The Precariat , Trump and cheap-to-extract Energy

When job figures in the US came out in early November 2016 the unemployment rate was 4.9 percent and hardly anyone worried. For economists a 5% unemployment rate is a really good figure. But remember the new definition of who is employed? Employment in most developed nations these days is "at least one hour of work done in the past week by a person aged 16 or older". So the "employed" includes all those who lack job security, and those with intermittent employment or underemployment and the resultant precarious existence.

This is what the Democrats missed. There is many a commentator who has observed that the urban privileged are completely out of touch with those who experience the worry of a day to day precarious existence, always uncertain whether they can pay their bills. This is the precariat. Professor Guy Standing, in a book published well before Brexit and Trump's election warned that the rapid growth of the precariat is producing instabilities in society. He warns it is a dangerous class because it is internally divided, leading to the villainisation of migrants and other vulnerable groups. And, lacking agency, its members may be susceptible to the siren calls of political extremism.

Something familiar there? While they might not call it the precariat, Bernie Sanders, Donald Trump and Nigel Farage all appeal to this group. So while the question is legitimate, the solutions of Trump and Farage are wrong, wrong, wrong.

The tragedy is that just as politicians miss the precariat, economists miss energy. And strangely they are related. Here is how:

Oil is a remarkably dense energy source with one barrel of oil supplanting eleven years of human labour. Graph its use with the rise in GDP and they are in complete lockstep. The economy as it is currently structured is utterly dependent on growing supplies of cheap to extract energy. Only a fool would deny it is extremely unwise to build an economic system that relies on ever growing expansion in oil supply. In real terms energy supply is already on the decline due to the expanding internal energy requirements of the oil industry.

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The cost of oil exploration and extraction is rising and with it debt

Actuary Gail Tverberg writes that peak oil didn’t play out as expected because we didn’t factor in the financing of the oil industry. As the cheap-to-extract oil ran low, the cost of extracting non-conventional oil grew higher. This meant the firms had to go into more debt in the form of bank debt, bonds and derivatives. Eventually the debt overwhelms the oil companies and the layoffs begin. In order to pay interest on all their debt, indebted firms have had to keep wages low. The same happens for all firms that extract commodities, because they all require cheap-to-extract energy. The last step is that these low wages reduce the general demand for goods.

Nicole Foss points out that if demand collapses, the money supply declines and a deflationary spiral begins that few notice. 18 months after the decline in oil prices started, by February 2016 Bloomberg Business reported there had been 250,000 oil jobs lost and apparently each of these jobs supports over three basic wage jobs.

Tverberg says, "Why is the price of oil so low now? In fact, why are all commodity prices so low? I see the problem as being an affordability issue that has been hidden by a growing debt bubble. As this debt bubble has expanded, it has kept the sales prices of commodities up with the cost of extraction, even though wages have not been rising as fast as commodity prices since about the year 2000. Now many countries are cutting back on the rate of debt growth because debt/GDP ratios are becoming unreasonably high, and because the productivity of additional debt is falling."

So the drop in oil prices leads us to an underlying problem. The world is reaching the limit of its debt expansion. This is what is called Debt Deflation.

So even though we are living in a time of energy constraints, our blinkers don't allow us to see that. Risk analyst David Korowicz wryly observes,"The irony is that people may rarely notice they are living under energy constraints. Energy retraction from the global economy can be achieved by production declines or collapses in demand, though as we have seen, they are deeply inter-related. We may experience energy use collapse not as an energy constraint, but as a systemic banking collapse and vanished purchasing power."

So here is the source of the vanished purchasing power of the precariat. In a post election blog energy analyst Richard Heinberg observes that the problems won't go away when Trump is elected. In the face of the door being closed to national action on climate change, build community resilience is his message. "The most promising responses to our twenty-first century crises are showing up at the community level anyway. It’s in towns and cities across the nation, and across the world, where practical people are being forced to grapple with weird weather, rising seas, an unstable economy, and a fraying national political fabric."

None of these arguments will be known to the incoming president, though some advisors may try to educate him.Good luck to them. He is an anti-science president. If he slaps tarriffs on as he has promised, purchasing power will decline still further and accelerate the already active deflationary spiral.

trump-digs-coal

Trump's attitude to women seems the same as his attitude to the environment – if it's there, it is there for my use. Coal stocks soared on his election and renewables dropped. However, oil stocks didn't rise much, possibly a sign that reality of constraints are already priced into the market. 

An interesting question with Trump is how committed he actually is to his own ideas, from the potentially sensible to the crazy.   He is a “top of the head” sort of a guy, who changes position and contradicts himself on exposure to new things (or simply because he finds himself in a new context). Is the Presidency just a vanity project for him, in which he will blow with any policy wind he encounters? His victory speech, and his abandonment of the “Lock her up” approach, suggested that.

At the worst, if his “vision” as expressed during the campaign carries through, the US (and to a lesser extent the world) are in for an appalling time – racist, misogynist, anti-environment, pro-individualist, pro-violence and so on. And if the Republican Party as a whole gets the bit between its teeth, the US Government will be gutted and corporates will simply finish their take over. At the best, there’s no doubt he has created more space for these sorts of behaviours at the fringes in the short term. In between, as seems more likely, the direction as a whole will probably be negative, but it’ll be muddled and maybe not so fast moving.

There are a few bright spots, less likelihood of a war with Russia and above all, an increased energy and commitment of climate change activists. Our lives depend on it. He has focussed our minds. There is no spare planet. Somehow we must find a way.

Adapting to Geophysical Reality

No species survives unless it is good at adapting to its environment. And environments can change very fast. This article addresses the adaptations we must make to a rapidly warming world, to living with a low carbon economy and to major collapse of the global economy.

Getting to a low fossil fuel economy fast
climate_0Climate change has been humanity’s wake up call. Energy is at the heart of everything we do. For centuries we have used the energy of the sun in one form or another. It was only when we discovered oil, a form of stored sunlight compacted for millions of years, that economic growth really took off.

How dense is oil? Richard Heinberg explains that to push your car for 30 miles would take 6-8 weeks of hard labour, but you can put a gallon of petrol in your car and get there quickly for a few dollars .

We use fossil fuel energy not just to power our cars and tractors, but power our assembly lines, make our cement, plastic, pharmaceuticals and paints. As the low hanging fruit becomes exhausted, the cost of digging out fossil fuels rises and the unconventional oil, gas and coal is of not such high quality. Despite the financial challenges, oil companies continue to forecast increases in extraction.

When climate scientist Bill McKibben first wrote in 1989 on the coming climate challenge, he didn’t foresee the pace of change. He continues to be astonished at the rapidity of loss of Arctic ice, increasingly devastation cyclones and other extreme weather events. In a talk to the Oberlin College and Conservatory conference in Ohio, After Fossil Fuels: the Next Economy, he said we now have a very limited timeframe.

Founder of the Carbon Tracker, Mark Campanale, reminded listeners that economist Nicholas Stern had estimated that to get to two degrees of warming the world needed to spend $90 trillion in infrastructure for a low carbon economy. Campanale had calculated that there is only a 50% chance of getting there in the time estimated by major governments signing the Paris Agreement using their scenarios. There is so much unburnable carbon in the reserves of oil, gas and coal companies, that even if there was no further digging or mining activity than there is now, we would still overshoot the 2 degrees.

To put this $90 trillion in investment needed in perspective, the world GDP is $70 trillion and the total value of the stock of all the companies in the world is only $60 trillion. Campanale, a sustainable investment analyst, noted that some investors are saying it will all blow over and it is cyclical. So they keep their shares in fossil fuel companies until this happens. All the oil companies and OPEC forecast continual growth of fossil fuel extraction.

Two weeks before this conference Bill McKibben had post an article Recalculating the Climate Math, in which he wrote that scientists now think that 2 degrees is too much; moreover, the amount of fossil fuels in the currently operating plants worldwide would actually bring us above 2 degrees. So the amount of CO2 we can burn has to be reduced from 943 to 800 gigatons. And if we are going to get to 1.5 degrees, a goal set in Paris, we will need to close all the coal mines and some of the gas fields we're currency operating long before they are exhausted. He finishes by saying ‘And if we don’t get it right, then all of us—along with our 10,000-year-old experiment in human civilization—will fail.’

And as for living with less oil, gas and coal, that is huge too. There are so many challenges, from how to power industrial machinery to how to transition from kerosene as aviation fuel, it hardly bears thinking about. There is no doubt however that we will have to grow our food more locally, to travel less and to have more localised economies. The permaculture movement can teach us how to build houses with less cement. There will be stranded assets like oil tankers and bankruptcies galore in the huge fossil fuel industry, let alone the huge losses on high-risk energy bonds in the fracking industry.

All the more reason why we have to think up the new economic system fast. Innovation to transition to a low carbon economy can only happen if investment is directed there and new companies have no deadweight taxes, only resource taxes.

We also need to adapt to an economy that will collapse.
Actuary Gail Tverberg, who through the years has predicted many changes that have come to pass, says the global economy can’t grow fast because the cheap-to-extract energy is depleting. She describes a situation where growth is slowing, global trade isn’t growing and central bankers can’t solve it even with historically low interest rates. More energy is needed now to extract energy, it takes energy to make and transport goods, and it takes an increasing amount of energy to create a growing amount of goods and services. Less cheap to extract energy produces less productivity growth and this translates into stagnant wages which no longer allow non elite workers to buy big ticket items like cars and houses. So the economy declines further.

She maintains this means commodity prices can’t hold up, so producing them eventually becomes uneconomical. And we are on a downward spiral. ‘This situation could lead to catastrophe because metals, agriculture and energy are all essential to the economy’. The rate of return on investment falls, new debt goes into buying assets and eventually, when commodity prices fall, asset prices fall. The price of agricultural land will fall. This leads to debt defaults and bank failures, affecting banks, insurance companies and pension plans. The lack of new loans will depress demand further. She predicts oil may fall below $20 a barrel.

Most investors and financial advisors are unaware that the price of commodities (in New Zealand it has largely been about the price of whole milk powder) is cyclical so it will turn around. But they haven’t factored in energy.

At the end of this long article in October, 2016 she concludes there is no way out of the problem over the long term. We will have reached our ‘Minsky Moment’.

Adapting to sudden financial collapse will be humanity’s biggest challenge.

Continuing War
1024_wepost3While most societies have lived with war, we now have the added factor that there is a scramble for the last remaining fossil fuel reserves. Investigative journalist and international security scholar Nafeez Ahmed has explained the conflict in Syria in those terms, saying that there is competition for the offshore oil and natural gas reserves between the world’s biggest oil companies and that is why they court Assad. When civil war broke out the plans of Shell and oil majors were unexpectedly suspended. When it is resolved they will be able to continue. American firm, Genie Oil and Gas has been granted exploration rights in the Golan Heights. Among Genie’s board members are Rupert Murdoch, Larry Summers, Dick Cheney.

American Shale Oil, a subsidiary of Genie candidly admits on its website: ‘The peaking of world oil production presents the US and the world with an enormous challenge, Aggressive action must be taken to avoid unprecedented economic, social and political costs.’

In addition there are two proposed gas pipelines to get gas for Europe that are on hold. One is from Iran through Iraq, Syria and Lebanon to Europe. This was signed by Assad and backed by Russia. The other is from Qatar’s North Field through Saudi Arabia, Syria and Turkey.

A Russian oil and gas company began oil prospecting operations in September 2015, the same area scoped by French firm CGGVeritas.

Climate change do the math

Status

Portrait of Bill McKibben, author and activist. photo ©Nancie Battaglia

Portrait of Bill McKibben, author and activist. photo ©Nancie Battaglia

No species survives unless it is good at adapting to its environment. And environments can change very fast.

Climate change has been humanity’s wake up call. Energy is at the heart of everything we do. For centuries we have used the energy of the sun in one form or another. It was only when oil was discovered, a form of stored sunlight energy compacted for millions of years, economic growth really took off.

How dense is oil? Richard Heinberg explains that to push your car for 30 miles would take 6-8 weeks of hard labour, but you can put a gallon of petrol in your car and get there quickly for a few dollars .

We use fossil fuel energy not just to power our cars and tractors, but power our assembly lines, make our cement, plastic, pharmaceuticals and paints. As the low hanging fruit becomes exhausted, the cost of digging out fossil fuels rises and the unconventional oil, gas and coal is of not such high quality. Despite massive financial challenges, oil companies continue to forecast increases in extraction.

When climate scientist Bill McKibben first wrote in 1989 on the coming climate challenge, he didn’t foresee the pace of change. He continues to be astonished at the rapidity of loss of Arctic ice, increasingly devastation cyclones and other extreme weather events. In a talk to the Oberlin College and Conservatory conference in Ohio, After Fossil Fuels: the Next Economy, he said we now have a very limited timeframe.

Founder of the Carbon Tracker, Mark Campanale, reminded listeners that economist Nicholas Stern had estimated that to get to two degrees of warming the world needed to spend $90 trillion in infrastructure for a low carbon economy. Campanale had calculated that there is only a 50% chance of getting there in the time estimated by major governments signing the Paris Agreement using their scenarios. There is so much unburnable carbon in the reserves of oil, gas and coal companies, that even if there was no further digging or mining activity than there is now, we would still overshoot the 2 degrees.

To put this $90 trillion in investment needed in perspective, the world GDP is $70 trillion and the total value of the stock of all the companies in the world is only $60 trillion. Campanale, a sustainable investment analyst, noted that some investors are saying it will all blow over and it is cyclical. So they keep their shares in fossil fuel companies until this happens. All the oil companies and OPEC forecast continual growth of fossil fuel extraction.

Two weeks before this particular conference Bill McKibben had posted an article Recalculating the Climate Math, in which he wrote that scientists now think that 2 degrees is too much warming. Moreover burning the fossil fuels in the currently operating plants worldwide would actually bring us above 2 degrees. So the amount we can burn has to be reduced from 943 to 800 gigatons of CO2. And if we are going to get to 1.5 degrees, a goal set in Paris, we will need to close all the coal mines and some of the gas fields we're currency operating long before they are exhausted. He finishes by saying ‘And if we don’t get it right, then all of us—along with our 10,000-year-old experiment in human civilization—will fail.’

The conference also had wonderful contributions from those involved with the divestment movement.

I have watched a considerable amount of this conference on youtube. While it is great as far as it goes, it would be even greater if this movement was linked to the very exciting currency design movement and the movement to reform the tax system so that taxes come from largely from ground rents. Imagine if they knew that dual currencies can lead to innovation and prosperity if the domestic currency  is designed to decay naturally. Yes imagine them knowing that the design of the currency actually affects whether you think long term or short term. Imagine them realising that it is critical to neutralise those who oppose carbon taxes because they fear job losses and there is finally a way of getting a basic income through rent sharing and this gives them safety from redundancy. Imagine if they asked and really understood what caused the economic growth imperative and how to fix this. Imagine if they realised the political impossibility of centralised solutions to  many issues. But insofar as it goes, it has contributed heaps. And it is very exciting that the critical topic is being discussed – how to design the next economy. This is what the New Economics Movement has been doing now for a considerable time.

Deirdre Kent
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Green Capitalism The God that Failed

Richard Smith, an economic historian, has written an amazing article which I have only just discovered, (thanks to the wonderful people on our Facebook group).

He comprehensively dismisses green capitalism, as recommended by people like Paul Hawken and Amory Lovins. He says green growth is a completely blind alley, a God that failed. You can't shop your way to sustainability.

He describes scary scenarios for a four degrees global warming, notes the lack of progress on reducing emissions over two decades and concludes that there is something wrong with capitalism itself. "From Kyoto to Cancun, governments have all made it abundantly clear that they will not sacrifice growth today to save the planet tomorrow."

Cap and trade usually gets watered down. This is because there is such a huge range of occupations that negatively affected by it that the lobby opposing it is too broad and too powerful. The theory was nice. The cap was supposed to come down over time, but industry lobbyists in Germany badgered the government for higher caps and special exemptions of all sorts. "They warned of unemployment, threatened to pack up and leave Germany and so on.  In the end governments caved." So in the market solution – cap and trade – profits ended up with the polluters and traders.  He says even carbon taxes when implemented can never be set at high enough levels to make a difference. And it makes no difference if it is revenue neutral or not.

Smith writes,"But the problem is not just special interests, lobbyists and corruption. And courageous political leaders could not turn the situation around. Because that's not the problem. The problem is capitalism.....There is no way to cut CO2 emissions by anything like 90 percent without imposing drastic cuts across the board in industrial production. Because we live under capitalism, not socialism, no one is promising new jobs to all those coal miners, oil drillers, gas frackers, power plant operators, farmers and fertilizer manufacturers, loggers and builders, auto builders, truck drivers, airplane builders, airline pilots and crews and countless other occupations whose jobs would be at risk if fossil fuel use were really seriously curtailed."

This book reminded me of Naomi Klein's This Changes Everything in that it clearly states the problem is capitalism.

The article was written two years ago. During the last eighteen months the price of oil has declined 70% and now hundreds of thousands of oil workers have lost their jobs. Soup kitchens in Aberdeen are feeding former oil workers and tens of thousands of jobs continue to be lost in Alberta and North Dakota and Texas alone. In Nigeria 120,000 jobs have been lost. This month the New York Times put the global figure at 250,000 jobs lost. Meanwhile, and connected with this, the global economy is under severe threat of a complete meltdown, and central banks clamber to find yet another way to calm the markets, always by injecting more debt into the system.

So what answers does Smith come up with? He offers eco-socialism. A quick look at their website indicates they would nationalise the fossil fuel industry and the industries that are heavily based on them which means the auto industry, aircraft and airlines, petrochemicals, and so on.

So while it is wonderful to see Richard Smith facing the political realities of climate change, overconsumption, waste and pollution, there is another step or two he could take. He could ask, "And is there something structurally in the system that has demanded this incessant growth? Is growth written into the system? Which system? And if so can that be reformed?" Now Richard Smith may know this. I wonder if he also knows you have to transform the land tenure system if you change the money system, since the first reform demands the second. When you know about the money system you often wish you didn't – that you could put the genie back in the bottle, so to speak. The corporates, as TPP has shown us, are more powerful than ever before in history and that changes the political landscape and our strategies. Few centralised solutions are now politically possible.

In our movement we have been struggling for over four years to work out some politically viable solution to our massive global problems. Maybe nationalising all these industries doesn't get to the bottom of the problem. We need elegant, more lasting solutions.

Anyway his article is superb as far as it goes. He also has a book of that name.
http://www.worldeconomicsassociation.org/downloads/green-capitalism-the-god-that-failed/ is the e-book

And here’s a review of the book: http://www.truth-out.org/opinion/item/31959-book-review-green-capitalism-the-god-that-failed

At last a good explanation for the rise of ISIS

Thank you, thank you Jim Tankersley of the Washington Post. You have finally answered the question about why people from the Middle East feel so bad about the west that they need to commit dastardly acts of terrorism.

I don't have friends who are experts on the Middle East's inequality and Piketty has spelt it out for us so well. Finally!

Your article should be read by everyone. You say the inequality is due to the concentration of oil wealth into a few countries with relatively little population. You draw attention to the oil monarchies controlling 60-70% of the wealth. It seems he is talking about Qatar, the United Arab Emirates, Kuwait, Saudi Arabia, Bahrain and Oman. They had 16% of the region's population in 2012 and almost 60% of its Gross Domestic Product.

Within those monarchies, Piketty says, a small slice or people controls most of the wealth while a large proportion, including women and refugees, are kept in a state of 'semi-slavery'.  Piketty's list starts with the first Gulf War, which resulted in allied forces returning oil 'to the emirs.' The wars that benefited only a select few have become what Piketty calls a 'powder keg for terrorism across the region'.

Tankersley writes 'Terrorism that is rooted in inequality is best fought economically.' Piketty says the region is the most unequal on the planet.

And Piketty says the Western nations largely have themselves to blame for terrorism as the west perpetuated the wars that worsened inequality. 'The countries in question are the regimes that are militarily and politically supported by the Western powers, all too happy to get some crumbs to fund their (soccer) clubs or sell them some weapons.'

It looks like this is what Piketty will be remembered for. The discussion is only just beginning.

Of course this brings us to searching for the real political solution, otherwise terrorism will persist for ever.

I am reminded of the first part of Silvio Gesell's wonderful 1906 book The Natural Economic Order. The part is called Free Land and he writes,' Free Land means that the earth is to be conceived as a globe on which there is no import or export of goods. Hence Free land also implies universal free trade and complete elimination of all tariff boundaries. National boundaries must become simply administrative boundaries, such as, for instance, the boundaries between separate cantons of Switzerland. From this description of Free Land it follows that such expressions as 'English coal, 'German potash', 'American oil and so forth can be understood only in a geographic sense. For everyone, no matter to what race he may belong, has the same right to English coal, German potash and American oil.'

Work this out, using the principle of sharing the rents from the earth's resources. Quite a challenge.

 

The Simplicity Option

“Simplicity is the ultimate sophistication.” – Leonardo da Vinci

Since the industrialization of society over the last two hundred years, humans have physically and mentally remained unchanged. We have, however, surrounded ourselves with accessories, added layers of complexity, and confusion in our lives. This urbanization has reduced humanity’s connection with nature.

Connection to the land and natural environment has been replaced by freeways, cities, concrete landscapes, and technological gadgetry that bring little solace and opportunity for reflection for individuals. Inner peace and happiness can be hard to find in a world of constant diversion and distraction. The ability to witness nature and live in harmony with the natural cycles provides unquantifiable experiences for those living a resilient life.

The 2010 Living Planet Report, based on the scientific research of the Global Footprint Network, reports humanity’s ecological footprint now exceeds the planet’s sustainable carrying capacity by 50 percent. In other words, human beings are now consuming ‘natural capital,’ which is diminishing the capacity of the planet to support life into the future. The propaganda and ideology that many economists, governments, and business people have been espousing in an effort to continue exploitation of resources is that developing countries can have similar standards of living to those in the West. The reality is that the West has been exploiting developing countries’ resources to fund our resource intensive lifestyles for many decades.

Think about this for a second. If the expected 9 billion people were to enjoy the “living standards” forecast for Western countries such as Australia, Canada, U.S., U.K, or Europe by 2050 (assuming 3% yearly economic growth), the world’s total consumption would be about 30 times as much as it is now. That would mean 30 times greater use of land, soils, trees, forests, minerals, fishing, energy, etc… With already stretched and depleted natural resources and ecosystems, this scenario would most likely end in ecological catastrophe.

Dr. Ted Trainer, senior Lecturer in the School of Social Sciences at the University of New South Wales in Australia, has been teaching about sustainability for many decades. He suggests:
It is difficult to see how anyone aware of these basic numbers could avoid accepting that people in developed countries should be trying to move to far simpler and less resource-intensive lifestyles and economies. The decreases might have to be around 90% – something that can only be achieved through dramatic reductions in production, consumption, and economic activity. To transition to a low energy society which resembles our current high energy model will be a significant challenge and highly unlikely. The enormity of the transition to alternative fuels and/or technologies will require a coordinated approach on an unprecedented scale. It would require vast amounts of resources and capital investment. (1)

Enter Voluntary Simplicity

As reported in the Melbourne Age, a growing number of people in the “voluntary simplicity” movement are choosing to reduce and restrain their consumption – not out of sacrifice or deprivation, but in order to be free, happy, and fulfilled in a way that consumer culture rarely permits. By limiting their working hours, spending their money frugally and conscientiously, growing their own vegetables, sharing skills and assets, riding bikes, rejecting high-fashion, and generally celebrating life outside the shopping mall, these people are new pioneers transitioning to a form of life beyond consumer culture. (2)

An Institute For Simplicity

There is even an Institute for Simplicity. The Simplicity Institute is an education and research centre seeking to:
  • seed a revolution in consciousness that highlights the urgent need to move beyond growth-orientated, consumerist forms of life.
  • envision and defend a ‘simpler way’ of life at a time when the old myths of progress, techno-optimism, and affluence are failing us.
  • transform the overlapping crises of civilisation into opportunities for ‘prosperous descent’

Goals of the Simplicity Institute

“To change something, build a new model that makes the existing model obsolete.” – Buckminster Fuller
SAMSUNG CAMERA PICTURESThe global economy is undermining the ecological foundations of life, producing perverse inequalities of wealth and spreading a cultural malaise as ever-more people discover that consumerism cannot satisfy the human craving for meaning. While industrial civilization continues this inevitable descent, humankind is being challenged to reimagine the good life, tell new stories of prosperity, and get to work envisioning and building a new world within the shell of the old. Genuine progress towards a just and sustainable world requires those who are over-consuming to move to far more materially ‘simple’ and less energy-intensive ways of living. This does not mean deprivation or hardship. It means focusing on what issufficient to live well, and creating new cultures of consumption, new systems of production, and new governance structures that promote a simpler way of life. Our basic needs can be met in highly localized and low-impact ways, while maintaining a high quality of life. The Simplicity Institute seeks to provoke a broader social conversation about the need to transition away from growth-based, consumer societies toward more resilient, egalitarian, and rewarding societies based on material sufficiency and renewable energy. Rethinking growth, capitalism, and consumerism in an age of environmental limits and economic instability cannot be avoided. The only question is whether it will be by design or disaster. (3)

To find out more about the Simplicity Institute CLICK HERE

  Article by Andrew Martin, author of  Rethink…Your world, Your future. and One ~ A Survival Guide for the Future…  RethinkcoverCE2Sources: excerpts from Rethink…Your world, Your future.  facebook (1) http://theconversation.com/the-simple-life-manifesto-and-how-it-could-save-us-33081 (2) http://www.theage.com.au/it-pro/the-simple-life-has-benefits-for-us-all-20120315-1v6f7.html#ixzz3jmqytmtA (3) http://simplicityinstitute.org/

Bubble finance, junk energy bonds, oil derivatives being neglected by mainstream media

Those who still think the plummeting price of oil is a good thing for the economy are taken in by PR spin or the simple lack of coverage in the mainstream media. It is not about consumers having lower petrol prices and more in their pocket. It’s not even about the energy. It’s about the money, the financial structure of the oil industry, particularly for the wildly speculative ventures like shale oil extraction. Environmentalists will see low oil prices as bad news for climate change but they need also to look at the way these energy shale firms are financed and learn about things they don’t want to know about, like junk bonds, leveraged loans and derivatives. It causes more immediate pain and must be survived first.

WTI to 12 Dec 2014The relentless slide continues. As of Monday 15 December in New Zealand the price of WTI oil was $56.73, down over 47% since June this year.

Unfortunately in New Zealand we are being shielded from all this bad news. Bubble finance is not a sexy topic for a front page. During the last week the Dominion Post, national radio, Sunday Star Times had nothing, and a business programme on Radio Live on Sunday touched on everything but the junk energy bond issue or the derivative issue. The programme gave the impression the only place to invest was in shares, bonds or fixed interest. When the derivatives market is so enormous, this is a major omission. It’s not as though the media believe the public won’t be able to understand junk energy bonds or derivatives. The corporate owned media only gives us bad news when it is about crime.

OK let’s try and explain it.

There are four major risks of plummeting oil prices
. The first is the risk to junk energy bonds held by pension funds, mutual funds and governments. Second is the secondary oil market, including the risk associated with a variety of oil derivatives contracts held by big banks. The third is the social unrest in oil exporting countries like Venezuela, Russia. And a fourth is the ongoing and contagious decline in prices of a range of other commodities – iron ore, copper, milk powder. Let’s just deal with the first two, though the fourth one is dealt with in passing.

1. Junk energy bonds. What on earth are these, you might ask. They are the risky bonds that energy companies sell to help finance their operations. The bonds give you high returns but they are also high risk as they are unsecured loans. That risk-taking now comes home to roost. For a new venture now the bank will lend you less because the oil in the ground as their security is now worth less. In December 2014 the oil is worth only about half what it was six months ago. So you have to get more of your funding from junk bonds. You end up shelling out more in interest and what’s more you get less in revenue from the sale of your oil.

Michael Snyder says “The impact of lower oil prices has been felt directly by high yield energy bonds and since September they have posted a return of -11.2%. J P Morgan has warned that if oil prices stay at $60 a barrel for three years 40% of the junk bonds could be facing a default.”

Of course other companies finance themselves using junk bonds (as well as bank loans at a low interest rate and their own revenue stream). The energy sector accounts for over 17% of the high yield bond market (junk bonds) and when these are hammered apparently a stock market decline always follows. It’s not a small sector either. Analyst Wolf Richter says there are $210 billion of them.

So they have to sell more bonds. Unfortunately now fewer investors want to buy the risky bonds so that means the yields go up to make it more tempting for investors. As the debt markets dry up and profits fall due to cheaper oil, the funding gap widens.

It was all beautifully explained in October 2014 when oil prices were $85/barrel here

Who loses from this? The investors. And those employed in the oil industry as smaller or more indebted firms are less viable than others. And that is just the start.

But it isn’t only junk energy bonds being affected now. As the Financial Times told us on December 12,
“Investors are fleeing the US junk debt market as a selloff that started in low-rated energy bonds last month has now spread to the broad corporate debt market amid fears of a spike in default rates.” Woops, that wasn’t meant to happen.

2 Oil derivatives. Like other industries over the last few decades of financial wizardry, the oil industry has been financialised.

Remember when housing debt was bundled up by the banks, securitised, divided into tranches according to risk, and sold off? It was to increase the profits of the banks. You just pass the risk on. The bonds are sold to unwary buyers who don’t realise the risk for massive losses. The whole process was enabled by rating agencies who rated junk bonds (the risky ones have high returns) as A++. A great movie explaining all this was The Inside Job.

Now we have version 2 of the same script. Instead of CDOs (Consolidated Debt Obligations) we have got CLOs (Consolidated Loan Obligations) – just a different name this time. It’s what is called ‘leveraged loans.’

The 6 largest ‘too big to fail’ banks control $3.9 trillion in commodity derivatives contracts. A large portion of this is in energy. And the big banks of the world are on the other end of derivative contracts.

One of the headlines of a tweet going round is “Plummeting Oil Prices Could Destroy The Banks That Are Holding Trillions In Commodity Derivatives”

There is nowhere to hide. As the entire global economy is dependent on the six biggest banks, we will all be affected, even in New Zealand.

The Oil Industry is not just any old industry
Writing on Zero Hedge in October when oil was $75/barrel, Michael Snyder explains the huge investment of the energy industry in both capital expenditure and R&D.

He quotes the Perryman group on the economic effects of the oil industry in US alone:
If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

The combination of junk bonds and financialisation
Putting these two first effects together, former Reagan budget chief David Stockman, in an analysis on his "ContraCorner" website Dec. 9, wrote: “The now-shaking high-yield debt bubble in energy is $500 billion — $300 billion in leveraged loans and $200 billion in junk bonds. This is the same estimate EIR has made in recent briefings, of one-quarter of the $2 trillion high-yield market being junk energy debt. In that junk energy debt market, interest rates have suddenly leaped, in the past 45 days, from about 4% higher than "investment grade" bonds, to 10% higher; that is, credit in that sector has disappeared, triggering the start of defaults of the highly leveraged shale companies and their big-oil sponsors.”

“In the larger, $2 trillion high-yield debt market as a whole, interest rates have also risen sharply, so far by 2-2.5%: i.e., contagion. Whether the debt collapse will be "mini", or maximum, may be determined in the markets for $20 trillion in commodity derivatives exposure.

“So now we come to the current screaming evidence of bubble finance—–the fact that upwards of $500 billion of junk bonds ($200B) and leveraged loans ($300 B) have surged into the US energy sector over the past decades—–and much of it into the shale oil and gas patch.

“An honest free market would have never delivered up even $50 billion wildly speculative ventures like shale oil extraction million of leveraged capital—let alone $500 billion— at less than 400bps over risk-free treasuries to.”

The simple fact is low oil prices kill millions of jobs. Falling oil prices are dangerous. While readers of mainstream media, listeners to radio and watchers of television remain in blissful ignorance of the nightmares that fund managers are living through, they will celebrate Christmas as though nothing had happened – and then ask later why nobody warned them.

The first Global Financial Crisis came on us with little apparent warning. The Queen was famously known to ask “ Why did nobody see this coming?”

For the last five years since QE, energy companies have received super cheap financing. Quantitative easing, where the Fed created trillions of dollars for banks, was a gift to the capital-intensive energy industry. Moreover job creation has been huge. Bloomberg reports Employment in support services for oil and gas operations has surged 70 percent since the U.S. expansion began in June 2009, while oil and gas extraction payrolls have climbed 34 percent.

It doesn’t matter whether the trigger for this fall was OPEC punishing the shale industry, falling demand in China, the end of QE or what it was. It was going to happen anyway and the trigger might have been anything. The whole pack of cards simply has to tumble. It’s a cauldron of death brought to the boil.

But many have seen it coming – Nicole Foss and Raul Ilargi Meijer of The Automatic Earth, Michael Snyder, Gail Tverberg, Jesse Colombo, Wolf Richter, Yves Smith are a few names that spring to mind. It’s just that haven’t been listened to yet. Whether is it the Tulip Bubble, the South Sea Bubble or the housing bubble of 2007, bubbles have a nasty habit of bursting.