Kansas Is Going Bye Bye

Greetings Peaksters

      I guess the technical term is "normalcy bias".  And what it means is failure to recognize that things have changed - fundamentally.    Its only natural.  If during your life, and your parents lives, one thing has been constant, it fades into the back ground,  Its a "given"  Its a "fixed variable"  and you can go ahead and fiddle with other parts of the system and not worry about it.

       All our lives we have experienced an ever growing source of cheap energy.     And all the things that cheap energy makes possible.   Things like:   a growing economy, lots of companies employing lots of people, and lots of taxes for governmental programs.  All our projections are based on this continuing. 

      Appropriate programs to adapt to resource limits must take into consideration that we are entering a "new normal".

      For example - the electric car sounds like a good strategy.  And if the need to change fuel types  was the only issue,  it might work as an adaptation. We could rely on the marketplace, and governmental subsidies to change the composition of the fleet.    But  turning the fleet to electric requires the very things we won't have -  a growing economy,  lots of people working, and lots of tax revenues (to subsidize them). But suppose we can't afford to trade in our gas guzzlers?     A more serious adaptation may be needed.  (Light rail, park and ride, car pooling) 

 "In the new oil cycle, sales of new autos are hampered as car owners hold on tight to existing vehicles. There isn’t enough growth in the wider economy to turn the fleet over. This is precisely the analytical mistake forecasters of future EV sales (electrical vehicles) continue to make when happily predicting broad adoption of electric power. Adoption is glacially slow because fleet turnover is slow. And fleet turnover is slow because the economy has been reduced to a much lower level of operation."

   But what about other adaptations?  What about the whole Keynesian tool kit?  Stimulus programs, low interest rates,  tax breaks?    see e.g http://gregor.us/policy/limits-to-keynesianism/

     

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http://www.chrismartenson.com/blog/new-price-era-oil-gold/65125

"If society consumed no energy, civilization would be worthless. It is only by consuming energy that civilization is able to maintain the activities that give it economic value. This means that if we ever start to run out of energy, then the value of civilization is going to fall and even collapse absent discovery of new energy sources."

~ Dr. Tim Garrett, University of Utah

The New Oil Cycle is Suffocating Economic Growth

There was a time when central bankers used to fight high oil prices with interest-rate hikes. But we are now in a different era with that equation, and central bankers are more likely to lament, as Ben Bernanke quipped in his spring 2011 press conference, that "the FED can’t print oil.” Yes, precisely. At the zero bound of interest rates and with debt saturation coursing through the private and public sector, the developed world faces not an inflationary restraint from oil prices, but rather an additional deflationary barrier. Welcome to the new oil cycle.

In the old oil cycle, new supply of petroleum was brought online to capture rising prices. In the new oil cycle, declines from existing fields neutralize this new supply, for a net global supply gain of zero. In the old oil cycle, recessions benefited large consumer countries like the United States as oil prices fell, giving a boost to the economy. In the new oil cycle, the price of oil falls only for a short time before resuming a higher swing. In the old oil cycle, the developed world set the oil price through swings in its demand. In the new oil cycle, the developing world, with its much lower sensitivity to high prices now sets the floor on oil. Most of all, the new oil cycle caps growth in the developed world. The new oil cycle kills the economies of the OECD nations.

Peak Autos

This week, JD Power and Associates released its 2012 sales outlook for the US light vehicle market. I’m quite thankful that Calculated Risk, the long-time blog on the US economy, keeps an updated chart series of this data, because it will help set the context for JD Power’s outlook and where we are in the current oil cycle. The forecast? For the annual rate of US automobile sales to reach 14 million by the second half of 2012. That would make for a healthy advance in auto sales from the current rate, around 13.25 million. Let’s take a look then at the multi-decade chart for light vehicle sales from 1967-2011.

Anyone familiar with a chart of the US stock market or US employment will immediately spot the long-arc trajectory here that begins in a very familiar place: 1982. That was the dark place, after twin recessions and a rude (but healthy) Volkering of inflation, from which the great bull market in stocks was born. This reflects current discussions of 1) how much the stock market could recover, 2) how much the employment market could recover, and 3) how much wages or real GDP could recover. The JD Power forecast for next year, if it comes to pass, would only restore vehicle sales to levels last seen in the 1990s.

I won’t digress (much) toward the enormous mistake the US has made in continuing to invest billions of dollars in public capital into the Auto-Highway Complex. But let’s at least disabuse ourselves of the notion that automobile transport has been a free-market phenomenon for nearly all developed nations. Both in Europe and in the US, automobile manufacturing has been a key part of the industrial (and political) structure for decades. And I am merely using this sector as a current example of a beloved and favored means to economic growth that no longer works for economies now that we’ve entered the new oil cycle.

In the old oil cycle, higher prices would have triggered new gains in MPG standards from the automobile industry, no doubt unleashing a new round of higher automobile sales. In the new oil cycle, sales of new autos are hampered as car owners hold on tight to existing vehicles. There isn’t enough growth in the wider economy to turn the fleet over. This is precisely the analytical mistake forecasters of future EV sales (electrical vehicles) continue to make when happily predicting broad adoption of electric power. Adoption is glacially slow because fleet turnover is slow. And fleet turnover is slow because the economy has been reduced to a much lower level of operation.

I recently showed data which quantifies the dramatic drop in oil consumption since the 2007 highs in the US economy. As usual, the correlation between economic growth and energy consumption is nearly perfect. The drop in European oil consumption has also been quite pronounced. I might add that in the case of Europe -- which enjoys broad coverage in electrified rail transport -- the reduced oil consumption is more notable. The United States entered the current decade with a lot of discretionary oil demand that was fated to come offline, but that was not the case in Europe. The continent has been weaned from casual oil use for decades, mostly through high taxes. But that did not prevent a new low in consumption post-2006, when prices began to soar -- with predictable effects. Stuart Staniford of the Early Warning blog presents the chart below with the latest data. It’s notable that Europe’s economy, the largest in the world, has shed a million barrels per day (mbpd), from 15.5 to 14.5 mbpd.

The Rescue Myth

Let’s pause here and be as frank as we can be about a rather widespread belief in the Western world shared among economists, policymakers, technologists, and corporations: The price of oil will eventually drop, and the global economy will also grow. Is that right? Well, unless you’ve been living in a cave, OECD countries are currently in the throes of a debt crisis, with at least 15% of the population unemployed or underemployed. Meanwhile, North American oil prices, as measured by the WTI benchmark, have just rejoined Brent at levels at/above $100 a barrel. And Western economies are now supposed to recover from this position? What price of oil are we to forecast, should the vast spare capacity and idle labor of the OECD come back online? I spoke to this issue back in 2009 in a post called Overhead Crush:

A concept that’s key to resource depletion is the higher volatility phase, in which both price and supply start to hit ceilings and floors in accelerated fashion. This tends to appear first during the actual peak supply period, or peak plateau period. The pattern has been seen in previous eras in such things as wood, fish, and whale oil. When the post-peak phase gets underway the price amplitude increases even further, playing havoc with supply and demand. As demand gets killed, and then finally collapses, it causes confusion about supply. But then, as demand returns, any questions about supply are soon answered as demand once again bumps up against the supply ceiling.

Visually, we can think of demand in this phenomenon as being in a kind of contracting triangle. Every time consumption resumes after a previous demand crash, it hits the ceiling at a lower level. This is the point where, if you find yourself living in the age of biomass and wood, you get rescued by coal. For example. This is also the point where, if you are living in the age of oil, it’s less likely you get rescued.

Normalcy Bias and the Problem of Growth

Normalcy bias, rampant in the West, leads most to conclude we’ll be rescued. Some magical combination of new technology, new policies, or miracle energy resources will soon arrive. Even on the conventional end of this spectrum, there is still a generalized belief in the inherent ability of the system to resume growth. In a recent paper from the New America Foundation, The Way Forward (Alpert, Hockett, Roubini), we find eminently reasonable solutions that target the system as it once was, but not the way it’s operating now. While the authors move beyond either purely Monetarist or Keynesian approaches in their solution set, their attention to energy inputs is far too moderate. Only a policy recommendation that foregrounded energy as the primary lever to apply to Western economies, rather than merely including it, would now have resonance. It is the energy-intensity of America in particular that must be confronted, not only in its domestic consumption but in the global energy inputs it commands through its outsourced production. Let's remember that oil, until it is eclipsed by coal, remains the primary energy source of the world, with a 33.56% share (2010, BP Statistical Review).