It's started again. The hype, the hubris, the positive spin. Economists and experts are chorusing that inflation has peaked, that we have turned the corner. Yes, we have turned the corner. But we're on a spiral staircase.
What does Peak Oil say
Peak Oil presents a fairly simple (but unhappy) scenario. Firstly, it presents energy as a vital and fundamental force underlying our consumption (and eventually, our survival). Consumption was possible to the extent that it was for as long as we had cheap and abundant energy. Energy is no longer cheap. Any guesses to why? That's right. It's no longer abundant. There's tons of the stuff left, just not quite enough for EVERYONE. And let's face, the human population has expanded enormously.
Peak Oil draws our attention to the top of the bell shaped curve (of oil supply). The theory says once peak oil (supply) has been reached, no matter what we do, no matter how much we drill, we cannot but produce/extract successively less oil. This brings about permanent contraction. Like may Peak Oil commentators, I believe we are moving down the slope now (in other words, we are starting to experience the chronic effects of Peak Oil). Put even more simply - world energy supplies have peaked; have reached maximum-ever levels.
Depletion vs Demand
The 'experts' in finance that I talk to are fixated on demand-side economics, and point to demand as the problem. Demand destruction is why the markets have crashed. True, but what caused the demand destruction? High oil prices. Demand destruction is the remedy - they argue - for high prices. Really? The problem is, when prices come down (due to players being sidelined, projects cancelled etc), the number of have-nots increases to a great extent. Initiatives are killed by falling energy prices - for example deep water drilling projects that are viable at $100, and electric cars - are no longer viable when these prices collapse by $30. Also, price relief isn't felt immediately by companies such as airlines that buy longer term contracts. The underlying problem is not demand, but depletion (no matter how we change our demand, we are critically addicted to energy, and that resource is reaching critically low levels now, which implies continually escalating price premiums feeding into everything that is energy dependent).
Dozens of new projects started up over the last few years, bringing 2.5 mbpd of new oil the market in 2005, 3 mbpd in 2006 and over 3 mbpd in 2007. However during this period global flows remained flat. Skrebowski suggested an underlying decline rate of the fields already in production of 4.5% or around 3.7 bmpd. The important point to note is that this figure is three times the demand growth – depletion of supply is the main story in the global demand supply balance, not demand. This amount is also greater than all non-conventionals, and Skrebowski said the decline was increasing at 0.3-0.4 mbpd. per year.
While problem isn't entirely a demand side problem, the solution though, is on the demand side. We can change our living arrangements.
Unsustainable Sense of Entitlement
The way in which we consume is unsustainable. And the rate of our consumption has reached critically high levels (not just for ourselves, for the environment too). In the last cycle we saw demand (and speculation) drive oil prices to $147. This broke (in fact bankrupted) the markets. The USA will announce that bankruptcy by around summer 2009, if not sooner. The consensus now though is that 'we have turned a corner', 'everything is going to be okay'. While no one can be faulted for wishing this to be the case, we can be faulted for sliding back into our habits, and our lazy, self-serving denialism. And this is happening.
How do we know for sure?
Specifically: high energy costs drove inflationary effects (for food and fuel, and other costs of living) to very difficult levels. If money grows on trees (and it does in terms of being dependent on plant based fossil fuels) markets reflected that this period had reached a tipping point: they shed wealth like trees in Autumn.
A huge Player in this deleveraging process was the Finance Sector - the banks. See, banks had made the same gamble that people buying houses had - that property prices could only go up. This was based on a psychology of previous investment, and greed. This mistake has cost world markets, literally, trillions of dollars.
Very few people understand the caveat to the dogmatic belief that property markets are like an Infinite Wealth Machine. While some believed a house was like an ATM dressed up as a sort of Beanstalk (connecting one to a fantasy world of wealth, leading to an even bigger house - a castle) and that you could just draw money against this evergreen ever growing asset, a small group of people were looking at the concept of suburbia (which is the urban library of these so-called forever appreciating assets) and began to realise that suburbia evolved - surprise surprise - thanks to the car. Suburbia was made possible thanks to road networks that could connect these plots of lands to various urban hubs. Suburbia, essentially, is car dependent, and so are all its accessories.
To function in the caricature of country living (suburbia) you need to supply your house with accoutrements. These basically include:
furniture - beds, sofas, tables, chairs, shelves, carpets
electronic equipment - televisions, computers, refrigerators, microwaves, stoves, lawnmowers, lights
and of course - a car.
The car is used to ferry food to the house from a large warehouse, which in turn gets stuff trucked and shipped to it.
The car is used to go to work.
The car is used to take the kids to school.
The car is used to ferry everything else besides food to fill the house up with stuff.
These multiple habits happen occur every day as a matter of course, pursued by tens of millions of people in the world's largest urban centres, and we appear to have expected this mass consumption to continue indefinitely. Right now, we are hoping that we can continue to expect this.
So we see suburbia is very energy intensive. It also stimulates hyper individualism, which underpins hyper-consumption. Hyper-consumption is a scenario in which each person feels entitled to their own house, car and accoutrements. A lot of stuff gets used up, and thrown away. And that's what you're left with - a throwaway society that is itself, not worth much, and can do very little that is useful.
Currently, almost 1 billion people have cars. Most of these live in suburbia. The remaining 5.7 billion do not have cars, and tend to be impoverished, many of them less educated, and often, starving. We are starting to see the limits to growth (the idea of accessorising each and every individual) at a point just prior to 1/6th of the world's population having being kitted out with cars and houses and shopping malls .
The inference is simple: though we may all feel entitled to our own phones, our own personal computer, own television and home, and a toothbrush in the color we want, this is simply a fantasy. In order to serve the current manifestation - the hyper individual - massive amounts of energy are diverted in this service. A simple example: one calorie of meat requires 10 calories of energy. People are eating far more meat than is healthy, and more than we are supposed to. we do so in mass deployed fry huts in various permutations: KFC, MacDonald's and all the rest. The principal food these fry huts sell is meat. Not only is the human diet (in fast food) an impossible habit from an energy perspective, but our fatty, protein rich diets tend to promote high levels of heart disease. What we eat sickens us to our very core.
The end of suburbia. The suburbs will diminish and we will see city centres become more livable. We may see new living arrangements that are more livable, and more European in appearance. Farming will become a major industry again.
Globalisation is set to reverse. This means less overseas travel, fewer big, multinational companies, less variety. There will be less duplication of services - so it's unlikely you will have a radio, television and computer. You'll have one. You won't have a stove and a microwave. You won't have a camera, a phone and an MP3 player - you will have one device. Increasingly, choices will have to be made between electrical/digital and analog devices. For example - car versus bicycle. Microwave versus stove (gas or wood-fired). Electricity in the future is likely to become prohibitively expensive as more and more coal is diverted to the synthesis of liquid fuel. As such, electrical devices will be more problematic (and expensive) either to run or maintain. This applies equally to the fantasy of an electric car (which requires, after all, an energy source to run).
We will live more locally, and less simply. We'll be less mobile.
When energy prices increase, it begins to affect suburbia adversely. Disposable income drops - more so when your suburb is situated far from shops and work. As inflation and interest rates increase, the relative value of homes depreciate because the cost of borrowing/maintaining these places becomes a lot more expensive.
By the way, using fossil fuel energy is a form of borrowing. It is using stored energy that was created during another time. It is an endowment that is available for a broad future period or it can be consumed in one or two generations. Petrochemicals have allowed us to create fertilisers, medicines, pesticides and so much besides. We have used this precious resource primarily to take ourselves to work and to the mall. Probably, our children will not enjoy the luxuries we've had nearly to the extent we have - they will not enjoy the almost limitless choices we have enjoyed. Probably, they will have far fewer choices, and they will live more locally.
Bottom line - we will see many of these cycles. Rallying markets, positive sentiments, business starting to boom, opportunities appearing. This will be followed by the growing impact of demand - we will start to feel the effects of depletion. Energy prices will spike. This will feed into the markets and render many of those opportunities as fantasy. Eventually the markets will tank, taking energy prices down again. Each time there will be some recovery and a consensus of wishful delusion. Each time the recovery will be followed by another spike in energy, followed by a crash - each one successively worse. Each time we will hope for things to improve, for them to be over, and each time we will move down a level on the energy spiral. Once shortages kick in (where electricity and energy for transport begin to vie for supremacy), and these are imminent, the system will be poised to break. The consequences of this are simple, but dire. Increasing:
- civil disorder/anarchy
- pandemic diseases
- general austerity
What remains for us to do is make the necessary adaptations especially during these 'reprieve' periods. This requires us to know that we are not far away from a far more difficult period. It will require discipline to operate in a manner that presupposes a more difficult phase to follow. Some fraction of our species, I have no doubt, will be capable of proactive, intelligent projects. Rail is a great area for investment now. It will nevertheless be difficult to protect this segment from the majority of disenfranchised have nots. The mob. 'Difficult' is integral to the next phase, and once we can accept that, we can begin to operate effectively and usefully in a real world reality. We have not done so for an embarrassingly long period, and this is one reason why the world has seemed such a meaningless farce. Because it has been.