THE END IS NEAR
«The End of the Western World we have known since 1945 »
« The End of the Western World we have known since 1945 »
Civilization as we know it is coming to an end soon. This is not the wacky proclamation of a doomsday cult, apocalypse bible prophecy sect, or conspiracy theory society. Rather, it is the scientific conclusion of the best-paid, most widely respected geologists, physicists, and investment bankers in the world. These are rational, professional, conservative individuals who are absolutely terrified by a phenomenon known as global "Peak Oil."
"Are We 'Running Out'? I Thought There Was 40 Years of the Stuff Left"
Oil will not just "run out" because all oil production follows a bell curve. This is true whether we're talking about an individual field, a country, or on the planet as a whole. Oil is increasingly plentiful on the upslope of the bell curve, increasingly scarce and expensive on the down slope. The peak of the curve coincides with the point at which the endowment of oil has been 50 percent depleted. Once the peak is passed, oil production begins to go down while cost begins to go up. In practical and considerably oversimplified terms, this means that if 2000 was the year of global Peak Oil, worldwide oil production in the year 2020 will be the same as it was in 1980. However, the world’s population in 2020 will be both much larger (approximately twice) and much more industrialized (oil-dependent) than it was in 1980. Consequently, worldwide demand for oil will outpace worldwide production of oil by a significant margin. As a result, the price will skyrocket, oil-dependant economies will crumble, and resource wars will explode.
The issue is not one of "running out" so much as it is not having enough to keep our economy running. In this regard, the ramifications of Peak Oil for our civilization are similar to the ramifications of dehydration for the human body. The human body is 70 percent water. The body of a 200-pound man thus holds 140 pounds of water. Because water is so crucial to everything the human body does, the man doesn't need to lose all 140 pounds of water weight before collapsing due to dehydration. A loss of as little as 10-15 pounds of water may be enough to kill him.
In a similar sense, an oil-based economy such as ours doesn't need to deplete its entire reserve of oil before it begins to collapse. A shortfall between demand and supply as little as 10-15 percent is enough to wholly shatter an oil-dependent economy and reduce its citizenry to poverty. The effects of even a small drop in production can be devastating. For instance, during the 1970s oil shocks, shortfalls in production as small as 5% caused the price of oil to nearly quadruple. The same thing happened in California a few years ago with natural gas: a production drop of less than 5% caused prices to skyrocket by 400%. Fortunately, those price shocks were only temporary.
The coming oil shocks won't be so short-lived. They represent the onset of a new, permanent condition. Once the decline gets under way, production will drop (conservatively) by 3% per year, every year. That estimate comes from numerous sources, not the least of which is Vice President Dick Cheney himself. In a 1999 speech he gave while still CEO of Halliburton, Cheney stated: By some estimates, there will be an average of two-percent annual growth in global oil demand over the years ahead, along with, conservatively, a three-percent natural decline in production from existing reserves. That means by 2010 we will need on the order of an additional 50 million barrels a day. Cheney's assessment is supported by the estimates of numerous non-political, retired, and now disinterested scientists, many of whom believe global oil production will peak and go into terminal decline within the next five years. Unfortunately, many of these experts are nowhere near as optimistic as Dick Cheney was in 1999. Andrew Gould, CEO of the giant oil services firm Schlumberger, for instance, recently explained the global decline rate might be far higher than what Cheney predicted seven years ago:
An accurate average decline rate is hard to estimate, but an overall figure of 8% is not an unreasonable assumption. An 8% yearly decline would cut global oil production by a whopping 50% in less than nine years. If a 5% cut in production caused prices to triple in the 1970s, what do you think a 50% cut is going to do? Other experts are predicting decline rates as high as 10%-to-13%. Some geologists expect 2005 to be the last year of the cheap-oil bonanza, while many estimates coming out of the oil industry indicate "a seemingly unbridgeable supply-demand gap opening up after 2007," which will lead to major fuel shortages and increasingly severe blackouts beginning around 2008-2012. As we slide down the down slope of the global oil production curve, we may find ourselves slipping into what some scientists are calling the "post-industrial stone age."
Dr. Richard Duncan: The Peak of World Oil Production and the Road to the Olduvai Gorge. Ultimately, the energy-intensive industrial age may be little more than a blip in the course of human history:
Peak Oil is also called "Hubbert's Peak," named for the Shell geologist Dr. Marion King Hubbert. In 1956, Hubbert accurately predicted that US domestic oil production would peak in 1970. He also predicted global production would peak in 1995, which it would have had the politically created oil shocks of the 1970s not delayed the peak for about 10-15 years.
"Big deal. If gas prices get high, I’ll just drive less. Why should I give a damn?"
Because petrochemicals are key components too much more than just the gas in your car. As geologist Dale Allen Pfeiffer points out in his article entitled, "Eating Fossil Fuels," approximately 10 calories of fossil fuels are required to produce every 1-calorie of food eaten in the US. The size of this ratio stems from the fact that every step of modern food production is fossil fuel and petrochemical powered:
1. Pesticides are made from oil;
2. Commercial fertilizers are made from ammonia, which is made from natural gas, which will peak about 10 years after oil peaks;
3. With the exception of a few experimental prototypes, all farming implements such as tractors and trailers are constructed and powered using oil;
4. Food storage systems such as refrigerators are manufactured in oil-powered plants, distributed across oil-powered transportation networks and usually run on electricity, which most often comes from natural gas or coal;
5. In the US, the average piece of food is transported almost 1,500 miles before it gets to your plate. In Canada, the average piece of food is transported 5,000 miles from where it is produced to where it is consumed.
In short, people gobble oil like two-legged SUVs. It's not just transportation and agriculture that are entirely dependent on abundant, cheap oil. Modern medicine, water distribution, and national defence are each entirely powered by oil and petroleum derived chemicals. In addition to transportation, food, water, and modern medicine, mass quantities of oil are required for all plastics, all computers and all high-tech devices. Some specific examples may help illustrate the degree to which our technological base is dependent on fossil fuels:
1. The construction of an average car consumes the energy equivalent of approximately 20 barrels of oil, which equates to 840 gallons, of oil. Ultimately, the construction of a car will consume an amount of fossil fuels equivalent to twice the car’s final weight.
2. The production of one gram of microchips consumes 630 grams of fossil fuels. According to the American Chemical Society, the construction of single 32 megabyte DRAM chip requires 3.5 pounds of fossil fuels in addition to 70.5 pounds of water.
3. The construction of the average desktop computer consumes ten times its weight in fossil fuels.
4. The Environmental Literacy Council tells us that due to the "purity and sophistication of materials (needed for) a microchip, . . . the energy used in producing nine or ten computers is enough to produce an automobile."
When considering the role of oil in the production of modern technology, remember that most alternative systems of energy — including solar panels/solar-Nan technology, windmills, hydrogen fuel cells, bio diesel production facilities, nuclear power plants, etc. — rely on sophisticated technology. In fact, all electrical devices make use of silver, copper, and/or platinum, each of which is discovered, extracted, transported, and fashioned using oil-powered machinery. For instance, in his book, The Lean Years: Politics of Scarcity, author Richard J. Barnet writes: To produce a ton of copper requires 112 million BTU's or the equivalent of 17.8 barrels of oil. The energy cost component of aluminium is twenty times higher. Nuclear energy requires uranium, which is also discovered, extracted, and transported using oil-powered machinery. Most of the feedstock (soybeans, corn) for bio fuels such as bio diesel and ethanol are grown using the high-tech, oil-powered industrial methods of agriculture described above. In short, the so-called "alternatives" to oil are actually "derivatives" of oil. Without an abundant and reliable supply of oil, we have no way of scaling these alternatives to the degree necessary to power the modern world.
"Is the Modern Banking System Entirely Dependent on Cheap Oil?"
The global financial system is entirely dependent on a constantly increasing supply of oil and natural gas. The relationship between the supply of oil and natural gas and the workings of the global financial system is arguably the key issue to understanding and dealing with Peak Oil, far more important than alternative sources of energy, energy conservation, or the development of new technologies, all of which are discussed in detail on page two of this site.
Dr. Colin Campbell presents an understandable model of this complex (and often difficult to explain) relationship: It is becoming evident that the financial and investment community begins to accept the reality of Peak Oil, which ends the first half of the age of oil. They accept that banks created capital during this epoch by lending more than they had on deposit, being confident that tomorrow’s expansion, fuelled by cheap oil-based energy, was adequate collateral for today’s debt. The decline of oil, the principal driver of economic growth, undermines the validity of that collateral which in turn erodes the valuation of most entities quoted on Stock Exchanges. The investment community however faces a dilemma. It desires to protect its own fortunes and those of its privileged clients while at the same time is reluctant to take action that might itself trigger the meltdown. It is a closely-knit community so that it is hard for one to move without the others becoming aware of his actions.
The scene is set for the Second Great Depression, but the conservatism and outdated mindset of institutional investors, together with the momentum of the massive flows of institutional money they are required to place, may help to diminish the sense of panic that a vision of reality might impose. On the other hand, the very momentum of the flow may cause a greater deluge when the foundations of the dam finally crumble. It is a situation without precedent.
Commentator Robert Wise explains the connection between energy and money as follows: It's not physics, but it's true: money equals energy. Real, liquid wealth represents usable energy. It can be exchanged for fuel, for work, or for something built by the work of humans or fuel-powered machines. Real cost reflects the energy cost of doing something; real value reflects the energy expended to build something. Nearly all the work done in the world economy -- all the manufacturing, construction, and transportation -- is done with energy derived from fuel. The actual work done by human muscle power is miniscule by comparison. And, the lion's share of that fuel comes from oil and natural gas, the primary sources of the world's wealth.
In October 2005, the normally conservative London Times acknowledged that the world's wealth might soon evaporate as we enter a technological and economic "Dark Age." In an article entitled "Waiting for the Lights to Go Out" Times reporter Bryan Appleyard wrote the following: Oil is running out; the climate is changing at a potentially catastrophic rate; wars over scarce resources are brewing; finally, most shocking of all, we don't seem to be having enough ideas about how to fix any of these things.
Almost daily, new evidence is emerging that progress can no longer be taken for granted, that a new Dark Age is lying in wait for ourselves and our children.
. . . growth may be coming to an end.
Since our entire financial order — interest rates, pension funds, insurance, stock markets — is predicated on growth, the social and economic consequences may be cataclysmic. If you want to understand just how cataclysmic these consequences might be, consider the current crisis in the UK as a "preview of coming attractions." On October 23, 2005 the London Telegraph reported: The Government has admitted that companies across Britain might be forced to close this winter because of fuel shortages. "The balance between supply and demand for energy is uncomfortably tight. I think if we have a colder -than-usual winter given the supply shortages, certain industries could suffer real difficulties." The admission was made after this newspaper revealed that Britain could be paralysed by energy shortages if the winter is colder than average.
The Met Office says there is a 67 per cent likelihood of prolonged cold this year after almost a decade of mild winters. That, coupled with high fuel prices, raises the fear that industry will not be able to cope. The severe consequences of these relatively small shortfalls between supply and demand (less than 5%) have prompted the UK government to look into draconian energy conservation measures that would be enforced via house-to-house searches by a force of "energy-police."
Parts of the US are facing similarly dire possibilities. In December 2005, US News and World Report published a six-page article documenting some potentially nightmarish scenarios about to descend on the US. According to the normally conservative publication, people in the north-eastern US could be facing massive layoffs, rotating blackouts, permanent industrial shutdowns, and catastrophic breakdowns in public services this winter as a result of shortages of heating oil and natural gas. This is happening despite the fact we are probably at least a few years away from seeing the peak in either oil or natural gas production. You have to ask yourself, "What's going to happen when the 'real problems' start showing up?"
"Are the Banks Aware of This Situation?"
The central ones certainly are. (Those new bankruptcy laws were passed for a reason.) On June 28, 2005, Gary Duncan, the economics editor for the UK based Sunday Times, reported that the Bank of International Settlements (BIS), aka "the central banker's central bank", had issued the following warnings regarding the economic fallout of further rises in the price of oil: Oil prices may well remain high for a prolonged period of time . . . Further rises — if they materialize — may have more severe consequences than currently anticipated . . . Everyone needs to commit to some unpleasant compromises now, in order to avoid even more unpleasant alternatives in the future . . .
Duncan goes on to summarize the bank's report as follows: The US current account deficit meant that a further slide in the dollar was "almost inevitable", while the BIS sounded a warning that the deficit could yet lead to "a disorderly decline of the dollar, associated turmoil in other financial markets, and even recession."
A bank as crucially important to the world economy and as influential to the markets as the BIS doesn’t just casually toss out terms like "unpleasant compromises", "severe consequences", "even more unpleasant alternatives", "turmoil," and "disorderly decline" in relation to the oil markets and the dollar (which is the reserve currency for all oil transactions in the world) unless something very nasty is brewing in the background. On a similar note, Warren Buffet, the world's second richest man, recently warned of "mega-catastrophic risks" and "investment time bombs" currently threatening the global economy. Add those to a mix of sky-high energy prices, destabilizing resource wars, less than inspiring leadership, a possible currency collapse, more” petrodollar warfare", and well, the picture begins to look pretty grim, pretty quick.
"What Does All of This Mean for Me?"
What all of this means, in short, is that the aftermath of Peak Oil will extend far beyond how much you will pay for gas. If you are focusing solely on the price at the pump, more fuel-efficient forms of transportation, or alternative sources of energy, you aren’t seeing the bigger picture.
"Is the Bush Administration Aware of This Situation?"
Of course they are. As mentioned previously, Dick Cheney made the following statement in late 1999: By some estimates, there will be an average of two-percent annual growth in global oil demand over the years ahead, along with, conservatively, a three-percent natural decline in production from existing reserves. That means by 2010 we will need on the order of an additional 50 million barrels a day.
To put Cheney’s statement in perspective, remember that the oil producing nations of the world is currently pumping at full capacity but are struggling to produce much more than 84 million barrels per day. Cheney’s statement was a tacit admission of the severity and imminence of Peak Oil as the possibility of the world raising its production by such a huge amount is borderline ridiculous.
A report commissioned by Cheney and released in April 2001 was no less disturbing: The most significant difference between now and a decade ago is the extraordinarily rapid erosion of spare capacities at critical segments of energy chains. Today, shortfalls appear to be endemic. Among the most extraordinary of these losses of spare capacity is in the oil arena.
Not surprisingly, George W. Bush has echoed Dick Cheney’s sentiments. In May 2001, Bush stated, "What people need to hear loud and clear is that we’re running out of energy in America."
One of George W. Bush's energy advisors, energy investment banker Matthew Simmons, has spoken at length about the impending crisis.
(Note: Although he has advised Bush/Cheney, Simmons considers himself strongly non-partisan on energy issues. His writings are highly regarded amongst the energy and banking community for their grounding in non partisan, heavily documented, and virtually infallible research & analysis.)
Simmons' investment bank, Simmons and Company International, is considered the most reputable and reliable energy investment bank in the world. Given Simmons' background, what he has to say about the situation is truly terrifying. For instance, in an August 2003 interview with From the Wilderness publisher Michael Ruppert, Simmons was asked if it was time for Peak Oil to become part of the public policy debate. He responded: It is past time. As I have said, the experts and politicians have no Plan B to fall back on. If energy peaks, particularly while 5 of the world’s 6.5 billion people have little or no use of modern energy, it will be a tremendous jolt to our economic well-being and to our health — greater than anyone could ever imagine.
When asked if there is a solution to the impending natural gas crisis, Simmons responded: I don’t think there is one. The solution is to pray. Under the best of circumstances, if all prayers are answered there will be no crisis for maybe two years. After that it’s a certainty.
In May 2004, Simmons explained that in order for demand to be appropriately controlled, the price of oil would have to reach $182 per barrel. Simmons explained that with oil prices at $182 per barrel, gas prices would likely rise to $7.00 per gallon. Simmons predictions are downright tame compared to what other analysts in the world of investment banking are preparing themselves for. For instance, in April 2005, French investment bank Ixis-CIB warned, "crude oil prices could touch $380 a barrel by 2015."
If you want to ponder just how devastating oil prices in the $200-$400/barrel range will be for the US economy, consider the fact that one of Osama Bin-Laden's primary goals has been to force oil prices into the $200 range.
Oil prices that far north of $100/barrel would almost certainly trigger massive, last-ditch global resource wars as the industrialized nations of the world scramble to grab what little of the black stuff is remaining. This may explain why the director of the Selective Service recently recommended the military draft be expanded to include both genders, ages 18-to-35.
A March 2005 report prepared for the US Department of Energy confirmed dire warnings of the investment banking community. Entitled "The Mitigation of the Peaking of World Oil Production," the report observed: Without timely mitigation, world supply/demand balance will be achieved through massive demand destruction (shortages), accompanied by huge oil price increases, both of which would create a long period of significant economic hardship worldwide. Waiting until world conventional oil production peaks before initiating crash program mitigation leaves the world with a significant liquid fuel deficit for two decades or longer.
The report went on to say: The problems associated with world oil production peaking will not be temporary, and past 'energy crisis' experience will provide relatively little guidance. The challenge of oil peaking deserves immediate, serious attention, if risks are to be fully understood and mitigation begun on a timely basis.
. . . the world has never faced a problem like this. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions were gradual and evolutionary. Oil peaking will be abrupt and revolutionary.
As one commentator recently observed, the reason our leaders are acting like desperados is because we have a desperate situation on our hands. If you've been wondering why the Bush administration has been spending money, cutting social programs, and starting wars like there's no tomorrow, now you have your answer: as far as they are concerned, there is no tomorrow. From a purely Machiavellian standpoint, they are probably correct in their thinking.
"How Do I Know This Isn't Just Fear-Mongering by Loony-Environmentalists?"
If you think what you are reading on this page is the product of a loony-left nut, consider what Representative Roscoe Bartlett (Republican, Maryland) has had to say in speeches to Congress or what billionaire investor Richard Rainwater has had to say in the pages of Fortune Magazine. On March 14, 2005 Bartlett gave an extremely thorough presentation to Congress about the frightening ramifications of Peak Oil. During his presentation Representative Bartlett, who may be the most conservative member of Congress, quoted from this site extensively, citing the author (Matt Savinar) by name on numerous occasions, while employing several analogies and examples originally published on this site.
On April 19, 2005 Representative Bartlett was interviewed on national television. Again, he referenced the article you are now reading: One of the writers on this, by the way, starts his article by saying, 'Dear Reader, Civilization as we know it will end soon.' Now your first impulse is to put down the article. This guy's a nut. But if you don't put it down and read through the article, you're hard-pressed to argue with his conclusions.
On May 12, 2005 Representative Bartlett gave another presentation about Peak Oil on the floor of the House of Representatives, stating that this website "galvanized" him. On July 19, 2005 he had the following to say: Mr. Speaker, if you go to your computer this evening and do a Google search for peak oil, you will find there a large assortment of articles and comments. Like every issue, you will find a few people who are on the extreme, but there will be a lot of mainstream observations there.
Matt Savinar wrote one of the articles that you will find there. Matt Savinar is not a technical person. He is a lawyer, a good one, and he does what lawyers do. He goes to the sources and builds his case. Matt Savinar could be correct when he said, "Dear Reader, civilization as we know it is coming to an end soon.'' I would encourage you, Mr. Speaker, to pull up his article and read it. It is really very sobering.
In subsequent speeches, Representative Bartlett read large excerpts of this site verbatim into the official US Congressional record. According to the December 26, 2005 issue of Fortune Magazine, Richard Rainwater, a multi-billionaire investor and friend of George W. Bush, reads this site regularly. In an article entitled "Energy Prophet of Doom" Fortune reporter Oliver Ryan writes: "Rainwater," the voice on the phone announces. "Now, type L-A-T-O-C into Yahoo, and scroll down to the seventh item." Rainwater doesn't use e-mail. Rather, he uses rapid-fire phone calls to spread the gospel he discovers every morning on the web. One day it might be the decline of arable land in Malaysia. The next it could be the Olduvai theory of per capita energy consumption. "L-A-T-O-C" stands for LifeAfterTheOilCrash.net, a blog edited by Matt Savinar, 27, of Santa Rosa, Calif.
The article goes on to quote Rainwater as saying: The world as we know it is unwinding with respect to Social Security, pensions, Medicare. We're going to have dramatically increased taxes in the U.S. I believe we're going into a world where there's going to be more hostility. More people are going to be asking, 'Why did God do this to us?'
Whatever God they worship. Alfred Sloan said it a long time ago at General Motors, that we're giving these things during good times. What happens in bad times? We're going to have to take them back, and then everybody will riot. And he's right. Apparently, Richard Rainwater and Alfred Sloan aren't the only people expecting large-scale civil unrest in the foreseeable future. In January 2006, the Department of Homeland Security gave Halliburton subsidiary Kellogg, Brown, & Root a $400 million dollar contract to build vast new domestic detention camps. While the camps are ostensibly being built to house and process an "emergency influx of immigrants", one can't help but suspect they will be used to house domestic citizens who respond to the economic fallout of declining oil production by taking to the streets.
"How is the Oil Industry Reacting to This?"
If you want to know the harsh truth about the future of oil, simply look at the actions of the oil industry. As a recent article in M.I.T.'s Technology Review points out: If the actions - rather than the words - of the oil business's major players provide the best gauge of how they see the future, then ponder the following. Crude oil prices have doubled since 2001, but oil companies have increased their budgets for exploring new oil fields by only a small fraction. Likewise, U.S. refineries are working close to capacity, yet no new refinery has been constructed since 1976. And oil tankers are fully booked, but outdated ships are being decommissioned faster than new ones are being built.
Some people believe that no new refineries have been built due to the efforts of environmentalists. This belief is silly when one considers how much money and political influence the oil industry has compared to the environmental movement. You really think Ronald Reagan and George H. Bush were going to let a bunch of pesky environmentalists get in the way of oil refineries being built if the oil companies had wanted to build them? The real reason no new refineries have been built for almost 30 years is simple: any oil company that wants to stay profitable isn't going to invest in new refineries when they know there is going to be less and less oil to refine.
In addition to lowering their investments in oil exploration and refinery expansion, oil companies have been merging as though the industry is living on borrowed time:
December 1998: BP and Amoco merge;
April 1999: BP-Amoco and Arco agree to merge;
December 1999: Exxon and Mobil merge;
October 2000: Chevron and Texaco agree to merge;
November 2001: Phillips and Conoco agree to merge;
September 2002: Shell acquires Penzoil-Quaker State;
February 2003: Frontier Oil and Holly agree to merge;
March 2004: Marathon acquires 40% of Ashland;
April 2004: Westport Resources acquires Kerr-McGee;
July 2004: Analysts suggest BP and Shell merge;
April 2005: Chevron-Texaco and Unocal merge;
June 2005: Royal Dutch and Shell merge;
July 2005: China begins trying to acquire Unocal
While many people believe talk of a global oil shortage is simply a conspiracy by "Big Oil" to drive up the prices and create "artificial scarcity," the rash of mergers listed above tells a different story. Mergers and acquisitions are the corporate world's version of cannibalism. When any industry begins to contract/collapse, the larger and more powerful companies will cannibalise/seize the assets of the smaller, weaker companies.
(Note: for recent examples of this phenomenon outside the oil industry, see the airline and automobile industries.)
If you suspect the oil companies are conspiring amongst themselves to create artificial scarcity and thereby artificially raise prices, ask yourself the following questions:
1. Are the actions of the oil companies the actions of friendly rivals who are conspiring amongst each other to drive up prices and keep the petroleum game going?
2. Are the actions of the oil companies the actions or rival corporate desperados who, fully aware that their source of income is rapidly dwindling, are now preying upon each other in a game of "last man standing"?
You don't have to contemplate too much, as recent disclosures from oil industry insiders indicate we are indeed "damn close to peaking" while independent industry analysts are now concluding that large oil companies believe Peak Oil is at our doorstep. As the Bulletin of Atomic Scientists recently observed, even Exxon Mobil is now "sounding the silent Peak Oil alarm." In their 2005 report entitled, "The Outlook for Energy", Exxon Mobil suggests that increased demand be met first through greater fuel efficiency. The fact that Exxon Mobil - one of the largest oil companies in the world - is now recommending increased fuel efficiency should tell you how imminent a crisis is at this point. Equally alarming is the fact that Chevron has now started a surprisingly candid campaign to publicly address these issues. While the campaign fails to mention "Peak Oil" or explain how a drastically reduced oil supply will affect the average person, it does acknowledge that, while it took 125 years to burn through the first trillion barrels of oil, it will only take 30 years to burn through the next trillion.
"How Do I Know Peak Oil Isn't Big Oil Propaganda That is being used To Create Artificial Scarcity & Justify Gouging Us at the Pump?"
If Peak Oil is "Big Oil propaganda" (as some claim), why did Sonoma State University's Project Censored declare it one of the most censored stories of 2003-2004? Surely, if "Peak Oil is Big Oil propaganda", Big Oil would have found a way to get it off the pages of under-funded publications like Project Censored and onto the pages of the mainstream papers and into the 24/7 cable news cycle years ago.
Likewise, if "Peak Oil is a myth propagated by the greedy oil companies to justify high prices", why didn't any of the greedy oil company CEOs offer "the peaking of world oil production" as a partial justification for high gas prices when they testified before Congress about high gas prices?
Yet either the executives or the Senators questioning them never mentioned "Peak Oil” during the hearings. Given the obvious importance of the issue, any reasonable person can't help but to ask, "Why the heck not?"
The answer is simple: the true consequences of Peak Oil cannot be acknowledged in such a highly public forum without crashing the financial markets or begging the obvious yet politically-dangerous and "patriotically-incorrect" question: Is the war in Iraq really a war for the world's last remaining significant sized deposits of oil?"
Although the answer to this question should be obvious, broaching the issue in such a highly public forum would bring more skeletons out of Dick Cheney's energy task force closet than any sane member of the Senate, Republican or Democrat, would ever want to face. (Would you?)
Finally, if Peak Oil was just "Big Oil" propaganda, why is Exxon Mobil (one of the biggest oil companies in the world) spending millions of dollars on its anti-Peak Oil advertising campaign?
What About Chevron's "Will You Join Us Campaign"?
The Chevron campaign, while far more candid than previous industry propaganda (or the propaganda currently put out by Exxon Mobil) still does not come close to conveying the truth about our situation or how it will affect the average person. The campaign is likely an attempt at controlling the parameters of the Peak Oil debate and making sure the public does not panic. The campaign appears geared towards keeping investors' confidence high and public anxiety low by acknowledging the (now obvious) problem but reassuring all interested parties that things are under control. Naturally, Chevron would much rather you learn about Peak Oil from their team of public relations experts (aka "spin miesters") than from this site or others like it.
That's probably why Chevron hired the Madison Avenue public relations firm Young and Rubicom, the same firm that handled the Bush/Cheney 2004 election advertisements, to produce the campaign.
Ironically, it's better for the oil companies that you think you are being gouged than to know the truth. If people knew the truth, they would likely begin drastically curtailing their consumption of oil, which would drive the price down. Consumers are unlikely to take such actions so long as they perceive the current price spikes as just "more of the same old-same old" and are confident about the future. The goal of Chevron's campaign is to maintain this confidence as long as possible.
"Can't We Just Explore More for Oil?"
Global oil discovery peaked in 1962 and has declined to virtually nothing in the past few years. We now consume 6 barrels of oil for every barrel we find.
Oil Discovery: (3 Year Average, Past and Projected)
Source: Association for the Study of Peak Oil
According to an October 2004 New York Times article entitled "Top Oil Groups Fail to Recoup Exploration Costs:"
. . . the top-10 oil groups spent about $8bn combined on exploration last year, but this only led to commercial discoveries with a net present value of slightly less than $4bn. The previous two years show similar, though less dramatic, shortfalls.
In other words, significant new oil discoveries are so scarce that looking for them is a monetary loser. Consequently, many major oil companies now find themselves unable to replace their rapidly depleting reserves.
Take a look at the above chart. During the 1960s, for instance, we consumed about 6 billion barrels per year while finding about 30-60 billion per year. Given those numbers, it is easy to understand why fears of "running out" were so often dismissed as unfounded.
Unfortunately, those consumption/discovery ratios have nearly reversed themselves in recent years. We now consume close to 30 billion barrels per year but find less than 4 billion per year.
In light of these trends, it should come as little surprise that the energy analysts at John C Herold Inc. - the firm that that foretold Enron's demise - recently confirmed industry rumours that we are on the verge of an unprecedented crisis.
"How Can I Be Sure This Isn't Just More 1970s Doom-and-Gloom?"
The oil shocks of the 1970s were created by political events. In 1973, OPEC cut its production in retaliation for US support of Israel. In 1979, Iran cut its production in hopes of crippling "the great Satan." In both cases, the US was able to turn to other oil producing nations such as Venezuela to alleviate the crisis. Once global production peaks, there won't be anybody to turn to. The crisis will just get worse and worse with each passing year.
The evidence of an imminent peak in global oil production is now overwhelming:
1. Ninety-nine percent of the world's oil comes from 44 oil-producing nations. At least 24 of these nations are past their peak and now in terminal decline.
2. The entire world - with the exception of the Middle East peaked in 1997. The US peaked in 1970, Russia in 1987, the UK in 1999. Even Saudi Arabia - the famed "producer for all seasons" may be on the verge of seeing it production collapse.
3. Global production of conventional oil has essentially plateaued since the year 2000.
As far as "doom-and-gloom" consider what widely respected Deutsche Bank had to say about Peak Oil in a recent report entitled, Energy Prospects After the Petroleum Age:
The end-of-the-fossil-hydrocarbons scenario is not therefore a doom-and-gloom picture painted by pessimistic end-of-the world prophets, but a view of scarcity in the coming years and decades that must be taken seriously.
The Australian Financial Review echoed the sentiments of Deutsche Bank in a January 2005 article entitled, "Staring Down the Barrel of a Crisis":
The world's oil production may be about to reach its peak, forever. Such apocalyptic prophecies often surface in the middle of the northern hemisphere winter. What is unusual is that this time the doomsday scenario has gained serious credibility among respected analysts and commentators.
Given the credentials of those sounding the alarm the loudest, it is extremely unwise for you to causally dismiss this as just more "1970s doom-and gloom."
"What About the Oil Sands in Canada and the Oil Shale in the American West?"
The good news is that we have a massive amount of untapped "non conventional" oil located in the oil sands up in Canada.
The bad news is that, unlike conventional sources of oil, oil derived from these oil sands is extremely financially and energetically intensive to extract. Whereas conventional oil has enjoyed a rate of "energy return on energy invested" (EROEI) of about 30 to 1, the oil sands rate of return hovers around 1.5 to 1.
This means that we would have to expend 20 times as much energy to generate the same amount of oil from the oil sands as we do from conventional sources of oil.
Where to find such a huge amount of capital is largely a moot point because, even with massive improvements in extraction technology, the oil sands in Canada are projected to only produce a paltry 2.2 million barrels per day by 2015. This doesn't even account for any unexpected production decreases or cost overruns, both of which have been endemic to many of the oil sands projects. More optimistic reports anticipate 4 million barrels per day of oil coming from the oil sands by 2020. Even if the optimists are correct, 4 million barrels per day much oil when you consider our colossal and ever growing demand in conjunction with the small amount of time we have left before the global peak:
1. We currently need 83.5 million barrels per day.
2. We are projected to need 120 million barrels per day by 2020.
3. We will be losing over 1 million barrels per day of production per year, every year, once we hit the backside of the global oil production curve.
4. The general consensus among now disinterested scientists is that oil production will peak by 2010 at the latest.
The huge reserves of oil shale in the American west suffer from similar problems. While Shell Oil has an experimental oil shale program, even Steve Mut - the CEO of their Unconventional Resources Unit - has sounded less than optimistic when questioned about the ability of oil shale to soften the coming crash. According to journalist Stuart Staniford's coverage of a recent conference on Peak Oil: In response to questions, Steve guesstimated that oil shale production would still be pretty negligible by 2015, but might, if things go really well, get to 5mbpd by 2030.
Disinterested observers are even less optimistic about oil shale. Geologist Dr. Walter Youngquist points out:
The average citizen . . . is led to believe that the United States really has no oil supply problem when oil shale’s hold "recoverable oil" equal to "more than 64 percent of the world's total proven crude oil reserves." Presumably the United States could tap into this great oil reserve at any time. This is not true at all. All attempts to get this "oil" out of shale have failed economically. Furthermore, the "oil" (and, it is not oil as is crude oil, but this is not stated) may be recoverable but the net energy recovered may not equal the energy used to recover it. If oil is "recovered" but at a net energy loss, the operation is a failure.
This means any attempt to replace conventional oil with oil shale will actually make our situation worse as the project will consume more energy than it will produce, regardless of how high the price goes.
Economist Professor James Hamilton who writes has documented further problems with oil shale: A recent Rand study concluded it would be at least 12 years before oil shale reaches the production growth phase. And that is a technological assessment, not a reference to the environmental review process. If it takes 15 years to get an oil refinery built and approved, despite well-known technology and well-understood environmental issues, viewing oil shale as something that could make major contributions to world energy supplies in the immediate future seems highly unrealistic.
"What About So Called 'Reserve Growth'"?
In recent years, the USGS and other agencies have revised their estimates of oil reserves upwards. Peak Oil "deniers" often point to these revisions as proof that fears of a global oil shortage are unfounded. Unfortunately, these upwards revisions are best classified as "paper barrels", meaning they exist on paper only, not in the real world:
USGS Poor Track Record
As recently as 1972, the USGS was releasing circulars that estimated US domestic oil production would not peak until well into the 21st century, and possibly not until the 22nd century. (See Theobald, Schweinfurth & Duncan, U.S. Geological Survey Circular 650)
This was despite the fact US production had already peaked in 1970, just as Hubbert had predicted. Richard Heinberg reminds us, "in 1973, Congress demanded an investigation of the USGS for its failure to foresee the 1970 US oil production peak."
In March 2000 the USGS released a report indicating more "reserve growth." Colin Campbell responded to the report by reminding us of the ludicrous estimates put out by the USGS in the 1960s and early 1970s:
Let us not forget that McKelvey, a previous director of the USGS, succumbed to government pressure in the 1960s to discredit Hubbert’s study of depletion, which was subsequently vindicated in the early 1970’s after US production actually peaked as Hubbert had predicted. It did so . . . in a very damaging report . . . that successfully misled many economists and planners for years to come.
These deeply flawed upward estimates were released because the USGS is a political organization and both politicians and the markets look upon optimistic estimates favourably.
EIA Admits Cooking Its Books
In 1998, the EIA released a report showing significant oil reserve growth. In a footnote to report, the EIA explained:
These adjustments to the estimates are based on non-technical considerations that support domestic supply growth to the levels necessary to meet projected demand levels. (EIA, Annual Energy Outlook 1998, p.17)
In other words, they predicted how much they think we're going to use, and then told us, "Guess what, nothing to worry about - that's how much we've got!"
OPEC's "Spurious Revisions" AKA "Cooking the Books"
During the 1980s, several OPEC countries issued some rather "interesting" upwardly revised estimates of their proven reserves of petroleum. Ron Swenson, proprietor of the website HubbertsPeak.com explains:
Many OPEC countries have been announcing reserve numbers, which are frankly very strange. Either their reported reserves remain the same year after year, suggesting that new discoveries exactly match production, or they have suddenly increased their reported reserves by unfeasibly large amounts.
The table 1/2 way down this page graphically illustrates Swenson's points. How were such large increases in reserve size possible without correspondingly large discoveries? The answer is quite fascinating as it connects to the Reagan administration's amazingly simple strategy to collapse the Soviet Union: bring down the price of oil. Professor Richard Heinberg explains:
Soon after assuming office in 1981, the Reagan Administration abandoned the established policy of pursuing detente with the Soviet Union and instead instituted a massive arms build-up; it also fomented proxy wars in areas of Soviet influence, while denying the Soviets desperately needed oil equipment and technology. Then, in the mid -1980s, Washington persuaded Saudi Arabia to flood the world market with cheap oil. Throughout the last decade of its existence, the USSR pumped and sold its oil at the maximum possible rate in order to earn income with which to keep up in the arms race and prosecute its war in Afghanistan. Yet with markets awash with cheap Saudi oil, the Soviets were earning less even as they pumped more. Two years after their oil production peaked, the economy of the USSR crumbled and its government collapsed.
(See also, Victory: The Reagan Administration's Secret Strategy to Hasten the Collapse of the Soviet Union by Peter Schweizer)
While Reagan's strategy was both simple and effective, it came with a catch: the amount of oil an OPEC nation such as Saudi Arabia could pump was tied to the amount of proven reserves it reported as compared to the other OPEC nations. The only way Saudi Arabia could continue to flood the market into the late 1980s was to revise its oil reserve estimates upwards.
In order to stay competitive under OPEC's proportional export rule, the other OPEC nations issued similarly bogus upward estimates. Thus most, if not all, of the so-called "reserve growth" in the Middle East is only on paper, not in the ground.
Update 1/23/2006: Kuwait's reported reserves cut by 50%
"What About this Theory that Oil is Actually a Renewable Resource?"
A handful of people believe oil is actually a renewable resource continually produced by an "abiotic" process deep in the Earth. As emotionally appealing as this theory may be, it ignores most common sense and all scientific fact. While many of the people who believe in this theory consider themselves "mavericks,” respected geologists consider them crackpots.
Moreover, the oil companies don't give this theory the slightest bit of credence even though they are more motivated than anybody to find an unlimited source of oil as each company's shareholder value is based largely on how much oil it holds in reserve. Any oil company who wants to make a ridiculous amount of money (which means all of them) could simply find this unlimited source of oil but refuse to bring it to the market. Their stock value would skyrocket as a result of the huge find while they could simultaneously maintain artificial scarcity by not bringing it to the market.
Even if the maverick/crackpot theories of "unlimited oil" are true, they aren't doing us much good out here in the real world as production is declining in pretty much every nation outside the Middle East.
It certainly isn't doing us any good here in the United States. Our domestic oil production peaked in October 1970 at 10 million barrels per day. It has since declined a little bit each year and now stands at about 5 million barrels per day. This is despite the fact that the US oil exploration companies have more money, more muscle, and more motivation to find oil than anybody other than God. If oil is a renewable resource, why isn't it renewing itself here in the good ole' US of A?
Furthermore, if oil fields really do refill themselves, why aren't advocates of the abiotic oil theory hiring themselves out to independent oil exploration firms? They could become fabulously wealthy by helping these firms locate and profit from the magically refilling fields. Perhaps the reason abiotic-oil advocates aren't hiring themselves out to oil companies are because the abiotic-oil theory is little more than clever oil company propaganda. Journalist Paula Hay explains:
If millions of people got the picture that Peak Oil is imminent, they would surely begin to take steps to protect themselves and their families—to power down—and decline would be slowed as a result of all those peoples’ aggregate actions. It would be a classic market response to new information.
Big Oil cannot allow this to happen if it intends to keep its profits sky-high. If people believe that oil is abundant forever; that Big Oil is screwing them; and that the government will step in any moment to save them, they have no incentive to power down.
Abiotic oil propaganda, coupled with finger pointing at the oil industry, is a perfect ruse to ensure people don’t start powering down. Peak Oil is not the oil industry’s propaganda.
Abiotic oil is the oil industry’s propaganda.
Interestingly enough, five of the seven policy recommendations made by outspoken abiotic oil advocate Jerome Corsi in his book "Black Gold Stranglehold" sound like taxpayer funded giveaways to Big Oil: (commentary in italics added)
1. Promote scientific research to investigate alternative theories.
2. Expedite leases offshore and in Alaska to encourage oil exploration. (Who benefits from this?)
3. Provide tax credits for deep drilling oil exploration. (Who benefits from this?)
4. Create an oil research institute to serve as a clearinghouse of oil industry information. (Who benefits?)
5. Develop a public broadcasting television series devoted to the oil industry. (Who benefits from this?)
6. Re-establish a gold-backed international trade dollar.
7. Establish tax incentives for opening new refineries in the U.S. (Who benefits from this?)
With the exception of numbers one & six, Corsi's policy recommendations read as though they came from an oil-industry wish list. That Corsi would so vigorously advocate tax breaks for the oil industry should come as little surprise: in 2004, he co-authored the "Swift Boat Veterans for Truth" attack book that many believe helped the tax cut-obsessed and oil industry-backed Bush administration stay in office.
In his book, Corsi cites the Eugene Island 330 oilfield as proof that oil fields refill themselves. Apparently he or his research staff failed to do a Google images search for "Eugene Island 330." If he had performed such a search, he would have come across the following graph, which plainly shows Eugene Island 330's oil production in decline for the past 25 years. Corsi's primary example of a "refilling field" is only producing about 1/6 the amount of oil it produced at its peak.
"If the Environmentalists Would Get Out of the Way, Can't We Just Drill in ANWR?"
While some folks desperately cling to the belief that oil is a renewable resource, others hold on to the equally delusional idea that tapping the Arctic National Wildlife Reserve will solve, or at least delay, this crisis. While drilling for oil in ANWR will certainly make a lot of money for the companies doing the drilling, it won't do much to help the overall situation for three reasons:
1. According of the Department of Energy, drilling in ANWR will only lower oil prices by less than fifty cents;
2. ANWR contains 10 billion barrels of oil - or about the amount the US consumes in a little more than a year.
3. As with all oil projects, ANWR will take about 10 years to come online. Once it does, its production will peak at 875,000 barrels per day - but not till the year 2025. By then the US is projected to need a whopping 35 million barrels per day while the world is projected to need 120 million barrels per day.
"Won't the Market and the Laws of Supply and Demand Address This?" Not enough to prevent an economic meltdown.
As economist Andrew Mckillop explains in a recent article entitled, "Why Oil Prices Are Barrelling Up," oil is nowhere near as "elastic" as most commodities:
One of the biggest problems facing the IEA, the EIA and a host of analysts and "experts" who claim that "high prices cut demand" either directly or by dampening economic growth is that this does not happen in the real world.
Since early 1999, oil prices have risen about 350%. Oil demand growth in 2004 at nearly 4% was the highest in 25 years. These are simple facts that clearly conflict with received notions about "price elasticity". World oil demand, for a host of easily described reasons, tends to be bolstered by "high" oil and gas prices until and unless "extreme" prices are attained.
As mentioned previously, this is exactly what happened during the oil shocks of the 1970s - shortfalls in supply as little as 5% drove the price of oil up near 400%. Demand did not fall until the world was mired in the most severe economic slowdown since the Great Depression.
While many analysts claim the market will take care of this for us, they forget that several fundamental flaws that will prevent the market from appropriately reacting to Peak Oil until it is too late besiege neoclassic economic theory. To illustrate, as of April 2005, a barrel of oil costs about $55. The amount of energy contained in that barrel of oil would cost between $100-$250* dollars to derive from alternative sources of energy. Thus, the market won't signal energy companies to begin aggressively pursuing alternative sources of energy until oil reaches the $100-$250 mark.
*This does not even account for the amount of money it would take to locate and refine the raw materials necessary for a large-scale conversion, the construction and deployment of the alternatives, and finally the retrofitting of the world's $45 trillion dollar infrastructure to run on these alternative sources.
Once they do begin aggressively pursuing these alternatives, there will be a 25-to-50 year lag time between the initial heavy-duty research into these alternatives and their wide-scale industrial implementation.
However, in order to finance an aggressive implementation of alternative energies, we need a tremendous amount of investment capital - in addition to affordable energy and raw materials - that we absolutely will not have once oil prices are permanently lodged in the $200 per barrel neighbourhood.
While we need 25-to-50 years to retrofit our economy to run on alternative sources of energy, we may only get 25-to-50 days once oil production peaks.
Within a few months of global oil production hitting its peak, it will become impossible to dismiss the decline in supply as a merely transitory event. Once this occurs, you can expect traders on Wall Street to quickly bid the price up to, and possibly over, the $200 per barrel range as they realize the world is now in an era of permanent oil scarcity.
With oil at or above $200 per barrel, gas prices will reach $10 per gallon inside of a few weeks. This will cause a rapid breakdown of trucking industries and transportation networks. Importation and distribution of food, medicine, and consumer goods will grind to a halt.
The effects of this will be frightening. As Jan Lundberg, founder of the Lundberg Survey, aka "the bible of the oil industry" recently pointed out:
The scenario I foresee is that market-based panic will, within a few days, drive prices up skyward. And as supplies can no longer slake daily world demand of over 80 million
Barrels a day, the market will become paralysed at price too high for the wheels of commerce and even daily living in "advanced" societies. There may be an event that appears to trigger this final energy crash, but the overall cause will be the huge consumption on a finite planet.
The trucks will no longer pull into Wal-Mart. Or Safeway or other food stores. The freighters bringing packaged techno - toys and whatnot from China will have no fuel. There will be fuel in many places, but hoarding and uncertainty will trigger outages, violence and chaos. For only a short time will the police and military be able to maintain order, if at all.
Once the seriousness of situation is generally acknowledged, a panic will spread on the markets and bring down the entire house of cards even if production hasn't actually peaked. For this reason, the mainstream media cannot discuss this issue without largely whitewashing the truly dire consequences for the average person. If they told the truth, people would panic and the markets would crash.
In summary, we are a prisoner of our own dilemma:
1. Right now, we have no economically scalable alternatives to oil. (Emphasis placed on economic scalability, not technical viability.)
2. We won't get motivated to aggressively pursue economically scalable alternatives until oil prices are sky high;
3. Once oil prices are sky-high, our economy will be shattered, and we won't be able to finance an aggressive switchover to whatever modest alternatives are available to us.
4. An aggressive conservation program will bring down the price of oil, thereby removing the incentive to pursue alternatives until it is too late.
5. The raw materials (silicon, copper, platinum) necessary for many sources of alternative energy are already in short supply. Any attempt to secure enough of these resources to power a large scale transition to alternative energies is likely to be met with fierce competition, if not outright warfare, with China.
6. The media and government can't tell the public the truth without creating a panic and crash of the Stock Market.
7. Most of the steps we need to take to deal with this, such as driving less, would severely hurt large sectors of the US economy. For instance, an aggressive fuel conservation program would lower the demand for new vehicles, as people would be driving less, thereby increasing the life of their vehicles. One out of every six jobs in the US is either directly or indirectly dependent on the automobile-manufacturing sector. With GM and Ford already on the ropes, any aggressive program of conservation would likely send them spiralling into bankruptcy. While some interests may rejoice at the notion of "Big Auto" going bankrupt, this is only because they don't realize the devastating effects a GM and/or Ford bankruptcy would have on all of us, regardless of our political affiliations.
"What About All the Various Alternatives to Oil? Can't We Find Replacements?"
Many politicians and economists insist that there are alternatives to oil and that we can "invent our way out of this." Physicists and geologists tell us an entirely different story.
The politicians and economists are selling us 30-year old economic and political fantasies, while the physicists and geologists are telling us scientific and mathematical truth. Rather than accept the high-tech myths proposed by the politicians and economists, its time for you to start asking critical questions about the so-called "alternatives to oil" and facing some hard truths about energy. While there are many technologically viable alternatives to oil, there are none (or combination thereof) that can supply us with anywhere near the amount of net-energy required by our modern monetary system and industrial infrastructure.
People tend to think of alternatives to oil as somehow independent from oil. In reality, the alternatives to oil are more accurately described as "derivatives of oil." It takes massive amounts of oil and other scarce resources to locate and mine the raw materials (silver, copper, platinum, uranium, etc.) necessary to build solar panels, windmills, and nuclear power plants. It takes more oil to construct these alternatives and even more oil to distribute them, maintain them, and adapt current infrastructure to run on them. Each of the alternatives is besieged by numerous fundamental physical shortcomings that have, thus far, received little attention:
"What About Green Alternatives like Solar, Wind, Wave, and Geothermal?"
Solar and wind power suffer from four fundamental physical shortcomings that prevent them from ever being able to replace more than a tiny fraction of the energy we get from oil: lack of energy density, inappropriateness as transportation fuels, energy intermittency, and inability to scale.
I. Lack of Energy Density/Inability to Scale:
Few people realize how much energy is concentrated in even a small amount of oil or gas. A barrel of oil contains the energy-equivalent of almost 25,000 hours of human labour. A single gallon of gasoline contains the energy-equivalent of 500 hours of human labour. Most people are stunned to find this out, even after confirming the accuracy of the numbers for themselves, but it makes sense when you think about it. It only takes one gallon of gasoline to propel three ton SUV 10 miles in 10 minutes. How long would it take you to push three ton SUV 10 miles?
Most people drastically overestimate the density and scalability of solar, wind, and other renewable. Some examples should help illustrate the limited capacity of these energy sources as compared to fossil fuels. According to author Paul Driessen, it would take all of California's 13,000 wind turbines to generate as much electricity as a single 555-megawatt natural gas fired power plant. According to the European Wind Energy Association's Wind Force 12 report issued in May of 2004, the United States has 6,361 megawatts of installed wind energy. This means that if every wind turbine in the United States were spinning at peak capacity, all at the exact same time, their combined electrical output would equal that of six coals fired power plants. Since wind turbines typically operate at about 30% of their rated capacity, the combined output of every wind turbine in the US is actually equal to less than two coals fired power plants. The numbers for solar are ever poorer. For instance, on 191 of his book The End of Oil: On the Edge of a Perilous New World, author Paul Roberts writes: " . . . If you add up all the solar photovoltaic cells now running worldwide (2004), the combined output - around 2,000 megawatts -barely rivals the output of two coal-fired power plants." Robert's calculation assumes the solar cells are operating at 100% of their capacity. In the real world, the average solar cell operates at about 20% of its rated capacity. This means that the combined output of all the solar cells in the world is equal to less that 40% of the output of a single coal fired power plant.
According to Exxon Mobil, the amount of energy distributed by a single gas station in a single day is equivalent to the amount of energy that would be produced by four Manhattan sized city blocks of solar equipment. With 17,000 gas stations just in the United States you don't need to be a mathematician to realize that solar power is incapable of meeting our urgent need for a new energy source that -like oil - is dense, affordable, and transportable. According to Dr. David Goodstien, professor of physics at Cal Tech University, it would take close to 220,000 square kilometres of solar panels to power the global economy via solar power. This may sound like a marginally manageable number until you realize that the total acreage covered by solar panels in the entire world right now is a paltry 10 square kilometres.
According a recent MSNBC article entitled, "Solar Power City Offers 20 Years of Lessons:" By industry estimates, up to 20,000 solar electricity units and 100,000 heaters have been installed in the United States — diminutive numbers compared to the country’s 70 million single-family houses. This means that even if the number of American households equipped with solar electricity is increased by a factor of 100, less than two million American households will be equipped with solar electric systems. Assuming we are even capable of scaling the use of household solar electric systems by that huge a factor, we must ask ourselves two questions:
What do the other 68 million households do? What about the millions of companies, nations, and industries around the world on which we in the industrialized world are dependent? Since oil, not electricity, is our primary transportation fuel (providing the base for over 90% of all transportation fuel) what good will this do us when it comes to keeping our global network of cars, trucks, airplanes, and boat going?
Unlike an oil pump, which can pump all day and all night under most weather conditions, or coal fired/natural gas fired power plants which can also operate 24/7, wind turbines and solar cells only produce energy at certain times or under certain conditions. This may not be that big of a deal if you simply want to power your household appliances or a small scale, decentralized economy, but if you want to run an industrial economy that relies on airports, airplanes, 18-wheel trucks, millions of miles of highways, huge skyscrapers, 24/7 availability of fuel, etc., an intermittent source of energy will not suffice.
While promising work is being done to counteract the intermittency of wind and solar energy, most of this work is still in the developmental stage and won't be ready or cost effective on a large scale for several decades at the earliest.
Without a cost-effective and scalable storage technology to provide power when the wind is not blowing or the sun is not shining, large scale solar/wind farms must be backed up by things like oil pumps or natural gas/coal fired powered plants. For this reason, the expansion of renewable like wind power actually requires an expansion in the supply of fossil fuels. Journalist Michael Kane writes: Europe is light-years ahead of America in wind energy, and Germany leads the world. The German numbers are painting a dismal picture for wind’s capacity. E.ON Netz - one of the world’s largest private energy providers - owns over 40% of Germany’s wind generating capacity. They released a report titled "WIND REPORT 2004" stating that wind energy requires "shadow stations" of traditional energy on back-up reserve in case the wind forecast is wrong. They state that reserve capacity needs to be 60% to 80% of the total wind capacity! So as more wind comes on line, it is all but certain that more hydrocarbon reserve capacity will be required, further demonstrating how renewable energy is used to supplement over-consumption? Here is the real kicker: these shadow stations cannot just be turned on and off at will. In order to be ready to produce electricity when the wind is not blowing or the sun is not shining, they must be fed a constant supply of natural gas or coal.
III .Inappropriateness as Transportation Fuels:
Approximately 2/3 of our oil supply is used for transportation. Over ninety percent of our transportation fuel comes from petroleum fuels (gasoline, diesel, jet-fuel). Thus, even if you ignore the challenges catalogued above, there is still the problem of how to use the electricity generated by the solar cells or wind turbines to run fleets of food delivery trucks, ocean liners, airplanes, etc. Unfortunately, solar and wind cannot be used as industrial-scale transportation fuels unless they are used to crack hydrogen from water via electrolysis. Hydrogen produced via electrolysis is great for small scale, village level, and/or experimental projects. However, in order to power a significant portion of the global industrial economy on it, we would need the following:
1.Hundreds of trillions of dollars to construct fleets of hydrogen powered cars, trucks, boats, and airplanes.
2.Hundreds, if not thousands, of oil-powered factories to accomplish number one.
3.The construction of a ridiculously expensive global refuelling and maintenance network for number one.
4.Mind-boggingly huge amounts of platinum, silver, and copper, and other raw materials that have already entered permanent states of scarcity.
IV.Painfully Low Starting Point:
Finally, most people new to this issue drastically overestimate the amount of energy we will be able to realistically derive from these sources inside of the next 5-25 years. If the previous examples didn't convince you that solar and wind are incapable of replacing oil and gas on more than a small scale/supplemental level, consider the following, easily verifiable facts: In 2003, the US consumed 98 quadrillion BTU's of energy. A whopping .171 quadrillion came from solar and wind combined. Do the math (.171/98) and you will see that a total of less then one-sixth of one percent of our energy appetite was satisfied with solar and wind combined. Thus, just to derive a paltry 2-3 percent of our current energy needs from solar and wind, we would need to double the percentage of our energy supply derived from solar/wind, then double it again, then double it again, and then double it yet again. Unfortunately, the odds of us up scaling our use of solar and wind to the point where they provide even just 2-3 percent of our total energy supply are about the same as the odds of Michael Moore and Dick Cheney teaming up to win a 5K relay race. Despite jaw-dropping levels of growth in these industries, coupled with practically miraculous drops in price per kilowatt hour (95% drop in two decades), along with increased interest from the public in alternative energies, the percentage of our total energy supply derived from solar and wind is projected to grow by only 10 percent per year.
Since we are starting with only one-sixth of one percent of our energy coming from solar and wind, a growth rate of 10 percent per year isn't going to do much to soften a national economic meltdown. Twenty-five years from now, we will be lucky if solar and wind account for one percent of our total energy supply.
While other alternative energy sources, such as wave and geothermal power, are fantastic sources of energy in and of themselves, they are incapable of replacing more than a fraction of our petroleum usage for the same reasons as solar and wind: they are nowhere near as energy dense as petroleum and they are inappropriate as transportation fuels. In addition, they are also limited by geography -wave power is only technically viable in coastal locations. Only a handful of nations, such as Iceland, have access to enough geothermal power to make up for much of their petroleum consumption. This is by no means reason not to invest in these alternatives. We simply have to be realistic about what they can and can't do. On a household or village scale, they are certainly worthy investments. But to hope/expect they are going to power more than a small fraction of our forty-five trillion dollar per year (and growing) global industrial economy is woefully unrealistic. On a related note, even if solar, wind, and other green alternatives could replace oil; we still wouldn't escape the evil clutches of so called "Big Oil." The biggest maker of solar panels is British Petroleum with Shell not too far behind. Similarly, the second biggest maker of wind turbines is General Electric, who obtained their wind turbine business from that stalwart of corporate social responsibility, Enron. As these examples illustrate, the notion that "Big Oil is scared of the immerging renewable energy market!" is silly. "Big Oil" already owns the renewable energy market.
"What About the Hydrogen Economy?"
Hydrogen isn't the answer either. As of 2003, the average hydrogen fuel cell costs close to $1,000,000. Unlike other alternatives, hydrogen fuel cells have shown little sign of coming down in price. Unfortunately, hydrogen and/or hydrogen fuel cells will never power more than a handful of cars due to the following reasons:
I. Astronomical Cost of Fuel Cells
With the fuel cell powered cars themselves costing $1,000,000 apiece, replacing 210 million cars (about 1/4 of the world's fleet) with fuel cell powered cars is going to cost $210,000,000,000,000 (two-hundred and ten trillion dollars). Furthermore, as a recent article in EV World points out, the average fuel cell lasts only 200 hours. Two hundred hours translates into just 12,000 miles, or about one year’s worth of driving at 60 miles per hour. That's not much of a deal for a car with a million-dollar price tag. That doesn't even begin to address the cost of replacing a significant portion of the millions upon millions of oil-powered airplanes, boats, trucks, tractors, trailers, etc., with fuel cells nor the construction of a worldwide system to maintain all of these new technologies.
II. Platinum Supply
A single hydrogen fuel cell requires approximately 20-50 grams of platinum. Let's say we want to replace 1/4 of the world's petroleum powered cars with hydrogen fuel cell powered cars. Twenty-to-fifty grams of platinum per fuel cell x 210 million fuel cells equals between 4.2 billion and 10.5 billion grams of platinum required for the conversion. Unfortunately, world platinum production is currently at only about 240 million grams per year, most of which is already earmarked for thousands of indispensable industrial processes. If the hydrogen economy were anything other than a total red herring, such issues would eventually arise, as 80 percent of the world’s proven platinum reserves are located in that bastion of geopolitical stability, South Africa. Even if an economically affordable and scalable alternative to platinum is immediately located and mined in absolutely massive quantities, the ability of hydrogen to replace even a small portion of our oil consumption is still handicapped by several fundamental limitations, some of which are detailed below. NASA, which fuels the space shuttle with hydrogen, may be able to afford to get around the following challenges, but there is a big difference between launching a single space shuttle and running a global economy with a voracious and constantly growing appetite for energy.
III. Inability to Store Massive Quantities at Low Cost:
Hydrogen is the smallest element known to man. This makes it virtually impossible to store in the massive quantities and to transport across the incredibly long distances at the low costs required by our vast global transportation networks. In her February 2005 article entitled "Hydrogen Economy: Energy and Economic Black hole," Alice Friedemann writes: Hydrogen is the Houdini of elements. As soon as you’ve gotten it into a container, it wants to get out, and since it’s the lightest of all gases, it takes a lot of effort to keep it from escaping. Storage devices need a complex set of seals, gaskets, and valves. Liquid hydrogen tanks for vehicles boil off at 3-4% per day. While some research into hydrogen storage technologies looks promising, it is still in the experimental stages and decades (at the earliest) from being ready to scale on an industrial level.
IV. Massive Cost of Hydrogen Infrastructure:
A hydrogen economy would require massive retrofitting of our entire global transportation and fuel distribution networks. At a million dollars per car, it would cost $350,000,000,000,000 to replace half of our current automotive fleet (700 million cars world wide) with hydrogen fuel cell powered cars. That doesn't even account for replacing a significant fraction of our oil-powered airplanes or boats with fuel cells. The numbers don't get any prettier if we scrap the fuel cells and go with straight hydrogen. According to a recent article in Nature, entitled "Hydrogen Economy Looks Out of Reach:" Converting every vehicle in the United States to hydrogen power would demand so much electricity that the country would need enough wind turbines to cover half of California or 1,000 extra nuclear power stations. Unfortunately, even if we managed to get this ridiculously high number of wind turbines or nuclear power plants built, we would still need to build the hydrogen powered cars, in addition to a hydrogen distribution network that would be mind-bogglingly expensive. The construction of a hydrogen pipeline network comparable to our current natural gas pipeline network, for instance, would cost 200 trillion dollars. That's twenty times the size of the US GDP in the year 2002. How such capital-intensive endeavours will be completed in the midst of massive energy shortages is anybody's guess.
V. Hydrogen's "Energy Sink" Factor:
As mentioned previously, solar, wind, or nuclear energy can be used to "crack" hydrogen from water via a process known as electrolysis. The electrolysis process is a simple one, but unfortunately it consumes more energy than it produces. This has nothing to do with the costs and everything to do with the immutable laws of thermodynamics. Again, Alice Friedemann weighs in: The laws of physics mean the hydrogen economy will always be an energy sink. Hydrogen’s properties require you to spend more energy to do the following than you get out of it later: overcome waters’ hydrogen-oxygen bond, to move heavy cars, to prevent leaks and brittle metals, to transport hydrogen to the destination. It doesn’t matter if all of the problems are solved, or how much money is spent. You will use more energy to create, store, and transport hydrogen than you will ever get out of it. Even if these problems are ignored or assumed away, you are still faced with jaw-dropping costs of a renewable derived hydrogen economy. In addition to the 200 trillion dollar pipeline network that would be necessary to move the hydrogen around, we would need to deploy about 40 trillion dollars of solar panels. If the hydrogen was derived from wind (which is usually more efficient than solar) the cost might be lowered considerably, but that's not saying much when you are dealing with numbers as large as $40 trillion. As far as how much you as the consumer would pay for hydrogen fuel derived from renewable resources, Joseph Romm, author of The Hype About Hydrogen, estimates you will have to pay $10-$20 per gallon of gasoline equivalent. That's assuming you can even find a renewable-hydrogen filling station. Even if the costs of these projects are cut in half, that makes little difference over the course of a generation, as our economy doubles in size approximately every 25 - 30 years. In other words, by the time we will have made any real headway in constructing a "hydrogen economy", the problem will have already compounded itself. If the "hydrogen economy" is such a hoax, why then do we hear so much about it? The answer is simple when you "follow the money" and ask,” who benefits?" (Hint: GM, Shell, et al.)
"What About Nuclear Energy?"
Nuclear energy requires uranium, which is problematic because as David Petch explains in his article "Peak Oil and You", even in the most optimistic scenarios, uranium will soon be in short supply: Figures illustrate the different projections of uranium depletion, pending an increase in annual consumption rates of 3%, 5% or 8%. Currently, uranium production falls incredibly short of the demand. As oil resources become scarce, uranium will have more pressure put upon it as a resource. All three different scenarios have a similar course until around 2013, where they part trails. By 2020, there is a serious uranium shortage.
Let's assume a Pollyanna position and assume that uranium deposits can be doubled up in the coming decade. Figures illustrate the 3 different scenarios, depending on the net increase in consumption per year. Rather than 2013 being a focal year, it is stretched out by 3 years to 2016. Uranium supply issues aside, nuclear energy (like solar and wind) are not an economically or energetically feasible transportation fuel. Put simply, you can't power your car with a nuclear reactor in the trunk. Even if these problems are assumed away, a large scale switch over to nuclear power is still not going to do all that much to solve our problems due to the cost and time frames involved in the of construction of nuclear power plants. s. It would take 10,000 of the largest nuclear power plants to produce the energy we get from fossil fuels. At $3-5 billion per plant, it's not long before we're talking about "real money" - especially since the $3-5 billion doesn't even include the cost of decommissioning old reactors, converting the nuclear generated energy into a fuel source appropriate for cars, boats, trucks, airplanes, and the not-so-minor problem of handling nuclear waste.
Speaking of nuclear waste, it is a question nobody has quite answered yet. This is especially the case in countries such as China and Russia, where safety protocols are unlikely to be strictly adhered to if the surrounding economy is in the midst of a desperate energy shortage. It may also be true in the case of the US because, as James Kunstler points out in his recent book, The Long Emergency: . . . reactors may be beyond the organizational means of the society we are apt to become in the future, mainly one with much weaker central authority, less police power, and reduced financial resources . . . in the absence of that (cheap) oil we can't assume the complex social organization needed to run nuclear energy safely. Assuming we find answers to all questions regarding the cost and safety of nuclear power, we are still left with the most vexing question of all: Where are we going to get the massive amounts of oil necessary to build hundreds, if not thousands, of these reactors, especially since they take 10 or so years to build and we won't get motivated to build them until after oil supplies have reached a point of permanent scarcity? Remember, once we get the reactors built, we still have the not-so-inexpensive task of retrofitting a significant portion of the following to run on nuclear-derived electricity:
1. 700 million oil-powered cars traversing the world's roads;
2. Millions of oil-powered airplanes crisscrossing the world's skies;
3. Millions of oil-powered boats circumnavigating the world's oceans.
Scientists have made some progress in regards to nuclear fusion, but the road from success in tabletop laboratory experiments to use, as an industrial scale replacement for oil is an extremely long one that, even in the most favourable of circumstances, will take decades to traverse. Again, as with other alternatives to petroleum, all forms of nuclear energy should certainly "be on the table." But if you're hoping that it's going to save you from the ramifications of Peak Oil, you are sorely mistaken.
"What About Bio fuels Such as Ethanol and Bio diesel?"
Bio fuels such as bio diesel, ethanol, methanol etc. are great, but only in small doses. Bio fuels are all grown with massive fossil fuel inputs (pesticides and fertilizers) and suffer from horribly low, sometimes negative, EROEIs. The production of ethanol, for instance, requires six units of energy to produce just one. That means it consumes more energy than it produces and thus will only serve to compound our energy deficit. In addition, there is the problem of where to grow the stuff, as we are rapidly running out of arable land on which to grow food, let alone fuel. This is no small problem as the amount of land it takes to grow even a small amount of bio fuel is quite staggering. As journalist Lee Dye points out in a July 2004 article entitled "Old Policies Make Shift From Foreign Oil Tough:" . . . relying on corn for our future energy needs would devastate the nation's food production. It takes 11 acres to grow enough corn to fuel one automobile with ethanol for 10,000 miles, or about a year's driving, Pimentel says. That's the amount of land needed to feed seven persons for the same period of time.
And if we decided to power all of our automobiles with ethanol, we would need to cover 97 percent of our land with corn, he adds. Bio diesel is considerably better than ethanol, (and probably the best of the bio fuels) but with an EROEI of three, it still doesn't compare to oil, which has had an EROEI of about 30. While any significant attempt to switch to bio fuels will work out great for giant agribusiness companies (political campaign contributors) such as Archer Daniels Midland, ConAgra, and Monsanto, it won't do much to solve a permanent energy crisis for you. The ghoulish reality is that if we wanted to replace even a small part of our oil supply with farm grown bio fuels, we would need to turn most of Africa into a giant bio fuel farm, an idea that is currently gaining traction in some circles. Obviously many Africans - who are already starving - would not take kindly to us appropriating the land they use to grow their food to grow our fuel. As journalist George Monbiot points out, such an endeavour would be a humanitarian disaster.
Some folks are doing research into alternatives to soybeans such as bio diesel producing pools of algae. As with every other project that promises to "replace all petroleum fuels," this project has yet to produce a single drop of commercially available fuel. This hasn't prevented many of its most vocal proponents from insisting that algae grown bio diesel will solve our energy problems. The same is true for other, equally ambitious plans such as using recycled farm waste, switch grass, etc. These projects all look great on paper or in the laboratory. Some of them may even end up providing a small amount of commercially available energy at some undetermined point in the future. However, in the context of our colossal demand for petroleum and the small amount of time we have remaining before the peak, these projects can't be expected to be more than a "drop in the bucket."
Tragically, many well-meaning people attempting to develop solutions don't even understand this. As Dr. Ted Trainer explains in a recent article on the thermodynamic limitations of biomass fuels: This is why I do not believe consumer-capitalist society can save itself. Not even its "intellectual" classes or green leadership give any sign that this society has the wit or the will to even think about the basic situation we are in. As the above figures make clear, the situation cannot be solved without huge reduction in the volume of production and consumption going on.
The current craze surrounding bio diesel is a good example of what Dr. Trainer is talking about. While folks who have converted their personal vehicles to run on vegetable oil should certainly be given credit for their noble attempts at reducing our reliance on petroleum, the long-term viability of their efforts is questionable at best. Once our system of food production collapses due to the effects of Peak Oil, vegetable oil will likely become far too precious/expensive a commodity to be burned as transportation fuel for anybody but the super-rich. As James Kunstler points out in an April 2005 update to his blog "Cluster Fuck Nation", many bio diesel enthusiasts are dangerously clueless as to this reality: Over in Vermont last week, I ran into a gang of bio diesel enthusiasts. They were earnest, forward-looking guys who would like to do some good for their country. But their expectations struck me as fairly crazy, and in a way typical of the bad thinking at all levels of our society these days.
For instance, I asked if it had ever occurred to them that bio diesel crops would have to compete for farmland that would be needed otherwise to grow feed crops for working animals. No, it hadn't. (And it seemed like a far-out suggestion to them.) Their expectation seemed to be that the future would run a lot like the present, that bio-diesel was just another ingenious, innovative, high-tech module that we can "drop into" our existing system in place of the previous, obsolete module of regular oil. Kunstler goes on to explain that when policies or living/working arrangements are set up around such unexamined expectations, the result is usually a dangerous deepening of our reliance on cheap energy and "easy motoring."
Bio diesel advocates can get downright nasty when somebody points out any of the above described limitations of their favourite fuel. For instance, in a December 2005 article entitled, "The Most Destructive Crop on Earth No Solution to the Energy Crisis," well known progressive journalist George Monbiot, recounted his experiences attempting to point out the limits of bio diesel:
The last time I drew attention to the hazards of making diesel fuel from vegetable oils, I received as much abuse as I have ever been sent for my stance on the Iraq war. The bio diesel missionaries, I discovered, are as vociferous in their denial as the executives of Exxon. If bio fuels such as bio diesel and ethanol are such poor substitutes for oil, why then do you hear about them so much? The answer becomes obvious once you follow the money: the vast majority of the bio fuels produced in this country are (as mentioned earlier) produced by giant agribusiness conglomerates such as Archer Daneiles Midland. Investigative reporter Mike Ruppert points out:
Archer Daniels Midland laughs all the way to the bank. With a price to earnings (P/E) ratio of 17:1, every dollar of net profit thrown into their coffers by politicians or investment advisors selling the snake oil of alternative fuels generates $17 in stock value which ADM will happily sell off before all markets succumb to Peak Oil. That $17 came out of your pocket whether you invested or not.
"What About Synthetic Oil From Coal?"
Coal can be used to make synthetic oil via a process known as gasification. Unfortunately, synthetic oil will be unable to do all that much to soften the coming energy crash for the following reasons:
I. Insufficiency of Supply/"Peak Coal":
The coal supply is not as great as many assume. According to a July 2004 article published by the American Institute of Physics: If demand remains frozen at the current rate of consumption, the coal reserve will indeed last roughly 250 years. That prediction assumes equal use of all grades of coal, from anthracite to lignite. Population growth alone reduces the calculated lifetime to some 90-120 years. Any new uses of coal would further reduce the supply . . . .The use of coal for conversion to other fuels would quickly reduce the lifetime of the US coal base to less than a human lifespan. Even a 50-75 year supply of coal is not as much as it sounds because coal production, like oil production, will peak long before the total supply is exhausted. Were we to liquefy a large portion of our coal endowment in order to produce synthetic oil, coal production would likely peak within 2 decades.
II. Falling "Energy Profit Ratio":
As John Gever explains in his book, Beyond Oil: The Threat to Food and Fuel in Coming Decades, the production of coal will be in energy-loser within a few decades: . . . the energy profit ratio for coal slips to 20 in 1977, comparable to that of domestic petroleum. While an energy profit ratio of 20 means that only 5 percent of coal's gross energy is needed to obtain it, the sharp decline since 1967 is alarming. If it continues to drop at this rate, the energy profit ratio of coal will slide to 0.5 by 2040. In other words, with an EPR of .5, it will take twice as much energy to produce the coal than the coal actually contains. It will thus be of no use to us as an energy source.
III. Issue of Scale and Environmental Catastrophe:
The environmental consequences of a huge increase in coal production would be truly catastrophic. Caltech physics professor Dr. David Goodstein explains: We use now about twice as much energy from oil as we do from coal, so if you wanted to mine enough coal to replace the missing oil, you’d have to mine it at a much higher rate, not only to replace the oil, but also because the conversion process to oil is extremely inefficient. You’d have to mine it at levels at least five times beyond those we mine now—a coal-mining industry on an absolutely unimaginable scale. In his book, Out of Gas: The End of the Oil Age, Dr. Goodstein tells us that a large scale switch to coal could produce such severe global warming that life on planet Earth would cease to exist.
"Can't We Use a Combination of the Alternatives to Replace Oil?"
Absolutely. Despite their individual shortcomings, it is still possible for the world economy to run on a basket of alternative sources of energy - so long as we immediately get all of the following:
1. A few dozen technological breakthroughs;
2. Unprecedented political will and bipartisan cooperation;
3. Tremendous international collaboration;
4. Massive amounts of investment capital;
5. Fundamental reforms to the banking system;
6. No interference from the oil-and-gas industries;
7. About 25-50 years of general peace and prosperity to retrofit the world's $45 trillion dollar per year economy, including transportation and telecommunication networks, manufacturing industries, agricultural systems, universities, hospitals, etc., to run on these new sources of energy.
8. A generation of engineers, scientists, and economists trained to run a global economy powered by new sources of energy.
9. Rational elected officials and capable government appointees to manage the generation long transition.
If we get all of the above, we might be able to get the energy equivalent of 3-5 billion barrels of oil per year from alternative sources. That's a tremendous amount of oil - about as much as the entire world used per year during the 1950s, but it's nowhere near enough to keep our currently mammoth-sized yet highly volatile global economic system going. The world currently requires over 30 billion barrels/1.2 trillion gallons of oil per year to support economic growth. That requirement will only increase as time goes on due to population growth, debt servicing, and the industrialization of nations such as China and India.
So even if the delusional optimistic 8-step scenario described above is somehow miraculously manifested, we're still facing a 70-90% reduction in the amount of energy available to us. A 70-90% reduction would be extremely painful, but not the "end of the world" if it wasn't for the fact that, as explained above, the monetary system will collapse in the absence of a constantly increasing energy supply. If a shortfall between demand and supply of 5% is enough to send prices up by 400%, what to you think a shortfall of 70-90% is going to do?
To make matters worse, even if the all of the above obstacles are assumed away, we are still faced with the problem of "economic doubling time." If the economy grows at a healthy clip of 3.5% per year, it doubles in size every 20 years. That growth must be fuelled by an energy supply that doubles just as quickly. Thus, our total "energy debt" will have compounded itself by the time we have made any major strides in switching to alternative sources of energy.
"What About Amazing New Technologies Such As Thermal Depolymerization, Solar Nanotech, Space Based Solar Arrays, and other 'Energy-Miracles'?"
I. Thermal Depolymerization
Thermal Depolymerization is an intriguing solution to our landfill problems, but since most of the feedstock (such as tires and turkey guts) requires high-grade oil to make in the first place, it is more "high-tech recycling" than it is a solution to a permanent oil shortage. While the following analogy is certainly a bit disgusting, it should clearly illustrate why thermal Depolymerization won't do much to soften the coming collapse: Expecting thermal Depolymerization to help solve our long-term energy problems makes as much sense as expecting the consumption of our own faces to help solve a long-term Famine. In both cases, the energy-starved party is simply recycling a small portion of the energy they had previously consumed.
On a less grotesque note, the technology is besieged by several fundamental shortcomings that those desperately hoping for a techno-messiah tend to overlook: First, there is the problem of production costs. According to a recent article in Fortune Magazine, a barrel of oil produced via the thermal Depolymerization process costs $80 to produce as of January 2005. To put that figure in perspective, consider the fact that oil pulled out of the ground in Saudi Arabia costs less than $2.50 per barrel, while oil pulled out of the ground in Iraq costs only $1.00 per barrel. This means that with spot oil prices in the $50/barrel range, a barrel of oil produced via thermal Depolymerization in January 2005 would have to sell for between $1,600-$4,000 per barrel to have a return on investment comparable to oil produced from Saudi Arabia or Iraq. Oil prices of $1,600-$4,000 per barrel would put gas prices at roughly $80-$200 per gallon. If the technology were the miracle many people are desperately hoping for, the company would likely not have needed a grant from the Department of Energy to keep its head above water. Nor would it have been the subject of an April 2005 Kansas City Star article appropriately entitled, "Innovative Turkey-to-Oil Plant Eats Money, Spits Out Fowl Odor."
Sky-high production costs and horrific odour problems aside, a look at the history of thermal Depolymerization tends to show it will never amount to more than a tiny drop in the giant barrel that is our oil appetite. The technology was first developed for commercial use in 1996. Here we are, ten years later and there is only one thermal Depolymerization plant online and it is producing less than 500 barrels of oil per day, despite record high oil prices. Even if oil production from thermal Depolymerization is up scaled by a factor of 1,000, and the cost of production brought down by a factor of 10, it will still only be producing 500,000 barrels of oil per day. While that may make a tremendous amount of money for the company, it won't make much difference in our overall situation as the global need for oil is projected to reach 120,000,000 barrels per day by 2020.
If thermal Depolymerization sounded "too good to be true" when you first heard about it, now you know why. Again, as with other alternatives, we shouldn't let these challenges discourage continued research, development, and investment into the technology. However, we have to be realistic about what the technology can and can't do. If you're a big agribusiness or energy company, you may want to look into thermal Depolymerization. If, on the other hand, you're just a regular person trying to figure out how you're going to acquire things like food, water, and shelter in a post-cheap oil world, you may as well forget about thermal Depolymerization. It is never going to make a discernable contribution to your standard of living.
II. Space Based Solar Arrays
As disappointing as thermal Depolymerization has been to those hoping for a techno-savoir, at least it has produced a small amount of commercially available energy. The same cannot be said for space-based solar arrays, which according to NASA, are plagued by "major technical, regulatory and conceptual hurdles" and won't see the light of day for several decades. Even if these major hurdles are somehow cleared inside of 5 years instead of 50 years, there is still the not-so-minor problem of rewiring all of industrial civilization - including agriculture, communications, transportation, defence, health care, education, industry, government, finance/banking, etc. . to run on space-derived solar energy. Of course, before the global rewiring can begin, we have to find the energy, raw materials, political willingness, financial capital, etc. to get such a project off the ground. We also have to find a way to prevent China's million-man standing army from snapping up all the raw materials necessary to make the transition.
III. Solar Nanotechonology
While there are some promising technological advancements in solar-Nanotechnology, even Dr. Richard Smalley, the scientist at the forefront of these technologies, admits we need a series of "miracles" to prevent a total collapse of industrial civilization. In the February 2005 issue of Discover Magazine, Dr. Smalley gave the following prognosis: There will be inflation as billions of people compete for insufficient resources. There will be famine. There will be terrorism and war.
He went on to say that it will take "presidential leadership" to inspire us to pursue technologies that might alleviate this crisis. In other words, the chances of technology saving you from the coming economic collapse are about the same as the chances of another virgin birth taking place. For you or any other "average" person to expect high-tech solutions to save you from the economic effects of Peak Oil is akin to a person living in sub-Saharan Africa to expect high-tech medical treatments to save their community from the effects of AIDS. These treatments are only available and affordable for super-wealthy people like Magic Johnson, not the average people in Africa. Likewise, many of the recent technological advancements in energy production and efficiency may be available and affordable to extraordinarily wealthy people or agencies like the Department of Defence, but they aren't going to be available or affordable to the rest of us.
"What About Super Fuel Efficient and/or Electric Cars?"
Hybrids or so-called "hyper-cars" aren't the answer either because the construction of an average car consumes the energy equivalent of approximately 27-54 barrels (1,110-2,200 gallons) of oil. Thus, a crash program to replace the 700 million internal combustion vehicles currently on the road with super fuel-efficient or alternative fuel-powered vehicles would consume the energy equivalent of approximately 18-36 billion barrels of oil, which is the amount of oil the world currently consumes in six-to-twelve months. Consequently, such a program (while well-intentioned) would actually bring the collapse upon us even sooner.
II. Electric Vehicles
Electric vehicles are incapable of replacing more than a small fraction (5 or maybe 10%) of the 700 million internal combustion engine powered cars on the road due to the limits of battery technology. Dr. Walter Youngquist explains: . . . a gallon of gasoline weighing about 8 pounds has the same energy as one ton of conventional lead-acid storage batteries. Fifteen gallons of gasoline in a car's tank are the energy equal of 15 tons of storage batteries. Even if much improved storage batteries were devised, they cannot compete with gasoline or diesel fuel in energy density. Also, storage batteries become almost useless in very cold weather, storage capacity is limited, and batteries need to be replaced after a few years use at large cost. There is no battery pack which can effectively move heavy farm machinery over miles of farm fields, and no electric battery system seems even remotely able to propel a Boeing 747 14 hours non-stop at 600 miles an hour . . . Some promising research into new battery technologies using lithium is being performed, but even the scientists at the forefront of this research admit, "We've got a long way to go."
Assuming these problems away, the construction of an average car also consumes 120,000 gallons of fresh water. Unfortunately, the world is in the midst of a severe water crisis that is only going to get worse in the years to come. Scientists are already warning us to get ready for massive "water wars." Thus, the only way for us to replace our current fleet of gas-guzzling SUVs with fuel-efficient hybrids or electric vehicles is to seize control of the world's reserves of both oil and fresh water and then divert those resources away from the billions of people who already rely on them. Even if were willing to undertake such an endeavour, the problem will still not be solved due to a phenomenon known as "Jevon's Paradox," whereby increases in energy efficiency are obliterated by corresponding increases in energy consumption. The US economy is a good example of Jevon's Paradox in action. Since 1970, we have managed to cut in half the amount of oil necessary to generate a dollar of GDP. At the same time, however, our total level of oil consumption has risen by about fifty percent while our level of natural gas and coal consumption has risen by even more. Thus, despite massive increases in the energy efficiency over the last 35 years, we are more dependent on oil than ever. This trend is unlikely to be abated in a market economy, where the whole point is to make as much money (consume as much energy) as possible.
"What About Large-Scale Efforts at Conserving Energy or Becoming More Energy Efficient?"
Amazingly, such efforts will actually make our situation worse. This probably makes absolutely no sense unless you understand how the modern day banking and monetary system works. To illustrate, let's revisit Jevon's Paradox, explained above, with an example: Pretend you own a computer store and that your monthly energy bill, as of December 2004, is $1,000. You then learn about the coming energy famine and decide to do your part by conserving as much as possible. You install energy efficient lighting, high quality insulation, and ask your employees to wear sweaters so as to minimize the use of your store's heating system. After implementing these conservation measures, you manage to lower your energy bill by 50% - down to $500 per month. While you certainly deserve a pat-on-the-back and while your business will certainly become more profitable as a result of your conservation efforts, you have in no way helped reduce our overall energy appetite. In fact, you have actually increased it. At this point, you may be asking yourself, "How could I have possibly increased our total energy consumption when I just cut my own consumption by $500/month? That doesn't seem to make common sense . . .?"
Well think about what you're going to do with that extra $500 per month you saved. If you're like most people, you're going to do one of two things:
1. You will reinvest the $500 in your business. For instance, you might spend the $500 on more advertising. This will bring in more customers, which will result in more computers being sold. Since, as mentioned previously, the average desktop computer consumes 10X it's weight in fossil fuels just during its construction, your individual effort at conserving energy has resulted in the consumption of more energy.
2. You will simply deposit the $500 in your bank account where it will accumulate interest. Since you're not using the money to buy or sell anything, it can't possibly be used to facilitate an increase in energy consumption, right?
Wrong. For every dollar a bank holds in deposits, it will loan out between six and twelve dollars. The bank’s customers to do everything from starting businesses to making down payments on vehicles to purchasing computers then use these loans. Thus, your $500 deposit will allow the bank to make between $3,000 and $6,000 in loans - most of which will be used to buy, build, or transport things using fossil fuel energy.
Typically, Jevon's Paradox is one of the aspects of our situation that people find difficult to get their minds around. Perhaps one additional example will help clarify it: Think of our economy as a giant petroleum powered machine that turns raw materials into consumer goods, which are later, turned into garbage: If you remove the machine's internal inefficiencies, the extra energy is simply reinvested into the petroleum supply side of the machine. The machine then consumes petroleum and spits out garbage at an even faster rate. The only way to get the machine to consume less petroleum is for whoever owns/operates the machine to press the button that says "slow-down." However, since we are all dependent on the machine for jobs, food, affordable health care, subsidies for alternative forms of energy, etc., nobody is going to lobby the owners/operators of the machine to press the "slow-down" button until it's too late. Eventually (sooner than later) the petroleum plug will get pulled and the machine's production will sputter before grinding to a halt. At that point, those of us dependent on the machine (which means all of us) will have to fight for whatever scraps it manages to spit out.
To be clear: conservation will benefit you as an individual. If, for instance, you save $100/month on your energy bills, you can roll that money into acquiring skills or resources that will benefit you as we slide down the petroleum-production down slope. But since your $100 savings will result in a net increase in the energy consumed by society as a whole, it will actually cause us to slide down the down slope faster.
"What's Going to Happen to the Economy?"
The US economy is particularly vulnerable to the coming oil shocks as we consume a greater proportion of the world's oil than any other nation. The unparalleled prosperity experienced in this country during the last 100 years was built entirely on cheap oil. Until the late 19th century, the US economy was primarily agrian in nature. Oil was discovered in 1859 but did not become a truly important industrial fuel until Henry Ford began mass-producing automobiles in the early 1900s. The mass production of automobiles became a cornerstone of the US economy while allowing people to move out of the cities and into the suburbs. The expansion of the suburbs fuelled the real estate and housing booms of the 20th century, which in turn fuelled the US steel, copper, construction, etc. industries. A system of finance sprung up that facilitated these booms while becoming dependent on them.
The affordability of the individual automobile and petroleum based fuels combined with the growth of the suburbs contributed to the destruction of the US mass transit system. The trends that were set in motion in the early part of the 20th century are still driving the US economy here in the 21st. The degree to which the US economy is still reliant on cheap-oil dependent industries such as automobile manufacturing and housing construction is evidenced by the following facts:
According to the American Automobile Manufacturers Association, one out of every seven jobs in the US is dependent on automobile manufacturing. According to an August 2005 report by Merrill Lynch, half of the new jobs created in the US since 2001 are dependent on housing construction. Most of the automobile and home purchases in this country are made with interest-bearing loans, which, absent a hyperinflationary monetary policy, can only be paid back en masse if the economy grows. The US economy, at least in its current incarnation, can only grow if people can afford to drive more. As researcher Stuart Staniford has shown in a series of graphs originally published on The Oil Drum, a strong causal (if not virtually direct) relationship exists between miles driven and economic growth: In short, the US has built its entire infrastructure and way of life under the assumption oil would always be cheap and plentiful.
"How Are People Likely to React to This?"
As the US economy begins to disintegrate, civil unrest may become increasingly violent and widespread. Each faction of the American body-politic will likely rally around reactionary political demagogues/movements who promise to bring back the good days by eliminating whatever domestic or foreign group(s) they have decided are at fault for the economic and geopolitical unravelling.
Liberals will blame "Bush, Big-Oil and the Hard Right Neocons" while conservatives will blame "Bin-Laden, Big-Government, and the Extreme Left Environmentalists."
The anticipation of massive unrest may be the real reason why the Department of Homeland Security has contracted with a Halliburton subsidiary to build massive new domestic detention camps.
In 1985, the authors of Beyond Oil: The Threat to Fuel and Food in the Coming Decades, warned us of such possibilities:
A stagnant or shrinking economy will have a major effect on society’s expectations. With few exceptions, each generation in the United States has become materially better off than the preceding one. This pattern of increasing wealth has become an indelible part of the American Dream; a higher standard of living than our parents is practically a birthright. These expectations are the standard against which actual performance is judged. During times of failed expectations, a society is especially vulnerable to a person or philosophy promising to restore it to its former glory. The fall of the Weimar Germany is probably the best example.
As commentator Robert Freeman pointed out in 2004, the end of oil may result in the end of America, as we know it.
"Are Governments Planning For This?"
Absolutely. The US government has been aware of Peak Oil since at least 1977 when the CIA prepared a report on it. As Professor Richard Heinberg has commented: The 1977 CIA document shows clear and detailed awareness of oil issues, including depletion, extraction technologies, pipelines, areas of likely new discovery, the quality of existing reserves, and the dynamics of the global oil market. The CIA has obviously been studying oil very carefully for some time and must therefore understand the issue of global oil peak.
In 1982, the State Department released its own report, which stated: . . . world petroleum production will peak in the 1990-2010 interval at 80-105 million barrels per day, with ultimate resources estimated at 2,100 billion barrels.
In short, the US government has been aware of and actively planning for this crisis for over 30 years. Three decades of careful, plotting analysis has yielded a comprehensive, sophisticated, and multifaceted plan in which military force will be used to secure and control the globe's energy resources. This plan is simplistically, but not altogether inaccurately - known as "Go to War to Get Oil."
This strategy was publicly announced in April 2001, when a report commissioned by Dick Cheney was released. According to the report, entitled Strategic Energy Policy Challenges For The 21st Century, the US is facing the biggest energy crisis in history and that the crisis requires "a reassessment of the role of energy in American foreign policy."
That's a diplomatic way of saying we are going to be fighting oil wars for a very long time.
James Woolsey, the former Director of the CIA, practically admitted as much at a recent conference on renewable energy:
I fear we're going to be at war for decades, not years . . . Ultimately we will win it, but one major component of that war is oil.
Recent statements by Henry Kissinger echo those of Woolsey. In a June 2005 Financial Times article entitled, "Kissinger Warns of Energy Conflict," Kissinger was quoted as saying: The amount of energy is finite, up to now in relation to demand, and competition for access to energy can become the life and death for many societies.
Kissinger distinguished these energy conflicts from previous conflicts such as the Cold War: When nuclear weapons spread to 30 or 40 countries and each conducts a calculation, with less experience and different value systems, we will have a world of permanent imminent catastrophe. The war in Iraq, which has been 23 years in the making, is just the beginning of a worldwide war that "will not end in our lifetime."
The reason our leaders are telling us the "war on terror will last 50 years" and that the US engagement in the Middle East is now a "generational commitment" is two-fold:
1. All the countries accused of harbouring terrorists - Iraq, Iran, Syria, and West Africa, Saudi Arabia - also happen to harbour large oil reserves.
2. Within 40-50 years, even these countries will see their oil reserves almost entirely depleted. At that point, the "war on terror" will come to an end.
While the Middle East countries find themselves targets in the "war on terror", China, Russia, and Latin America find themselves targets in the recently declared and much more expansive "war on tyranny." Whereas the "war on terror" is really a war for control of the world's oil reserves, this newly declared "war on tyranny" is really a war for control of the world's oil distribution and transportation chokepoints.
This type of large-scale, long-term warfare will likely require a massive expansion of the military draft. It's probably not a coincidence that the director of the Selective Service recently gave a presentation to Congress in which he recommended the military draft be extended to both genders, ages 18-35.
The strategy - as distasteful as it may be - is characterized by a Machiavellian logic. Given the thermodynamic deficiencies of the alternatives to oil, the complexity of a large scale switch to these new sources of energy, and the wrenching economic and social effects of a declining energy supply, you can see why our leaders view force as the only viable way to deal with the coming crisis.
"Is There Any Reason to Remain Hopeful?"
If what you really mean is, "Is there any way technology or the market or brilliant scientists or comprehensive government programs are going to hold things together or solve this for me or allow for business to continue as usual?", the answer is no. On the other hand, if what you really mean, "Is there any way I can still have a happy, fulfilling life in spite of some clearly grim facts?", the answer is yes, but it's going to require a lot of work, a lot of adjustments, and probably a bit of good fortune on your part.
"What Can I do to Prepare?"
What you can or will do to prepare for this situation will depend on your age, health, marital status, geographic location, financial situation and other factors too numerous to mention. The best advice I can offer that applies to the widest number of people is to do the following to the best of your ability:
1. Relocate to an area as least vulnerable to these issues as possible.
2. Reallocate your financial assets so that you are as best positioned to handle these issues as you can realistically hope to be.
3. Relocalize your lifestyle as much as possible so that you are as least dependent on far-flung, petroleum-powered transportation and distribution networks as possible.
3. Strengthen your body so that you are as least dependent on our petroleum-dependent system of health care as possible.
4. Solidify any skills and/or social networks you have that might prove valuable in light of these changes.
5. If you're in shock and what to interact with others about these issues, check out "Running on Empty 3". Understand that being in shock is pretty much "par-for -the course" when it comes to learning about these issues. Trust me when I say it subsides after a while.
6. If you want to discuss personal preparation with others, check out "Running on Empty 2" and the Planning for the Future Forum on PeakOil.com
7. If you feel the need to tell friends or family, be forewarned that most people don't take too kindly to this information. Your best bet, in my opinion, is either send them an email with a link to www.europeanpress.org and some of the other excellent Peak Oil websites or give them a copy of the documentary End of Suburbia.
Note: I sell this book on this site so I do stand to profit from my recommendation. I am, however, far from the only person who recommends the film as a tool for introducing others to Peak Oil.
The coming major global crisis
Non-proliferation doesn't rank very high on Washington's agenda judging from its cozy relationships with the nuclear-weapons powers of Israel, India and Pakistan. Unlike Iran, none of those countries are signatories to the nuclear Non-Proliferation Treaty. Only Iran has been allowing inspections of its nuclear facilities - and it is Iran that the savants in Washington are now, in effect, threatening to bomb.
The LEAP/E2020, now estimates to over 80% the probability that the week of March 20-26, 2006 will be the beginning of the most significant political crisis the world has known since the Fall of the Iron Curtain in 1989, together with an economic and financial crisis of a scope comparable with that of 1929. This last week of March 2006 will be the turning-point of a number of critical developments, resulting in an acceleration of all the factors leading to a major crisis, disregard any American or Israeli military intervention against Iran. In case such an intervention is conducted, the probability of a major crisis to start rises up to 100%, according to LEAP/E2020.
An Alarm based on 2 verifiable events.
The announcement of this crisis results from the analysis of decisions taken by the two key-actors of the main on-going international crisis, i.e. the United States and Iran:
- on the one hand there is the Iranian decision of opening the first oil bourse priced in Euros on March 20th, 2006 in Teheran, available to all oil producers of the region ;
- on the other hand, there is the decision of the American Federal Reserve to stop publishing M3 figures (the most reliable indicator on the amount of dollars circulating in the world) from March 23, 2006 onwar.
These two decisions constitute altogether the indicators, the causes and the consequences of the historical transition in progress between the order created after World War II and the new international equilibrium in gestation since the collapse of the USSR. Their magnitude as much as their simultaneity will catalyse all the tensions, weaknesses and imbalances accumulated since more than a decade throughout the international system.
A world crisis declined in 7 sector-based crises.
LEAP/E2020's researchers and analysts thus identified 7 convergent crises that the American and Iranian decisions coming into effect during the last week of March 2006, will catalyse and turn into a total crisis, affecting the whole planet in the political, economic and financial fields, as well as in the military field most probably too:
1. Crisis of confidence in the Dollar
2. Crisis of US financial imbalances
3. Oil crisis
4. Crisis of the American leadership
5. Crisis of the Arabo-Muslim world
6. Global governance crisis
7. European governance crisis
The entire process of anticipation of this crisis is described in detail in coming issues of LEAP/E2020’s confidential letter - the GlobalEurope Anticipation Bulletin, and in particular in the 2nd issue to be released on February 16, 2006. These coming issues will present the detailed analysis of each of the 7 crises, together with a large set of recommendations intended for various categories of players (governments and companies, namely), as well as with a number of operational and strategic advices for the European Union.
Decoding of the event "Creation of the Iranian Oil Bourse priced in Euros”
However, and in order not to limit this information to decision makers solely, LEAP/E2020 has decided to circulate widely this official statement together with the following series of arguments resulting from work conducted.
Iran's opening of an Oil Bourse priced in Euros at the end of March 2006 will be the end of the monopoly of the Dollar on the global oil market. The immediate result is likely to upset the international currency market as producing countries will be able to charge their production in Euros also. In parallel, European countries in particular will be able to buy oil directly in their own currency without going though the Dollar. Concretely speaking, in both cases this means that a lesser number of economic actors will need a lesser number of Dollars. This double development will thus head to the same direction, i.e. a very significant reduction of the importance of the Dollar as the international reserve currency, and therefore a significant and sustainable weakening of the American currency, in particular compared to the Euro. The most conservative evaluations give €1 to $1,30 US Dollar by the end of 2006. But if the crisis reaches the scope anticipated by LEAP/E2020, estimates of €1 for $1,70 in 2007 are no longer unrealistic.
Decoding of the event "End of publication of the M3 macro-economic indicator”
The end of the publication by the American Federal Reserve of the M3 monetary aggregate (and that of other components), a decision vehemently criticized by the community of economists and financial analysts, will have as a consequence to lose transparency on the evolution of the amount of Dollars in circulation worldwide. For some months already, M3 has significantly increased (indicating that « money printing » has already speeded up in Washington), knowing that the new President of the US Federal Reserve, Matt Bernanke, is a self-acknowledged fan of « money printing ». Considering that a strong fall of the Dollar would probably result in a massive sale of the US Treasury Bonds held in Asia, in Europe and in the oil-producing countries, LEAP/E2020 estimates that the American decision to stop publishing M3 aims at hiding as long as possible two US decisions, partly imposed by the political and economic choices made these last years:
1)the ‘monetarisation’ of the US debt
2)the launch of a monetary policy to support US economic activity.
two policies to be implemented until at least the October 2006 «mid-term » elections, in order to prevent the Republican Party from being sent in reeling.
This M3-related decision also illustrates the incapacity of the US and international monetary and financial authorities put in a situation where they will in the end prefer to remove the indicator rather than try to act on the reality.
Decoding of the aggravating factor "The military intervention against Iran”
Iran holds some significant geo-strategic assets in the current crisis, such as its ability to intervene easily and with a major impact on the oil provisioning of Asia and Europe (by blocking the Strait of Ormuz), on the conflicts in progress in Iraq and Afghanistan, not to mention the possible recourse to international terrorism. But besides these aspects, the growing distrust towards Washington creates a particularly problematic situation. Far from calming both Asian and European fears concerning the accession of Iran to the statute of nuclear power, a military intervention against Iran would result in an quasi-immediate dissociation of the European public opinions which, in a context where Washington has lost its credibility in handling properly this type of case since the invasion of Iraq, will prevent the European governments from making any thing else than follow their public opinions. In parallel, the rising cost of oil which would follow such an intervention will lead Asian countries, China first and foremost, to oppose this option, thus forcing the United States (or Israel) to intervene on their own, without UN guarantee, therefore adding a severe military and diplomatic crisis to the economic and financial crisis.
Relevant factors of the American economic crisis:
LEAP/E2020 anticipate that these two non-official decisions will involve the United States and the world in a monetary, financial, and soon economic crisis without precedent on a planetary scale. The ‘monetarisation’ of the US debt is indeed a very technical term describing a catastrophically simple reality: the United States undertake not to refund their debt, or more exactly to refund it in "monkey currency". LEAP/E2020 also anticipate that the process will accelerate at the end of March, in coincidence with the launching of the Iranian Oil Bourse, which can only precipitate the sales of US Treasury Bonds by their non-American holders. In this perspective, it is useful to contemplate the following information: the share of the debt of the US government owned by US banks fell down to 1,7% in 2004, as opposed to 18% in 1982. In parallel, the share of this same debt owned by foreign operators went from 17% in 1982 up to 49% in 2004.
Question: How comes that US banks got rid of almost all their share of the US national debt over the last years?
Moreover, in order to try to avoid the explosion of the "real-estate bubble" on which rests the US household consumption, and at a time when the US saving rate has become negative for the first time since 1932 and 1933 (in the middle of the "Great Depression"), the Bush administration, in partnership with the new owner of the US Federal Reserve and a follower of this monetary approach, will flood the US market of liquidities.
Some anticipated effects of this systemic rupture.
According to LEAP/E2020, the non-accidental conjunction of the Iranian and American decisions, is a decisive stage in the release of a systemic crisis marking the end of the international order set up after World War II, and will be characterised between the end of March and the end of the year 2006 by a plunge in the dollar (possibly down to 1 Euro = 1,70 US Dollars in 2007) putting an immense upward pressure on the Euro, a significant rise of the oil price (over 100$ per barrel), an aggravation of the American and British military situations in the Middle East, a US budgetary, financial and economic crisis comparable in scope with the 1929 crisis, very serious economic and financial consequences for Asia in particular (namely China) but also for the United Kingdom, a sudden stop in the economic process of globalisation, a collapse of the transatlantic axis leading to a general increase of all the domestic and external political dangers all over the world.
For individual dollar-holders, as for trans-national corporations or political and administrative decision makers, the consequences of this last week of March 2006 will be crucial. These consequences require some difficult decisions to be made as soon as possible (crisis anticipation is always a complex process since it relies on a bet) because once the crisis begins, the stampede starts and all those who chose to wait lose.
For private individuals, the choice is clear: the US Dollar no longer is a "refuge” currency. The rising-cost of gold over the last year shows that many people have already anticipated this trend of the US currency.
Anticipating... or being swept away by the winds of history.
For companies and governments, it is crucial to integrate now action plans in today's decision-making processes, which can contribute to soften significantly the "monetary, financial and economic tsunami" which will break on the planet at the end of next month. To use a simple image - by the way, one used in the political anticipation scenario « USA 2010 »-, the impact of the events of the last week of March 2006 on the "Western World” we have known since 1945 will be comparable to the impact of the Fall of the Iron Curtain in 1989 on the "Soviet Block”.
If this Alarm is so precise, it is that LEAP/E2020’s analyses concluded that all possible scenarios now lead to one single result: we collectively approach a "historical node" which is henceforth inevitable whatever the action of international or national actors. At this stage, only a direct and immediate action on the part of the US administration aimed at preventing a military confrontation with Iran on the one hand, and at giving up the idea to monetarise the US foreign debt on the other hand, could change the course of events. For LEAP/E2020 it is obvious that not only such actions will not be initiated by the current leaders in Washington, but that on the contrary they have already chosen "to force the destiny" by shirking their economic and financial problems at the expense of the rest of the world. European governments in particular should draw very quickly all the conclusions from this fact.
For information, LEAP/E2020's original method of political anticipation has allowed several of its experts to anticipate (and publish) in particular : in 1988, the approaching end of the Iron Curtain; in 1997, the progressive collapse in capacity of action and democratic legitimacy of the European institutional system; in 2002, the US being stuck in Iraq’s quagmire and above all the sustainable collapse of US international credibility; in 2003, the failure of the referenda on the European Constitution. Its methodology of anticipation of "systemic ruptures" now being well established, it is our duty as researchers and citizens to share it with the citizens and the European decision makers; especially because for individual or collective, private or public players, it is still time to undertake measures in order to reduce significantly the impact of this crisis on their positions whether these are economic, political or financial.
These decisions were made a few months ago already:
. the information on the creation by the Iranian government of an oil bourse priced in Euros (Mehrnews.com) first appeared in Summer 2004 in the specialised press.
. the Federal Reserve announced on November 10, 2005 that it would cease publisging the information concerning M3 from March 23, 2006 onward :
By examining Table 13B of the December 2005 Securities Statistics of the Bank for International Settlements entitled International Bonds and Notes (in billions of US dollars), by currency ), one can notice that at the end of 2004 (China not-included), 37.0% of the international financial assets were labelled in USD vs 46,8% in Euros ; while in 2000, the proportion was contrary with 49,6% labelled in USD for 30,1% only in Euros. It indicates that the March 2006 decisions will most probably accelerate the trend of exit-strategy from the dollar.
Monetary aggregates (M1, M2, M3, M4) are statistical economic indicators. M0 is the value of all currency - here the dollar - that exists in actual bank notes and coins. M1 is M0 + checking accounts of this currency. M2 is M1 + money market accounts and Certificates of Deposits (CD) under $100,000. M3 is M2 + all larger holdings in the dollar (Eurodollar reserves, larger instruments and most non-European nations' reserve holdings) of $100,000 and more. The key point here is that when the Fed stops reporting M3, the entire world will lose transparency on the value of reserve holdings in dollars by other nations and major financial institutions.
See his eloquent speech on these aspects before the National Economists Club, Washington DC, November 21, 2002
It should be noticed that the upward trend of the Dollar in 2005 was mostly the result of an interest rate differential which was favourable for the US Dollar, and of the "tax break on foreign earnings” Law (only valid for 1 year) which brought back to the US over $200 billion in the course of 2005. (source: CNNmoney.com)
As regards Europe, LEAP/E2020 wishes to underline that European governments are no longer in line with their opinions concerning the major topics, and in particular concerning the European collective interest. The January 2006 Global Eurometre clearly highlighted the situation with a Tide-Legitimacy Indicator of 8% (showing that 92% of the panel consider that EU leaders no longer represent their collective interests) and a Tide-Action Indicator of 24% (showing that less than a quarter of the panel thinks EU leaders are capable of translating their own decisions into concrete actions). According to LEAP/E2020, public declarations of support to Washington coming from Paris, Berlin or London, should not hide the fact that the Europeans will quickly dissociate from the US in case of military attack (the GlobalEurometre is a monthly European opinion indicator publishing in the GlobalEurope Anticipation Bulletin 3 figures out of which 2 are public).
It should be noticed that the upward trend of the Dollar in 2005 was mostly the result of an interest rate differential which was favourable for the US Dollar, and of the "tax break on foreign earnings” Law (only valid for 1 year) which brought back to the US over $200 billion in the course of 2005.
As regards Europe, LEAP/E2020 wishes to underline that European governments are no longer in line with their opinions concerning the major topics, and in particular concerning the European collective interest. The January 2006 Global Eurometre clearly highlighted the situation with a Tide-Legitimacy Indicator of 8% (showing that 92% of the panel consider that EU leaders no longer represent their collective interests) and a Tide-Action Indicator of 24% (showing that less than a quarter of the panel thinks EU leaders are capable of translating their own decisions into concrete actions). According to LEAP/E2020, public declarations of support to Washington coming from Paris, Berlin or London, should not hide the fact that the Europeans will quickly dissociate from the US in case of military attack (the GlobalEurometre is a monthly European opinion indicator publishing in the GlobalEurope Anticipation Bulletin 3 figures out of which 2 are public).:
It should be noticed that the upward trend of the Dollar in 2005 was mostly the result of an interest rate differential which was favourable for the US Dollar, and of the "tax break on foreign earnings” Law (only valid for 1 year) which brought back to the US over $200 billion in the course of 2005. (source: ) As regards Europe, LEAP/E2020 wishes to underline that European governments are no longer in line with their opinions concerning the major topics, and in particular concerning the European collective interest. The January 2006 GlobalEurometre clearly highlighted the situation with a Tide-Legitimacy Indicator of 8% (showing that 92% of the panel consider that EU leaders no longer represent their collective interests) and a Tide-Action Indicator of 24% (showing that less than a quarter of the panel thinks EU leaders are capable of translating their own decisions into concrete actions). According to LEAP/E2020, public declarations of support to Washington coming from Paris, Berlin or London, should not hide the fact that the Europeans will quickly dissociate from the US in case of military attack (the GlobalEurometre is a monthly European opinion indicator publishing in the GlobalEurope Anticipation Bulletin 3 figures out of which 2 are public).
(source : Bond Market Association, Holders of Treasury Securities: Estimated Ownership of U.S. Public Debt Securities ; Dailykos.com)
The United Kingdom indeed owns close to 3,000 billion $ of credits, that is almost three times what countries such as France or Japan hold. (source Bank of International Settlements, Table 9A, Consolidated Claims of Reporting Banks on Individual Countries)
Cf. GlobalEurope Anticipation Bulletin N°1 (January 2006)
Preparatory measures taken to sell oil in euros TEHRAN, Dec. 2 (MNA) - The Chairman of the Majlis Energy Commission, Kamal Daneshyar said here, on Friday, that preparatory measures have been taken to sell oil in euros instead of dollar, adding that such a measure is quite positive and should be taken as soon as possible.
Speaking to the Persian service of Iranian Students News Agency (ISNA), he went on to say that Iran should at the first phase sell its oil in both Dollar and Euro, and then gradually move toward Euro as the mere source.
As for the probable consequences of such a decision, Daneshyar said that when such a measure is taken, the United States would soon realize that it is not the one who can always inflict economic damages on the Islamic Republic and that Iran can also get even with it.
Daneshyar who also represents Mahshahr in the Majlis noted that prior to this the way was not paved for undertaking such a program, adding that fortunately the present government possesses the necessary management bravery to prepare the ground for taking such a measure.
Discontinuance of M3
On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.
Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks).
Securities statistics December 2005
The BIS compiles a number of quarterly statistics on securities markets, including:
• international debt securities
• international equities
• domestic securities
Moreover, it publishes quarterly data on international syndicated loans, which, like securities, can be traded on the secondary market. The data are mainly derived from market sources and provide information on aggregates of amounts outstanding and new issues. The data are broken down according to criteria similar to those applied to the banking statistics. Only the borrower/issuer side of securities and syndicated loans issues is covered.
The main purpose of the securities and syndicated loans statistics is to complement the quarterly international banking statistics so as to provide more comprehensive monitoring of international financial market activity. The data allow analysts to assess the relative use of capital markets as opposed to banks in international financial intermediation and to monitor issuance in international markets by residents of different countries. Combined with pricing data, they can also be used to assess supply and demand factors in asset markets and potential financial strains.
Neocon neoliberal Newspeak TEHRAN, Feb. 14 (MNA) -- Most of the neoconservatives in the United States advocate globalization and the neoliberal economic model. What’s wrong with this picture?
At first glance, nothing is wrong with the statement because it is basically true. At second glance, everything is wrong with it. Liberal and conservative used to be opposites. Now we have neoliberal neoconservatives. If the neocons are also neoliberals, how do we avoid confusion when using the words liberal and conservative?
It is natural for language to evolve, but when antonyms become synonyms, there is a problem. The situation is similar to the Newspeak and doublethink of George Orwell’s book 1984. Newspeak was a language meant to control people by decreasing their power of reasoning through oversimplification of the language and doublethink.
Orwell wrote: “Double-think means the power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them.”
There are now countless examples of this in the English language. In war, civilian casualties are called collateral damage. The use of the expression collateral damage allows people to avoid the unpleasantry of having to think about innocent civilians being killed. Every country used to have a war ministry, but they all later changed the name to the defense ministry or the defense department. In 1984, it was called the Ministry of Peace, or Minipax in Newspeak. Try this simple exercise. Imagine you are listening to the radio and the newscaster says: "The war minister has just issued a statement.” Now suppose the newscaster said: "The defense minister has just issued a statement.” Notice how a change of one word changed your reaction. Consider the many acronyms that have entered the language such as NATO, NAFTA, and CIA. Their complete names, North Atlantic Treaty Organization, North American Free Trade Agreement, and Central Intelligence Agency, contain the words treaty, free, free trade, agreement, and intelligence. On hearing these words, the mind naturally makes many free associations that cannot occur when the acronyms are used. The neoliberal neocons themselves use a form of Newspeak. The most glaring example of this is when neoliberal neocon officials in the United States tell citizens that they must take away some of their freedom in order to protect their freedom. Shades of Orwell’s "freedom is slavery”.
U.S. officials have spoken of the need to cancel elections in order to safeguard democracy if a serious crisis arises. Some have even gone so far as to suggest that in a national emergency the U.S. Constitution may have to be temporarily suspended in order to protect the civil liberties enshrined in that document. Bizarrely, very few U.S. citizens are protesting. Apparently, they have already learned how to employ double-think. Language is being used to control people. People are actually subconsciously brainwashing themselves through the language they use.
The word neocon itself is Newspeak since its use in place of the longer form eliminates all the connotations of the words neoconservative and conservative. Let’s look at a few more quotes from 1984 to get a better understanding of what is happening today.
"To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them, to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy was impossible and that the Party was the guardian of democracy, to forget whatever it was necessary to forget, then to draw it back into memory again at the moment when it was needed, and then promptly to forget it again: and above all, to apply the same process to the process itself. That was the ultimate subtlety: consciously to induce unconsciousness, and then, once again, to become unconscious of the act of hypnosis you had just performed. Even to understand the word 'doublethink' involved the use of doublethink.”
"The Ministry of Peace concerns itself with war, the Ministry of Truth with lies, the Ministry of Love with torture and the Ministry of Plenty with starvation. These contradictions are not accidental, nor do they result from ordinary hypocrisy; they are deliberate exercises in doublethink. For it is only by reconciling contradictions that power can be retained indefinitely. In no other way could the ancient cycle be broken. If human equality is to be for ever averted -- if the High, as we have called them, are to keep their places permanently -- then the prevailing mental condition must be controlled insanity.”
"The purpose of Newspeak was not only to provide a medium of expression for the world-view and mental habits proper to the devotees of Ingsoc, but to make all other modes of thought impossible. It was intended that when Newspeak had been adopted once and for all and Oldspeak forgotten, a heretical thought -- that is, a thought diverging from the principles of Ingsoc -- should be literally unthinkable, at least so far as thought is dependent on words.”
"Newspeak was designed not to extend but to diminish the range of thought, and this purpose was indirectly assisted by cutting the choice of words down to a minimum. But the special function of certain Newspeak words, of which oldthink was one, was not so much to express meanings as to destroy them. The intention was to make speech, and especially speech on any subject not ideologically neutral, as nearly as possible independent of consciousness. Ultimately it was hoped to make articulate speech issue from the larynx without involving the higher brain centres at all.”
The advocates of globalization often use a form of Newspeak.
When government officials and economists say the economy of a Third World country is booming, despite the fact that they know the masses live in abject poverty, and the media repeat the lie, that is doublethink through Newspeak. Of course, the economy of the country in question is only booming for the globalist and local upper classes, and perhaps also for the middle classes, but somehow almost nobody questions the lie. And the neoliberal globalists are laughing all the way to the bank. The acceptance of such a lie by the general public is an even greater real-life catastrophe than the fictional one described in 1984. Worse still, some people acknowledge that it is a lie but respond with apathy or slavish resignation in the belief that nothing can be done about the situation. Do we want to live in dystopia, the worst of all possible worlds, the doubleplusungood of all possible worlds? If not, we should watch our language and take care that we are still using our higher brain centers.
Remarks by Governor Ben S. Bernanke: Before the National Economists Club, Washington, D.C.
November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here
Since World War II, inflation--the apparently inexorable rise in the prices of goods and services--has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability.
With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem--the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation-- a decline in consumer prices of about 1 percent per year--has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.
So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier--a stable record indeed.
The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself. The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.
Of course, we must take care lest confidence become overconfidence. Deflationary episodes are rare, and generalization about them is difficult. Indeed, a recent Federal Reserve study of the Japanese experience concluded that the deflation there was almost entirely unexpected, by both foreign and Japanese observers alike (Ahearne et al., 2002). So, having said that deflation in the United States is highly unlikely, I would be imprudent to rule out the possibility altogether. Accordingly, I want to turn to a further exploration of the causes of deflation, its economic effects, and the policy instruments that can be deployed against it. Before going further I should say that my comments today reflect my own views only and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.
Deflation: Its Causes and Effects
Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand-- a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.
However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero. Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."
Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be. To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.
Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard. The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of "debt-deflation"--the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.
Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern--the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.
Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.
However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero. In the remainder of my talk, I will first discuss measures for preventing deflation--the preferable option if feasible. I will then turn to policy measures that the Fed and other government authorities can take if prevention efforts fail and deflation appears to be gaining a foothold in the economy.
As I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place. Beyond this commonsense injunction, however, there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation.
First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero. Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times.
Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.
Third, as suggested by a number of studies, when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.
As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way. I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise. Furthermore, the specific responses the Fed would undertake would presumably depend on a number of factors, including its assessment of the whole range of risks to the economy and any complementary policies being undertaken by other parts of the U.S. government.
Let me start with some general observations about monetary policy at the zero bound, sweeping under the rug for the moment some technical and operational issues. As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum-monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep shortterm rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.
Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).
Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.
Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable. At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding. For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.
To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.
The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.
I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.
Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.
Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead rebalanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.
Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
The claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.
First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.
In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.
Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.
Ahearne, Alan, Joseph Gagnon, Jane Haltmaier, Steve Kamin, and others, "Preventing Deflation: Lessons from Japan's Experiences in the 1990s," Board of Governors, International Finance Discussion Paper No. 729, June 2002.
Clouse, James, Dale Henderson, Athanasios Orphanides, David Small, and Peter Tinsley, "Monetary Policy When the Nominal Shortterm Interest Rate Is Zero," Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series No. 2000-51, November 2000.
Eichengreen, Barry, and Peter M. Garber, "Before the Accord: U.S. Monetary-Financial Policy, 1945-51," in R. Glenn Hubbard, ed., Financial Markets and Financial Crises, Chicago: University of Chicago Press for NBER, 1991.
Eggertson, Gauti, "How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible," unpublished paper, International Monetary Fund, October 2002.
Fisher, Irving, "The Debt-Deflation Theory of Great Depressions," Econometrica (March 1933) pp. 337-57.
Hetzel, Robert L. and Ralph F. Leach, "The Treasury-Fed Accord: A New Narrative Account," Federal Reserve Bank of Richmond, Economic Quarterly (Winter 2001) pp. 33-55.
Orphanides, Athanasios and Volker Wieland, "Efficient Monetary Design Near Price Stability," Journal of the Japanese and International Economies (2000) pp. 327-65.
Posen, Adam S., Restoring Japan's Economic Growth, Washington, D.C.: Institute for International Economics, 1998.
Reifschneider, David, and John C. Williams, "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit, and Banking (November 2000) Part 2 pp. 936-66.
Toma, Mark, "Interest Rate Controls: The United States in the 1940s," Journal of Economic History (September 1992) pp. 631-50.
Limited job lift from tax break?
One-year tax break on return of overseas profits was designed to lift employment, newspaper says. U.S. multinational companies have announced plans to return more than $200 billion in profits made overseas to their U.S. operations, according to a published report, but it is unclear how much impact that flow of cash will have on job creation here. The Wall Street Journal reports that the flow of cash comes under a one-year tax break passed in 2004 as part of the American Jobs Creation Act. But the newspaper reported that it offered only broad outlines for how companies intend to use the extra dollars earned outside the U.S. Most frequently say they are using the bulk of the money for tasks such as paying down debt and meeting payrolls, with direct job creation rarely appearing on the list.
The newspaper reports that there is normally a broad exception to corporate taxes for profits "permanently" reinvested in overseas operations, while money moved back to the U.S. gets taxed. Under the one-year law, profits returned from overseas still generate a tax bill, but one not nearly as hefty as it would have been otherwise. The newspaper cites data from International Strategy & Investment Group Inc., which estimates that 91 large companies have disclosed some $206 billion in profit repatriation plans under the break. That figure could rise to $350 billion, according to the newspaper report. When the law passed before the 2004 election, advocates pointed to a study by economist Allen Sinai that estimated a temporary cut in the tax on foreign earnings would create 666,000 U.S. jobs over five years, the newspaper reported. Sinai told the newspaper that he now believes the gains may be more modest, perhaps as few as 450,000 during that same period. But he said that is still a success for the law.
"It looks to me like the act is roughly working as it was expected to." Sinai told the newspaper. "We never found huge impact -- but certainly in our work we found improvement in growth, capital expenditures and jobs coming from the measure." The law does not require companies to make any moves to hire U.S.-based employees to qualify for the tax break. In fact, some companies will continue to shave U.S. staff at the same time they bring cash back.
The newspaper reports that consumer products manufacturer Colgate-Palmolive Co. (Research) said in July that it planned to repatriate $800 million, even as it also moved ahead with plans to close a third of its factories and eliminate roughly 12 percent of its workforce, or 4,450 jobs.
Some companies are adding to U.S. facilities at the same time they are bringing overseas profits home, but even in those cases, it's tough to tie the overseas money to the new jobs here, the newspaper reports. Intel Corp. (Research) plans to bring back $6.3 billion in foreign profits, Intel spokesman Chuck Mulloy told the newspaper. He noted that the No. 1 chip manufacturer is building a $3 billion wafer fabrication facility in Chandler, Ariz., and recently announced $345 million in investments in two existing U.S. plants. But he couldn't tell the newspaper that those investments were directly tied to the returned profits. Computer manufacturer Dell Inc. (Research), is bringing back $4.1 billion in foreign profits and is spending about $100 million on a new factory in North Carolina, set to open Wednesday, the newspaper reported. But a company spokesman also could not say the new plant, which will employ up to 1,500 people, is tied to the overseas cash.
"When you're talking about $4.1 billion, ($100 million) is not a big chunk of it," Dell spokesman Jess Blackburn told the newspaper. "In general, we're going to use it for some R&D spending, some advertising and marketing and for compensation and benefits for nonexecutive people at Dell."
Even if companies use the money to improve their balance sheet or buy capital equipment, it can better position the company for future growth, Daniel Clifton, executive director of the American Shareholders Association, told the newspaper.
Bond Market signals end of U.S. economic sovereignty
Back in the mid-1990s, I studied the relationship between the financial system, and the physical economy. I thought it would be most interesting to update that investigation, but in the course of doing so, I found some preliminary data so startling that I though I should share it as quickly as possible. What I share below the skip highlights the impending end of the U.S. dollar as the world's reserve currency.
My basic idea a decade ago was that with the deregulation of banking begun by the conservative revolution, there is ever-expanding gap between financial flows, as measured by financial turnover of various financial instruments, and the activity of the real, physical economy. For example, I compared foreign trade on one hand with foreign exchange trading on the other, from 1956 to 1990. The results were shocking. Measuring U.S. foreign trade as the value of exports, plus imports, plus international transactions (for services such as air flights, consulting, etc.), I found that total foreign trade was about 73% of total foreign exchange trading, which amounted to an estimated $41.0 billion 1956. This figure of around 75% remained stable for each of the years that the Federal Reserve did its tri-annual study of foreign exchange, up until 1980, when total mercantile trade fell to just under 10% of total foreign exchange trading. In other words, the amount of foreign exchange trading was pretty closely related to actual trade in physical goods and services, until 1980, when foreign exchange trading was suddenly ten times larger than actual trade in physical goods and services.
What had happened? Well, what is generally known is that Nixon took the U.S. dollar off the gold standard in 1971. What is less well known is that Nixon's hand was forced by a quite unanticipated threat of gold redemption by the British. In mid-August 1971, the British ambassador quite literally walked into the U.S. Treasury Department to request that $3 billion be converted into gold. It has been over a decade since I assembled and wrote this material, so I am fuzzy on the particulars, but I do remember being shocked and mystified at the prominent role played by the British in this drama. The important point I want to make here is that after the financial and monetary debacles of the early 1970s, the U.S. economy was thrown wide open for all sorts of financial looting schemes and corporate takeovers. It is the beginning of the end, in effect, of the economic and financial sovereignty of the United States. This is the background you should always keep in mind as you whine and wail about the corporate-controlled mass media. What I now believe, is that the U.S. media would never have devolved as painfully as it has were it not for the likes of Rupert Murdoch, and the likes of Rupert Murdoch would never have been able to do what they did if it were not for the deregulation of the U.S. economy, and the U.S. banking and financial systems in particular.
Now, Stirling Newberry has written about the political and financial implications of the U.S. becoming what he calls "a giant "paper-for-oil" deal." How the cycle of deficits has kept the right in power in America.
To prevent investors in these countries from gaining control, the developed world, and particularly the US, is forced down a particular path: it must cut taxes on our wealthy, so that they match the taxes on the wealthy of Saudi Arabia. Newberry is generally on target, though the data I gathered in the past few days suggests that at this point, we can stop worrying about foreign investors gaining control of the U.S. economy. Essentially, the U.S. economy is a charade, increasingly incapable of physically meeting its own needs -- for cars, for steel, for electronics, for shirts, for pants, for shoes, even for food. The charade is financed by the rest of the world, most notably Japan and China, which produce goods for the U.S. market, and take in return U.S. dollar-denominated paper. These are essentially IOUs, whether they be commercial paper, corporate bonds, or U.S. government securities. The fact that most of the world's trade and finances is denominated in U.S. dollars has greatly assisted the U.S. in playing this shell game much, much longer than almost all observers thought it could.
On the face of it, this is not a bad shell game - if you're an American. You can ignore the uncomfortable economic realties of a shrinking industrial base and sorely under-funded physical infrastructure, and live high on the hog at the expense of them "furr-a-neers." But no charade can last forever, and the evidence is mounting that we are approaching end-game. Two weeks ago, Henry C K Liu Of debt, deflation and rotten apples wrote on AsiaTimes.com that the U.S. is about to experience the same deflationary disaster Japan has suffered for the past few years.
At some point, even paper debts cannot be repaid by printing more paper because of the exponentially ballooning interest spiral. Paying interest on unpaid interest will soon accelerate the debt crisis. Debt, if not repaid by gold, must be repaid by work; and the Fed, by printing more paper money, actually destroys what little real productive work is still available in the US economy. In fact the financial-services sector, a euphemism for the debt-manipulation sector, is producing most of the new jobs in the United States. Such jobs create financial value by pushing paper around at increasing speed.... What happened to Japan was that even with the world's largest holding of dollar reserves, the country was unable to ward off a protracted deflationary financial crisis caused structurally by exporting wealth for paper [i.e., dollar denominated IOUs: financial securities] that is useless in Japan.... The notion that a strong dollar is in the US national interest no matter who owns it is at best controversial and increasingly foolhardy. It is where the dollars are based that determines whether a strong dollar is good for the US national interest. A strong dollar in a global dollar economy is only good for offshore dollar owners, not US residents.... The real factor is that dollars are not spendable outside of the global dollar economy, thus are useless for domestic development in nondollar economies. The dollar is not even fully useful in the US domestic economy because of low yields in the domestic US market.... Deflation is a problem that cannot be cured by monetary measures alone, as Japan has found out and as the United States is about to. Global deflation can only be cured by reforming the international finance architecture to allow international trade to be replaced by domestic development as the engine for growth....
The market favors trade over development because the market treats development cost as an externality. When someone other than the recipient of a benefit bears the costs for its production, for example education and environmental protection, the costs of the benefit are external to its enjoyment. Economists call these external costs negative "externalities". These externalities amount to a market failure to distribute costs and benefits fairly and efficiently within the economy. Globalization is basically a game of negative externalities. Inhuman wages and working conditions, together with neglected environmental protection and cleanup, are other negative externalities that protect corporate profit. It is by ignoring the need for development and by externalizing its cost that the market can deliver profitability to corporate shareholders. Development can only be done with a revival of national banking in support of a new national purpose of balance growth the will benefit all equitably, rather than the systemic transfer of wealth from the general public to a minority owners of capital, mistaken as growth.
I simply LOVE the part about having to shift from trade to national development, because that means having to address some real problems, such as giving 4 billion people working sanitation systems and access to clean water. That means nation building which was the big stone the neo-cons stumbled over in the planning for the Iraq war. You see, neo-cons do not like real economic activity, such as building sewage plants and laying water pipes. Neo-cons much prefer making a quick buck through one speculative financial scheme or another. And deregulation opened the door to legions of speculative financial schemes that never existed before. Of course, they can't sell deregulation as tilting the playing field in favor of speculators at the expense of producers. They sold deregulation as "improving the efficiency of markets." Any tendency toward re-imposing regulation is quickly and viciously slapped down as "socialism" or even "communism."
Now, if you're still with me, let's take a look at what I found. First, I found that the Bond Market Association has a very nifty table entitled Holders of Treasury Securities: Estimated Ownership of U.S. Public Debt Securities, which shows that foreign ownership of U.S. government debt has climbed from 17.0% of total holdings of $886.1 billion in 1982, to an estimated 49.8% of $4,063.8 billion ($4.06 trillion) in 2005. In the same period, ownership by individual Americans fell from 11.4%, to 5.4%. Particularly interesting is what happens to the percentage owned by American banking institutions: 18.2% in 1982, to 1.7% last year. That is one point seven percent. One and seven tenths percent. You have to wonder: What do the banks know that the rest of us don't? You really need to look at the Bond Market Association table, so go ahead, click on the link, we'll be here when you're ready to come back.
The major question is: how much longer will U.S. creditors be willing to accept dollar-denominated paper? So, it was off to the website of the Bank for International Settlements I went, to get the latest statistics on international credit. I suspect that most of you are not very familiar with the Bank for International Settlements, which can be described as the central bank for the world's central banks.
The interesting statistics I found in the most recent Statistical Annex of the BIS confirms a trend that will likely prove extremely troubling, if not downright disastrous, for the Bush administration in the next three years. Table 13B, entitled International Bonds and Notes (in billions of US dollars), by currency shows that of the $13.588 trillion total of financial securities counted by the BIS's reporting central banks (which did NOT include China) at the end of 2004, 37.0% were denominated in U.S. dollars, while 46.8% were denominated in Euros. This is a dramatic reversal from when Bush took office. At the end of 2000, the BIS counted $5.883 trillion in financial securities, of which 49.6% were dominated in dollars, and 30.1% in Euros.
In other words, there is already a move away from dollar-denominated paper; in fact, it has been going on for a few years now. The one caveat is that the BIS statistics do not include the People's Republic of China; being so large a trading partner with the U.S., including China may significantly alter these numbers. But, I believe that the trend away from dollar-denominated paper would remain intact.
Talking point against the Republicans: Why are they so eager to use military forces to defend what they say are vital U.S. interests, but are so blind to the immense damage being done to the U.S. economy and financial system?
One final point I found interesting in the BIS data, if I may digress. As I stated at the beginning, much of the financial flows in the world today have little or nothing to do with real economic activity. Most of it is speculation, pure and simple. And a lot of it is dirty or hot money. Table 9A, Consolidated Claims of Reporting Banks on Individual Countries is interesting in that it includes the statistical outliers of Switzerland, Luxembourg, Jersey (not New Jersey, mind you, but that little speck of land off the coast of England) and, ta daa, the Cayman Islands.
Jersey, the largest of the Channel islands in the English Channel, had an estimated 2005 population of 90,800. Its foreign claims were $109.5 billion. But the favorite hiding place for hot money is the Cayman Islands, population 43,100, with foreign claims of $612.280 billion. Now, these are foreign claims ON these locations, not BY these locations. In other words, this is an indication of how much in financial assets has been secreted away in these locations. I have included a few other countries, and their populations, that you can compare so you can see for yourself just how distorted the world's financial system has become.
The BIS compiles a number of quarterly statistics on securities markets, including:
• international debt securities
• international equities
• domestic securities
Moreover, it publishes quarterly data on international syndicated loans, which, like securities, can be traded on the secondary market.
The data are mainly derived from market sources and provide information on aggregates of amounts outstanding and new issues. The data are broken down according to criteria similar to those applied to the banking statistics. Only the borrower/issuer side of securities and syndicated loans issues is covered.
The main purpose of the securities and syndicated loans statistics is to complement the quarterly international banking statistics so as to provide more comprehensive monitoring of international financial market activity. The data allow analysts to assess the relative use of capital markets as opposed to banks in international financial intermediation and to monitor issuance in international markets by residents of different countries. Combined with pricing data, they can also be used to assess supply and demand factors in asset markets and potential financial strains.
GlobalEurope Anticipation Bulletin ?
Each year, the European Union grows into a more influential global player; this situation nevertheless conveys some paradox:
• seen for outside the EU, this growing influence seems contradictory with the information gathered from inside the EU that shows on the one hand a political and institutional system in total disarray, and on the other hand citizens increasingly European... but also increasingly critical.
• seen for inside the EU, the difficulty that there is to envisage this growing global influence partly hides the Europeans’ new collective responsibilities on a number of global issues, therefore blurring even more the internal debate on the future of the EU which classical political and institutional players are no longer capable to impulse.
This paradox has resulted in an increased demand for explanations and/or contributions from partners/users of the network Europe 2020. Indeed Europe 2020’s work of political anticipation is now widely acknowledged in the EU and worldwide, in particular due to the fact that Europe 2020 is the only think-tank that anticipated as early as mid-2004 a strong probability that the European Constitution would not be ratified.
1- March 20-26, 2006 - Release of major world crisis: « The End of the Western World we have known since 1945 »
We estimate to over 80% the probability that the week of March 20 to 6, 2006 will be the beginning of the most significant political crisis the world has known since the Fall of the Iron Curtain in 1989, .
2- The seven facets of the world crisis in gestation
The American and Iranian decisions coming into effect during the last week of March 2006, will catalyse and turn into a total crisis seven sector-based crises affecting the whole planet in the political, economic and financial fields, as well as in the military field most probably too....
3- Euroland faced to the Dollar plunge
The world crisis anticipated for the end of March 2006 will test Euroland and determine the sustainability of its currency. The Dollar plunge will put upward pressure on the Euro compared to all other currencies (the Chinese currency in particular).
4- The future of the EU constitutional project: Analysis of the converging capacity among the various institutional players
The internal difficulties of the member-states in their continuation of the European constitutional project were detailed in GEAB Nr1.
ODYSSEY: MY QUEST FOR THE OLDUVAI SIGNATURE
I would rather discover a single fact, even a small one, than debate the great issues at length without discovering anything at all. -- Galileo Galilei, c. 1640
My Odyssey with the Olduvai theory began thirty-two years ago during a lecture series titled, Of Men and Galaxies, given at the University of Washington by cosmologist Sir Fred Hoyle. It has often been said that, if the human species fails to make a go of it here on Earth, some other species will take over the running. In the sense of developing high intelligence this is not correct. We have, or soon will have, exhausted the necessary physical prerequisites so far as this planet is concerned. With coal gone, oil gone, high-grade metallic ores gone, no species however competent can make the long climb from primitive conditions to high-level technology. This is a one-shot affair. If we fail, this planetary system fails so far as intelligence is concerned. The same will be true of other planetary systems. On each of them there will be one chance, and one chance only. (Hoyle, 1964; emphasis added)
I was fascinated—and stunned. His soft-spoken proposal seemed incredulous, bizarre, preposterous—and possibly inevitable. A return to the Stone Age? Deep cultural and material impoverishment? However nobody else in the audience seemed the least concerned. Perhaps Hoyle was just giving a lead-in to his next science fiction thriller. So for the next decade I went about my way: raising kids, building airplanes and teaching engineers. Haunted by Hoyle's hypothesis.
Then in 1975 and 1976, conferences took me to Colorado and, by-the-by, to Mesa Verde National Park where the magnificent, long-deserted cliff dwellings of the Anasazi made it clear that all civilizations are ephemeral. But Fred Hoyle wasn't reiterating the tired old-saw of historian-philosophers such as Spencer, Spengler, Sorokin and Toynbee: i.e., the endless rise-and-fall cycles of civilizations. He was talking about something quite different, more profound, more pervasive. Global Industrial Civilization has no cycles at all. It's "a one-shot affair." Exponential growth, exponential decline. That's it.
Time passed, and the years from 1985 to 1992 found me working for power company in Saudi Arabia. While there, I traveled widely, including visits to Ethiopia, China, India, the (then) USSR, etc. Mainly I traveled to answer the question, "Is Fred Hoyle right?" The question, of course, was not about the durability of any one of these nations (most looked fragile, some non-existent), but about the life-expectancy of Global Industrial Civilization itself.
Based on what I'd seen around the world, industrialization isn't evolving toward sustainability. Just the opposite. Hoyle was right. "This is a one shot affair.... there will be one chance, and one chance only." So the real question was, "How long will it last?" A thousand years? A million years? Or what? So in 1989, just before leaving on a trip to East Africa (and incidentally, the Olduvai Gorge), I dug through some books. There was no lack of speculation. Estimates differed wildly; a summary appears in Table 1. [ For completeness, my 1991(a) estimate is included. ]
Table 1. Estimates of the Life-Expectancy of Industrial Civilization
Haldane 1927 "39 million years"
Russell 1949 "it cannot long continue"
Drake 1961 one million years
Watson 1969 potentially "millions of years"
Arrester 1971 natural response, about 200 years Meadows, et al. 1972 natural response, 100-200 years
O'Neill 1976 "even our success becomes failure"
Leakey1977 about 100 years
Harris 1977 "a bubble-like nature"
Crick 1981 short to 10,000 years or more
Laszlo 1987 "extremely short" to very long
Back in Saudi Arabia, I began a paper for presentation at the American Society of Engineering Educators Conference in New York, October, 1989. The title was, "Evolution, Technology, and the Natural Environment: A Unified Theory of Human History." So to say, the "coming-out" of the Olduvai theory. I concluded the broad sweep of human history can be divided into three phases:
• The first, or pre-industrial phase was a very long period of equilibrium when economic growth was limited by simple tools and weak machines.
• The second, or industrial phase was very short period of nonequilibrium that ignited with explosive force when powerful new machines temporarily lifted all limits to growth.
• The third, or de-industrial phase lies immediately ahead during which time industrial economies will decline toward a new period of equilibrium, limited by the exhaustion of non-renewable resources and continuing deterioration of the natural environment. (Duncan, 1989)
In that paper I used "world average energy-use per person" as a measurable indicator of Industrial Civilization. I sketched the peak at 1990. Only one problem— I had no hard data to test the theory. But I did have Hoyle's hypothesis and my own round-the-world observations of global conditions and trends. Then, in the nick-of-time, an article appeared in the September issue of Scientific American showing that world average energy-use per person had peaked in about 1973, and had since gone into steep decline (Gibbons, et al., 1989; their curve is included in Figure 2). At the end of my presentation, a handful of engineers from the audience gathered around and we discussed my theory and its consequences. Most agreed. However I needed more data. Again I returned to Saudi Arabia. But there, with meager access to data, I struggled with several more papers (e.g., Duncan, 1990; 1991a; 1991b). Then somehow the editor of a small journal got wind of what I was doing and invited me to submit an article. It was published as, "The Life-Expectancy of Industrial Civilization: The Decline to Global Equilibrium" (Duncan, 1993c). In the main it concluded,
• Industrial Civilization can be described by a single pulse waveform of duration X, as measured by average energy-use per person per year.
• The life-expectancy of Industrial Civilization is less than one-hundred (100) years: i.e., X < 100 years.
But data was still lacking. I moved back to the USA, and by early-1993 had tested the Olduvai theory against two new sets of data. The energy data was from the energy industry itself, and the population data was from the United Nations [i.e., BP (1992) and UN (1992)]. Eureka! The Olduvai signature appeared at last. The British Petroleum and United Nations data confirmed that world per capita energy-use had peaked in about 1978 and subsequently had declined (Duncan, 1993b). Only the Olduvai theory could explain the peak and decline. In contrast, both the "exponential growth theory" (of "mainstream" economics) and "steady-state" theory (of "utopian" economics) failed. By late-1993, I had further tested the Olduvai theory against several more sets of data, e.g., Davis (1990) and the UN (1993). In both cases, the historic peak occurred in about 1978. Again, the Olduvai theory prevailed (Note 4). I reported these results in a paper, "Sustainability—Is There a Middle Road?: The Transient-Pulse Theory of Industrial Civilization" (Duncan, 1993a).
[ Note 4: In the foregoing tests, I purposely avoided any dull mathematics. Only "long-division" was used: i.e., the ratio of world energy-use to population. Any 6th grader could do it. That's important. ]
While new energy and population data was coming in, I spent the next two and a half years developing a better method for predicting the energy production life-cycle (see Duncan, 1996). Although theoretically important, that work isn't relevant here because the Olduvai theory is arbitrated by historic data only.
Next, we'll take a closer look at the theory.
FROM THE CAVES, TO THE MOON, TO THE CAVES
The moon landing may be our Great Pyramid, an accomplishment never to be equaled. -- Alan Cromer, 1993
Figure 1 is qualitative. Descriptive only. A visual aide. Right-brain stuff. It's a sketch of the Olduvai theory. The "Olduvai signature," I call it. So please don't try to scale out the horizontal or vertical axes. (We'll do that later.)
1. Pre Industrial Phase [c. 3 000 000 BC to 1765]
• A - Tool making (c. 3 000 000 BC)
• B - Fire used (c. 1 000 000 BC)
• C - Noelithic agricultural revolution (c. 8 000 BC)
• D - Watts steam engine of 1765 Industrial Phase (1930-2025)
2. Industrial Phase [1930 to 2025, estimated ]
• E - Per capita energy-use 37% of peak value
• F - Peak energy-use
• G - Present energy-use
• H - Per capita energy-use 37% of peak value
3. Post Industrial Phase [c. 2100 and beyond ]
• J, K, and L = Recurring future attempts at industrialization fail. Other scenarios are possible.
[Note 5: In Figure 1, it may be helpful to think of the curve as income per person per year in dollars. Or perhaps as material standard of living. Better yet, just remember the little cartoon folks.]
Figure 1 divides the very long span of human history into three phases: (1) PreIndustrial, (2) Industrial, and (3) Post-Industrial. Seven events are marked on the left part of the curve (i.e., points A through G). Likewise, five hypothetical events are marked on the future part of the curve (i.e., H through L).
Phase 1, the Pre-Industrial Phase, spans thousands of millennia of sustainable conditions when society was powered exclusively by (renewable) solar energy. It began some three million years ago when our hominid ancestors started making simple tools (point A, Figure 1). The tools, in turn, made possible greater energy-use in such forms as food, fiber and shelter. Epic milestones leisurely passed, including the use of fire at about one million BCE and the Neolithic Agricultural Revolution at about 8,000 BCE. The end of the Pre-Industrial Phase is marked at 1765, the year James Watt invented the condensing steam engine (point D, Figure 1).
Phase 1 was followed by a transition period—i.e., The Industrial Revolution— delimited by the years 1765 and 1930 (points D and E, Figure 1).
Phase 2, the Industrial Phase, comprises the shaded portion of Figure 1. The life expectancy of Industrial Civilization is defined as the duration in years (x) between the leading and lagging "37% points" (i.e., points E and H). It is a short, extravagant period when transportation, commerce and industry were powered predominantly by (nonrenewable) fossil-fuels. Historic data (presented later) quantifies the peak period of the curve: i.e., the years between points E and G. Using that data, I mark the beginning of the Industrial Phase at 1930 (point E), the year average energy-use per person reached 37% of its peak value.
Note that the peak of Industrial Civilization was reached in about 1977 (point F), less than fifty years after it began. More significant, Figure 1 identifies the global energy "watershed". For the first time in the gaping millennia of human existence, average per capita energy-use peaked and began to decline!
As I read it, the descent into the Olduvai valley will be steep and swift. A scenario of Phase 3, the Post-Industrial Phase, is sketched in Figure 1 (i.e., from point I onward) wherein Industrial Civilization has disintegrated into farming villages, kinship tribes and rogue bands. The surviving population will have "achieved" permanent sustainability—at the subsistence level.
Of course, other scenarios are possible. For example, "The human species may follow the road to extinction rather than revert to the berry-picking stage" (Georgescu-Roegen, 1971). Or more recently, "The danger of extinction is real ... It is time to face the facts" (Leslie, 1996). However, because the circumstances of human society beyond the end of the second phase (i.e., point H. Figure 1) don't effect my thesis, the third phase is de-emphasized in the remainder of this discussion.
Hard to believe? Yes indeed. So let's do the numbers.
THE ENERGY WATERSHED _/\_ UP-SLOPE, PEAK, DOWN-SLOPE
Physicists learned to realize that whether they like a theory or they don't like a theory is not the essential question. Rather, it's whether or not the theory gives predictions that agree with experiment. -- Richard Feynman, 1985
Figure 2 is quantitative. Numeric. Left-brain stuff. It's an accurately scaled graph showing the peak period of Industrial Civilization between 1950 and 1995. So please do scale out the horizontal and vertical axes. And if you'd like to go back to 3,000,000 BCE, Isaac Asimov (1991) gives all the numbers.
"BOE" means Barrels of Oil Equivalent
As far as I know, credit goes to Robert H. Romer (1985) for first publishing the peak-period data for world per capita energy-use. He gives the peak at 1979, followed by a sharp decline through 1983, the last year of his data. However, this information was published as a relatively opaque worksheet. And curiously, no mention was made about the energy watershed.
Credit likewise goes to Gibbons, et al. (1989; see Note 6) for an early publication of the peak-period of world per capita energy-use. The authors displayed the data as a viewer-friendly graph that peaked in 1973, followed by a steep downward slope through 1985. Here again, no mention was made about the significance of the peak or decline. Their curve is included in Figure
[Note 6: Dr. Gibbons is Science Advisor to President Clinton.]
As previously mentioned, in 1993 I published two papers containing extensive world per capita energy-use data and presented that data as both worksheet values and plotted graphs. Moreover, I emphasized the importance of the peak and the implications of longterm decline. My first paper (1993b) shows the peak at 1978 and decline through 1991. My second paper (1993a) shows the peak at 1980 and decline through 1992. The two-year difference is due to the use of independent sets of data. In June 1996, I updated my tests of the Olduvai theory. This latest test shows the peak at 1978 followed by decline through 1995.
A separate data test of the theory was made by F. M. Wright in June 1996. He showed the per capita energy-use peak at 1978 and overall decline continuing through 1994, as graphed in Figure 2. The slight difference between our curves results from the fact that Wright used US Census Bureau data for world population, while I used UN data. Note however that our curves are virtually superimposed.
These tests show that, (1) on the average, world per capita energy-use peaked in 1977, and (2) the subsequent rate of decline has been about 0.90% per year. The Olduvai theory explains this data. In contrast, however, the exponential-growth theory and the steady-state theory both fail. While Table 2 isn't (yet) the Rosetta Stone of Industrial Civilization, each new set of data takes it one year closer.
DENYING THE UNDENIABLE
On the whole, however, it is only out of pride or gross ignorance, or cowardice, that we refuse to see in the present the lineaments of times to come. -- Marguerite Yourcenar, 1951
Mental blockbusters have exploded throughout the history of human inquiry. "Revolutions" they're called. But typically they only pricked human egos, and ruffled vested interests and tired-old dogmas. Thus, the past discoveries (such as the solar-centric theory) were benign because such psycho-threats could simply be flouted or ignored. But the Olduvai theory is different because, willy-nilly, it will adversely impact the lives of almost everybody.
Back in 1989 I became deeply depressed when I concluded that our greatest scientific achievements will soon be forgotten and our most cherished monuments will crumble to dust. But more so, I knew that my children would feel the pressure, and will likely suffer. That really hurt. In time however, my perspective changed. Now I just treat the Olduvai theory like any other scientific theory. Nothing personal. Each year, I gather the data. Update Figure 2. And watch the theory unfold. Let the chips fall. What else?
Still, the impending Post-Industrial Stone Age is a tragedy because it really isn't inevitable. There's no absolute reason why we couldn't live in material sufficiency on this planet for millions of years. But prudence isn't our forte. "Even our success becomes failure." And, in a way, it's not our fault. Long ago Natural Selection dealt us a bad hand—we're sexually prolific, tribal, short-term and self-centered. And after thousands of years of trying, Culture hasn't changed that. And there is no sign that She will. Backward to the future. Forward to the past. Almost perfect symmetry.
. SUMMARY AND CONCLUSIONS
Industrial Civilization doesn't evolve. Rather, it rapidly consumes "the necessary physical prerequisites" for its own existence. It's short-term, unsustainable. "This is a one shot affair.... there will be one chance, and one chance only."
Energy-use per person is used as a measurable index of industrialization. In 1989, I proposed the Olduvai theory of Industrial Civilization, as illustrated in Figure 1.
• Industrial Civilization can be described by a single pulse waveform of duration X, as measured by average energy-use per person per year.
• The life-expectancy of Industrial Civilization is less than one-hundred (100) years: i.e., X < 100 years.
In 1989 I postulated that per capita energy-use had peaked and was already on the decline. But back then I lacked sufficient data to test the theory.
By 1996, however, I had successfully tested the Olduvai theory against numerous sets of data. Four of these tests are graphed in Figure 2. The following facts emerge.
1. On the average, world per capita energy-use reached a maximum value (i.e., a peak) in 1977.
2. The 1977-1995 rate of decline has averaged 0.90% per year.
3. Per capita energy-use will continue to decline as long as the world population growth rate exceeds the energy growth rate.
4. If the decline continues (and extinction is avoided), human societies will bottom out at the subsistence level of energy-use.
The Olduvai theory explains the Figure 2 data, but the exponential-growth theory (of mainstream economics) and the steady-state theory both fail.
The Olduvai theory cannot be overthrown (i.e., scientifically rejected) by outrage or indignation. However, it can be overthrown by either, (1) demonstrating that the four sets of data in Figure 2 are in error, or (2) by gathering additional data over the next few decades and demonstrating that the Olduvai theory cannot explain that data. In any case, the data will be the final arbiter.
Suggestion: If you're a 'lady or man from Missouri' or a 'doubting Teresa or Thomas' (and you should be), then go to your library, get the data, and test the Olduvai theory yourself. I'll gladly include your findings in the next update of Figure 2.
Asimov, I. & White, I. (1991) The March of The Millennia: A Key Look at History. New York: Walker.
BP (1996 & previous ed.). BP Statistical Review of World Energy. British Petroleum Company, London.
Cromer, A. (1993). How high, high-tech? Northeastern University Magazine, May. Boston.
Davis, G. R. (1990). Energy for planet earth. Scientific American 263, 21-27.
Duncan, R. C. (1996). The Mexican petroleum 'play' in two 'acts': Taking hold of oil production data. System Dynamics Conference Proceedings. System Dynamics Society, Cambridge, MA.
Duncan, R. C. (1993a). Sustainability—Is there a middle road? Moses Greeley Parker Lecture Series. Lowell, MA.
Duncan, R. C. (1993b). The realities of world energy production: A prediction based on historic data. Humanist Association of Massachusetts, Cambridge, MA.
Duncan, R. C. (1993c). The life-expectancy of Industrial Civilization: The decline to global equilibrium. Population and Environment 14, 325-357.
Duncan, R. C. (1991a). The life-expectancy of Industrial Civilization. System Dynamics Conference Proceedings (Bangkok). Systems Dynamics Society, Cambridge, MA.
Duncan, R. C. (199lb). The evolution of social control: Is a world society governable? Proceedings of the Preparing for a Sustainable Society Conference, Ryerson Polytechnical Institute, Toronto.
Duncan, R. C. (1990). A unified theory of human history: Summary presentation. AESR Newsletter, April, v. III, n. 1.
Duncan, R. C. (1989). Evolution, technology and the natural environment. Proceedings of the ASEE Conference, Binghamton, New York.
Feynman, R. P. QED, Princeton University Press, Princeton, NJ.
Georgescu-Roegen, N. (1971). The Entropy Law and The Economic Problem. The University of Alabama Distinguished Lecture Series #1.
Gibbons, J. H., Blair, P. D., & Gwin, H. L. (1989). Strategies for energy use. Scientific American, 3, 86-93.
Hoyle, F. (1964). Of Men and Galaxies. University of Washington Press, Seattle.
Leslie, J. (1996). The End of the World: The Science and Ethics of Human Extinction.
Romer, R. H. (1985). Energy Facts and Figures. Spring Street Press, Amherst, MA.
UN (1996 & previous ed.). Statistical Yearbook. United Nations Organization, New York.
Wright, F. M. (1996). Personal communication. Seattle, WA.
Yourcenar, M. (1951). Memoirs of Hadrian. (1968 ea.) Penguin, Middlesex, UK.
THE WORLD PETROLEUM LIFE-CYCLE
The world oil production peak, we assume, will be a turning point in human history. Our major goal is to forecast the all-time world oil peak, not by one heroic effort, but rather by a series of smaller efforts -- much like an experienced team of mountaineers would climb the world's tallest peak.
The main goals of this paper are sevenfold:
(1) Introduce a unique new 'tool' to forecast petroleum production, so-named the 'World Oil Forecasting Program' ('Program') and demonstrate its predicting power, versatility, and utility.
(2) Use it to predict the peak year for each of the world's top 42 oil-nations.
(3) Use it to predict the peak year for each of the world's seven regions.
(4) Use it to predict the peak year for world oil production.
(5) Use it to predict the production peaks and cross-over points of (a) the Middle East and non-Middle East, and (b) OPEC and non-OPEC.
(6) Use it to answer the questions: Can we delay the world oil peak? If so, by how much? What is the relationship between new production and peak delay?
(7) Describe how the 'World Oil Forecasting Method' ('Method') uses the Program to produce a series of forecasts which, taken together, will inevitably converge on the world peak. Show how a 'phase-diagram' ensures the consistency and convergence of our Method.
Some definitions will be useful. 'Petroleum' and 'oil' are used synonymously to include crude oil, shale oil, oil sands and natural gas liquids (NGLs). EUR means expected ultimate recovery. 'Qi' means cumulative production to year i. 'RR' means remaining reserves. 'G' means billion (109). 'b' means barrels.
Presently the world's favorable petroleum geology is unequally divided up among some 182 nations, of which the top 42 produce more than 98% of the world's oil; the next 70 nations less than 2%; the remaining 70, none. The top 42 producers are detailed in Table 1.
The historic production data is from the BP Statistical Review of World Energy (1961-1998). The forecasts were generated by the World Oil Forecasting Program, described later. The numbers in Table 1 are the bedrock of our study.
MODERN HISTORY BIBLIOGRAPHY
MODERN HISTORY BIBLIOGRAPHY