Saved By Seneca?

The farms of Ohio
had been replaced by shopping malls
and Muzak filled the air
From Seneca to Cuyahoga Falls 

     -The Pretenders

The scheme of a life
Written in the wind

     -Patty Smith  (Seneca)

Greetings

          So, we come to a fork in the road .  On one path, we all get together are start to reduce our high energy life styles voluntarily.  On another, we continue to grow in size and affluence  and burn up everything until there is nothing left to burn.   A third option is that we leave resources in the ground, but only  because of some outside limitation. 

         Could this outside limitation  be a resource limit such as peak oil?    Under that scenario, we would still continue to burn things as long as we could, but that once the fuel supply peaked we would burn less and less.  Ugo Bardi takes a look at this scenario here.   Even assuming a fossil fuel peak in the relatively near future, he finds that if the decline follows the "Hubbert curve", we would still be produce enough CO2 to raise the temperatures to dangerous levels.  He says:

 "In short, even if we follow a "peaking" trajectory in the production of fossil fuels, we are going to emit around twice as much carbon dioxide as what some people (probably optimistically) consider to be the "safe" limit."

            According to Bardi, only a "Seneca curve" could achieve a slowdown in CO2 steep enough to miss 2 degrees.

  "A Seneca shaped production curve would considerably reduce the amount of fossil carbon that can be burned in the future. Tentatively, if the collapse were to start within the next 10 years and it were to cut off more than half of the potential coal production, then, we could remain within the estimates of the 2 deg. C limit, hoping that it could be enough. Hubbert can't save the ecosystem, but Seneca could (maybe). 

  In order for this to happen we would need to see 1) a peak in oil use in the near future, and 2) a steep decline from then on.

      Bardi suggest that a Seneca collapse could occur in the event of a self reinforcing economic disruption.  This theme has been explored by Gail Tverberg in her blog, Our Finitle World.   A good summary of her position is provided here.   She paints a scenario where the price of producing oil continues to rise, while the price the economy can afford does not.   There is no  "Goldilocks" price which which work for both consumers and producers..

          So, what price do producers need?   Here , Tverberg , uses data from Kopits presentations, illustrating that the privately held oil companies,  on average, need a price of $120 / barrel to "break even", where break even means " achieve positive cash flow under current capex and dividend programs"  .   A similar chart shows a " break even " for OPEC countries of $100, where "break even"  "includes tax requirements by parent countries".    (Nice graphic here ) This last phrase is somewhat opaque,but I think it means the taxes paid to support the generous welfare programs in those countries.  

         On the other side, the maximum price that can be charged without reducing demand  is probably around 5% of GDP .  Here Kopits sets that figure at $115.  (see also The First Peak Oil Recession (2009), where Kopits states that historically the US has gone into recession when oil hit 4% - which would mean a price of $92)

          So, we can see the nature of the problem.  The economy can't afford oil above  $92- $115, but on average OPEC members need only $100.  OPEC currently provides about 60% of world oil consumption.   The average IOC only needs needs $120.   Thus, about half of the producers need a price that is higher than the economy can afford.   However, this mismatch between producer and consumer does not guarantee a sharp decline.   Even though the price has slipped below " break even", producers do not immediately turn off the spigot.    This is fairly obvious given the situation during that last 18 months.    OPEC producers have tremendous cash reserves and can afford to not " break even"  for long periods.   Similarly, IOC'S may also be willing to operate at a loss for short periods of time.   It is no secret that many of the shale producers have been in this situation for a while.   They have been able to balance the books with loans, either from bankers or by selling high yield bonds.   

       In this article, Art Berman explores this situation, and suggests that the lenders will continue to participate as long as there is some hope that the price will rise in the near future.   He argues that the price will not rise until a number of producers declare bankruptcy.  At that point the lenders will recognize the risks involved and will cut off further funding.  This will create more bankruptcies, but will also help remove the surplus.  This process may be underway. See here  His judgement is that prices must first go lower, before they can rise.  Others expect the low prices to stimulate demand, which will eat up the surplus. 

       Bardi thinks that a Seneca curve could only be triggered by a world wide depression.   One might argue that the opposite is also true -energy use and economic activity track each other closely.     As for Tverberg, she doesn't rule that out.

"It looks to me as though we are heading into a deflationary depression, because the prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn’t happening. Instead, Janet Yellen is talking about raising interest rates later this year, and  we are seeing commodity prices fall further and further. Let me explain some pieces of what is happening."

         Falling commodity prices are triggering concern elsewhere as well.  Commodity prices  have fallen to a ten year low.    Sunday's New York Times reports on the resulting  layoffs in the  US industry.   

 "The fall in prices for a variety of products, including crude oil, iron ore and agricultural crops like corn and soybeans is reminiscent of the collapse of the technology boom in 2000 or the bursting of the housing bubble nearly a decade ago. And behind the pain and anxiety are headwinds blowing from China and other emerging markets, where growth is slowing and demand for the raw materials that drive the global economy has dried up."

  The IMF recently lowered its projection of world growth rates, citing falling commodity prices.    In September, Janet Yellen, head of the US Federal Reserve, cited falling commodity prices as a reason to continue its ultra low interest rate policy.

     “At a press conference following the announcement, Fed chair Janet Yellen listed off a number of reasons why the U.S.’s central bank thinks the economy is still too weak for an interest rate liftoff...... We saw a very substantial downward pressure on oil prices and commodity markets and those developments have had a significant impact on many emerging market economies that are important producers of commodities, as well as more advanced countries including Canada,” Yellen said

    It is probably  worth remembering that even the current anemic growth is being generated by an enormous amount of debt.  Although too much debt was widely seen as a contributor to the 2008 crisis  (along with high oil prices),  debt levels have continued to rise.  See here.   For a guided tour of the cities, counties, states and companies most at risk from debt see here

      To get a feeling for the debt levels of the US government in context of GNP, this chart from the fed, shows the how debt has been used to offset the fact that earning power of average Americans ,which has not increased in 40 years(see here).    Of course, since the 2008 crisis, the debt level has sky rocketed. One interesting question is what will happen when the next crisis hits?   Will the US government "double down"  and increase debts levels further? 

From to 

2015 Q2: 101.33026

Source: Federal Reserve Bank of St. Louis, US. Office of Management and Budget

(Percent of GDP)

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         I don't pretend to understand economics, so I am in no position to evaluate  the likelihood of a significant economic down turn.      This type of event would be unpleasant, and  is hardly to be wished for. .  Bardi notes:

      "But, even if that came to pass, a Seneca collapse is a major disaster in itself for humankind, so there is little to rejoice at the thought that it could save us from runaway climate change. In practice, the only hope to avoid disaster lies in taking a more active role in substituting fossils with renewables. In this way, we can force the production of fossil fuels to go down faster than it would do as an effect of gradual depletion, but without losing the energy supply we need. It is possible - it is a big effort, but we could do it if we were willing to try (see this paperby Sgouridis, Bardi and Csala for a quantitative estimate of the effort needed)"

   

      

When the shark bites

"increases are of sluggish growth,

the way to ruin is rapid."

 Seneca 

"Send lawyers guns and money

the shit has hit the fan"

Warren Zevon

Greetings

        Tainter suggest that civilizations tend to collapse when increased investment  provides less and less marginal returns.

     Here is a thought provoking graph - which may illustrate this process.  First look at the the debt to GDP ratio.  You can see that  between 1950 and 1980, it was quite stable.  Then starting in 1980 (around the time of the "oil shocks") it start to rise - more and more debt was required to achieved the same amount of GDP.    

    Why would this happen?  Perhaps the second line explains it.  It shows the per capita available energy.     When energy was easily available and cheap, it was easy to increase GDP - but as the situation changed and energy because  less easily available,  the marginal return on investment  slowed.  

    Why would debt increase?   Arguably more debt was needed to make up for the diminishing profits. -(for an good explanation of how higher oil prices lead to lower profits - and lower employment - via automation and off shoring see here)

    Which reminds me of a theme of Kunstler - "capital formation".   He says:

And what’s been going on is that we’ve been trying to compensate for the lack of capital formation with this imaginary money. And by capital formation, I mean the ability to accumulate real wealth from real wealth-producing activities. And creating credit card money on a national level is not real wealth-producing activity.   Kunsler interview

  It takes a lot of capital to fund an energy project.,  Regardless of whether the project is a coal mine, a oil well, or a solar panel.    As we move from cheap energy to low EROI energy - there is less and less  energy returned  to fund the next round of development - less capital.  One indicator of this lack of capital, is the use of increasing amounts of debt.  If you can't fund the project with profits - you borrow from the future, and buy it with debt.

    

    

Fig. 1: Graph shows evolution of primary energy consumption per capita in Btu (blue line) and the ratio of total debt to nominal GDP (red line in %) from 1950 to 2011. Vertical dashed lines show approximate thresholds of different growth/decline phases of USA. (Source: EIA, St. Louis Fed)

    

  How much longer can debt levels continue to rise?  Who knows?  Or what happens when the debt levels fall?   Without more debt, where will the money come from, to support future energy flows?    Future GDP?   What will the future look like?  One possibility is the Seneca Cliff   proposed by Ugo Bardi.  He has created a model that incorporates negative feedbacks, which make the road down much steeper than the road up.

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see also - Podcast with Ugo Bardi, where he discusses his Seneca  model, which has a "shark fin" curve which rises slowly, but falls quickly.   Thus if the growth phase of the industrial era was around 200 hundred years while Bardi suggest that retreat could only take 50 years.. 

http://www.doomsteaddiner.net/blog/2013/08/03/podcast-peak-shale-oil-what-peak/  

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Sunday, July 21, 2013

The decline of an empire

Guest post by Alexander Ac

Given that City of Detroit has now officially filed for bankruptcy, it is worth to look at the bigger picture. Is the fate of once mighty city just a short pause on the way to further prosperity? Or is it rather a symptom of something bigger and more widespread regarding the future of a post-industrial society?

Without exaggeration, Detroit was once a symbol of “American Dream”, characterized by the highest per capita income in the entire country, growing population, industrialization, mass production, growing wealth, etc. The population reached almost 2 million people.

Now, Detroit is more the symbol of “American Nightmare”, with a declining population* increasing poverty and criminality, declining property value, declining public services, etc. Now the population is bellow 700 thousands people.

The period after the WW2 was characterized by an explosive growth of population and energy consumption, tremendous increases in productivity brought by cheap energy, globalization of trade, technological innovation, especially in fields of computers and communication, increasing quality of healthcare, and hopefully collective growth of population happiness.

The same period can by also characterized by several fundamental trends, which probably explain a lot. Let’s look at the following graph:

Fig. 1: Graph shows evolution of primary energy consumption per capita in Btu (blue line) and the ratio of total debt to nominal GDP (red line in %) from 1950 to 2011. Vertical dashed lines show approximate thresholds of different growth/decline phases of USA. (Source: EIA, St. Louis Fed).

Expansion phase (1950-1979)

This period can be broadly characterized by a rapid population growth, rapid total energy consumption per capita growth (2% p.a.), infrastructure construction, and relatively stable debt/GDP ratio (0.3% p.a.). We could talk about the “expansion phase”, from which most of the population benefited in terms of increasing quality of life. Increasing safety, better access to health care, better education and freedom of almost everything were a given facts of life. Even the environmental conditions might have improved in some or even most locations. And global warming was not of a serious concern at that time.

Slow decline phase (1979-2009)

This characterization of 30 years following the peak in per capita energy consumption might be surprising to many, but should not be really. Many of the great achievements of science and technology started to be slowly overrun by resource depletion. This trend was largely undetected, since increased level of debt masked the real price of the energy. We decided to pay less for prosperity (better call it consumption) today, in exchange for more tomorrow, assuming that happy days of cheap energy would return at some moment in the future. Human naivety is endless, as we can easily observe. But during the phase of exponential growth in the debt to GDP (almost 5% p.a.) and slowly declining per capita energy consumption (0.5% p.a.), many of the previously positive trends turned negative. Here is a list of just some of them:

• Growth in the income inequality between rich and poor
• Declining fertility growth rates
• Growth of the financial sector as the share of GDP
• Outsourcing of the energy intensive industrial jobs to foreign countries
• Increasingly negative trade balance
• Declining quality of education
• Increasing healthcare costs
• Declining added value of further debt
• Increasing oil dependency upon Middle East countries
• Ageing infrastructure (what you build during 10 dollars/barrel era is difficult to maintain or even expand with 100 dollars/barrel era)

Fast decline phase (2009-???)

These and others long-term negative trends ended up with a financial crisis in 2008-9, which turned out to be global. Debt to GDP ratio peaked in the US, and its decline started off what we might call “fast decline” phase. Close to zero Fed Funds Rate or “quantitative easing” policies are not going to change fundamental evolution of the US economy. There is no new “industrial revolution” behind the corner, no matter what “shale oil” or “shale gas” money loosing/climate catastrophe ignoring propaganda wants you to convince.  We have plundered the cheap resources and now we have to face the consequences. If we are collectively wise enough, which is not happening yet, we might have a small change of avoiding WW3 in coming years and decades. Unfortunately, history seems to predict a different outcome.

* Keep in mind that under a global decline scenario people have nowhere to migrate, unlike in the case of local decline, such as for Detroit.