt options would be very limited, and the next step would be national bankruptcies.

Collapse of critical infrastructures. Neither material nor financial resources would suffice to maintain existing infrastructures. Infrastructure interdependencies, both internal and external with regard to other subsystems, would worsen the situation.

Famines. Ultimately, production and distribution of food in sufficient quantities would become challenging.

War.  Oil shortages are likely to be seen by importing nations as a national security issue leading to conflict, which could also emerge over renewable energy resources.

By Chris Martenson: Signs of Distress

https://www.peakprosperity.com/blog/110096/signs-distress

What if there’s nothing wrong with the people who are anxious or depressed, but the exact opposite is true; those who are cheerful and chipper are missing the plot?

 

The world is edging closer to the final moments after which everything will be forever changed. Grand delusions, perpetuated over decades, will finally hit the limits of reality and collapse in on themselves.

We’re over-budget and have eaten deeply into the principal balances of all of our main trust accounts. We are ecologically overdrawn, financially insolvent, monetarily out past the Twilight Zone, consuming fossil fuels (as in literally eating them), and adding 80,000,000 net souls to the planet’s surface — each year! — without regard to the consequences.

Someday there will be hell to pay financially, economically, and ecologically as there simply isn’t any way to maintain these overdrafts forever. Reality does not renegotiate. Its deal terms aren’t compromisable.

For those who have the neural plasticity to actually see what’s happening around us, the changes are already here, blatant and frightening. Younger folks, with their fresher eyes and fewer ties to the past, can see them a lot easier than their elders.

The prosperity enjoyed by the past few generations — especially the Baby Boomers — was stolen from future generations. All the while, they pretended as if their borrowing-heavy standards of living were the result of sheer genius and intelligence; like trust fund babies who mistake being born on third base for hitting a triple.

Young people have sussed this out; and are now pulling back from many of the principal occupations of their forebears — like marriage, babies and buying homes and cars. This perplexes older folks, who are beginning to find themselves increasingly at odds with the generations following after them.

Humans can be very very smart, but the flip-side of our ingenuity is our capacity for self-delusion. We’ve very consistently preferred to look past our faults. That can work for a while, but eventually an incomplete view will lead to a complete disaster. For example: depleting our topsoils today to grow more eventually leads to a collapse of our food system tomorrow. Similarly, increasing societal complexity ultimately drains the resources out of an empire, until it withers and fails. Such is what we can learn from history. Each of these examples is rooted in the self-delusion that today’s actions don’t have real consequences.

Monetary printing experiments like those currently being run by the world’s central banks are the ultimate form of self-delusion. Money is the most potent form of social communication, underlying all contracts and agreements. Violate those and literally everything falls apart, as we are seeing happen in real-time in Venezuela right now.

Money printing and its other historical debasement equivalents, serve to cover up (barely) critical signals. Derelict ideas that should die a quick death, instead, persist. Mis-priced money leads mal-investment (e.g., Italian junk debt selling with the same yield as ten year US Treasury debt!!). Extremely unfair redistributions of wealth from the bottom to the top result. Every. Single. Time. This time is no different.

Imagine You Are a Smart Leader

Note: I make a distinction between being wise and smart. I wrote about wise leaders and citizens here. Today I am talking about smart leaders of citizens in denial.

Imagine you are a smart leader with a good understanding of science and engineering, like many Chinese leaders, and unlike our idiot Western economists and lawyers.

You know cheap money policies have created the largest bubble in history.

You know there is not enough affordable energy left to grow out of the problem.

You know that austerity policies will cause a depression, at best, and will cause you to lose your job.

You know that thermodynamics and mathematics guarantees an economic reset in the not too distant future.

You know that there will be much less energy and other critical resources like food available after the reset.

You know that there will be much less credit available to purchase anything with after the reset.

You know that you will not be able to feed your people, and keep your job, without access to energy, food, and other critical resources.

You know that you cannot afford a massive military build-up to forcibly secure resources, and even if you could, the future shortage of energy to power it makes a big military an unwise investment.

You know that a few cheap nuclear weapons are probably sufficient to prevent someone with a bigger military from taking your resources.

You know that fiat currencies, like those every country uses, have value because they are a claim on energy that is expected to be burned in the future.

You know that there will not be enough energy in the future to fulfill claims made by fiat currencies, and therefore they will lose most of their value after the reset and will not be useful for purchasing resources.

You know that gold’s value comes from the energy that was burned in the past to produce it, and therefore other countries may exchange energy and food for gold after the reset.

What would you do?

You would print money to purchase gold from other countries with leaders that are too stupid and/or too deeply in denial to understand what is going on.

By Steve St. Angelo: CLOSE TO NEW GOLD STANDARD? Australia Exports Record Amount Of Gold To China

australia-us-gold-mine-suppy-vs-exports

Australia and the U.S. continue to export the majority of its gold to Hong Kong and China. For example, Australia and the United States exported 121 mt of gold to Hong Kong and China during the first quarter of 2017. Australia exported 57.4 mt, while the U.S. exported 63.3 mt. Thus, Hong Kong and China received 55% of all Australian and U.S. gold exports Q1 2017.