Following a break, Dr Robert Hirsch chaired a session on the link between Energy and the Economy, and it was possibly the bleakest of the meeting. Chris Martenson talked about looking at the economy as a straight highway, and then hitting a bend. While models often see progress in linear terms life does not turn out that way. Money is loaned into existence and credit (and thus debt) has increased over time. Since 1970 it has doubled five times. Money and energy have been tied, but while money must continue to grow, energy cannot. Credit market growth (with an R^2 of 0.98) has an exponential relationship with time. He sees the problem not with the individual smaller bubble causes of housing, etc but rather the overall credit size itself.
He sees the problems coming in the 2014-2015 time frame when Peak Oil will be recognized and while growth may continue, prosperity may not.
He was followed by Nicole Foss- who many of us have read under the pen name Stoneleigh. She sees fossil fuels as generating the largest bubble in history. The economy has been driven up by energy, but as that declines what will take its place? In the sense that bubbles are Ponzi schemes where only early investors make a return on their investment, as this one comes to an end as the largest suckers get fleeced, so they collapse to general hurt.
Markets are driven by perception rather than reality. But by the time the general public hears of “a good thing” it is generally over. Hearing the “it’s a new paradigm” should warn you to sell the stock. But the world is driven on emotion. And when there is a collapse it is often sudden, bringing the value down below what it was before the bubble began. (And oil prices are following this model.) From this she could see nothing ahead but progress into a deflation and depression. We are already in a large debt and liquidity trap and as credit disappears the depression will develop and be sustained. The huge derivatives market may be the first to go, given its insignificant intrinsic value.
The problem is in part that it will be based on reducing volumes of oil, and with that reduction there is no possibility of a rebound, since the resource is not there to develop it. Oil has thus hegemonic power. The depression will, however, sustain its dominance since reduced demand will allow it to remain dominant.
The final speaker of the evening was Robert Hirsch, who has also recently co-authored a book – The Impending World Energy Mess which was available in signed copy at the meeting. In large measure his talk followed the book (from which you may gather that I did buy, and have half-read, a copy – and it is worth doing so, I may do a review later). He noted that the economy depends on energy, not the other way around. Further we should expect that the general public will still be surprised when oil supplies start to decline in the next 2 – 5 years. From then they will continue to decline for at least a decade, until alternate sources of fuel become sufficiently available. He covered the oil problem, including their forecast of how it will develop, and what an individual could do about it.
The story is a familiar one to the peak oil community: we are over reliant on a few giant oil fields that are depleting and not being replaced. We have been sensibly in a production plateau since 2005, something not predicted by earlier models, but there are an increasing number of reputable sources that see an end to the plateau, and the consequent decline, coming relatively soon. This will impact GDP and hurt national economies. The recent recession and drop in oil demand may have only shifted the onset of the decline by a few weeks.
It is unrealistic to expect a rapid answer to the decline from politicians. Looking at the likely rate of decline, a 2% fall could be easily handled, a 4% fall could be handled with difficulty, but at 6% it is going to be bad. They have had to guess, and think, at the moment that it will likely be at around 4%.
China, having foreseen this problem, are doing smart things to prepare for it. We in the West are not. It will lead to increased tensions – though they did not look at the potential for resource wars, or the likelihood that producers would withhold production for political or economic reasons.
Looking at individual response, we should all expect to be impacted, and because of the lack of political ability to resolve the issue (or even to address it yet) we should expect that the result will be very similar to the oil shortages of the 70s. There was a degree of panic – this will happen again. This time, however, there will be no North Sea or North Slope to come to the rescue. Nor can the oil taps be opened wider to remediate the problems. As a result he has got out of the market – since good stocks and bonds will be hurt as well as bad. He has added annuities to his portfolio, bought some gold, and moved closer to mass transit and the shops.
He reminded us that this is a liquid fuels problem, while most renewables (wind and solar and hydro) deal with the electricity supply, which is not helpful to the crisis. We also have enough food. The issue is in transportation where we need a substitute for oil.
In questions he was asked about rationing. He fully anticipates it happening, but it will be very complicated to develop and impose. Countries will respond in different ways and become more independent. The United States will have to reindustrialize, since it will not be able to rely on foreign manufacture. We increased productivity by having oil help labor. Now this must reverse.
He did not see the problem being deflation, but rather in the control of inflation. But then it is easier to write a history book than a forecast. He could only see that many people will get hurt in the coming years.
Is he aware of the shale oil? Tar sands? Natural gas? (we can make fuels from that and from my understanding, we have a ton of it). We also have a tremendous supply of coal, and if required, can turn coal into oil (while the political support isn't there for big domestic mining of coal right now, if things got really bad, I think public concern would override anything the environmentalists would say). We also have oil off the coastlines as well that we do not drill for at the moment.
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