A letter to my family on peak oil and the global economy

Tim turned 16 the other day. By the time Tim is 30 the world will be producing only half the oil it is producing now and when he is 40 it will be producing less than a third.

Since I found out about peak oil in 2004 I have bothered you with my dire predictions. I know we got the timing wrong, and I know we have subsequently found shale oil and the global economy has continued on a business as usual path. You think I was wrong, do you?

Well here we are at 2017 and the article I have just read several times explains why the timing was wrong. We didn’t allow for fracking and we didn’t factor in the financing of oil. But now we are stuck. You tell me where the Nafeez Ahmed article falters. He quotes from an HSBC report and that is the sixth to biggest bank in the world. The HSBC article quotes from the International Energy Agency and from a Swedish University’s energy programme. Ahmed quotes further from a recent Cornell University paper which in turn quotes a paper from the Italy’s premier agency for government research.

I know very few of you will want to read the Ahmed paper. After all it is holiday season and we all have books to read, swimming to enjoy, bike rides and tramps to accomplish and screens to attend to.

So let me summarise this paper a little, adding an odd bit for explanatory reasons:

Conventional oil peaked in 2005. Unconventional oil (shale oil, deep sea oil) peaked in March 2015. Oil is the most dense energy form human beings have ever found and nothing has yet replaced it. Consequently it is closely correlated with economic growth and population growth. The current economic system requires constant economic growth. Oil has fuelled the growth in global wealth.

Ten years ago some of you replied, “Don’t worry, we will find something”. Oh yes we found fracking, and China went back to coal. But we also had already found debt instruments. If you don’t understand what these are you are in good company. Not even the heads of hedge funds or big banks know what strange derivatives (bets) are being invented by their traders sometimes. Ahmed says simply “the world is borrowing from the future to sustain our present consumption levels”. I know the shale oil companies were largely funded not from banks but from selling bonds. Ordinary people bought company bonds and got paid very high interest rates. The interest rates have risen so high that many shale companies are going broke paying them.

As oil exploration is yielding fewer and smaller fields and the oil is getting deeper and more expensive to extract, the oil companies abandon uneconomic fields. This happened around New Zealand and we attributed it largely to the actions of Greenpeace. But it was more than that. It costs them too much to extract it. Oil prices have recently climbed to just over $50 a barrel and companies need about $60 to break even. So they borrow. The trouble is this debt doesn’t produce real wealth.

Remember back in 2008 just before the Global Financial Crisis we had soaring oil prices? Oil went to $150 a barrel. Since nearly all goods are transported and the transport cost went up there was less money left for the rest of the economy. So we had a huge recession. So if oil prices are too high we get a recessionary effect that destabilises the global debt bubble. That debt is now higher than the pre-2008 crisis. If oil prices are too low we get too much debt which brings with it huge bank risks.

The economy can’t grow without oil. So we are stuck. The article says “the economy can quite literally never recover unless it transitions to a truly viable new energy source which can substitute for oil.”

Ahmed won’t of course have read my essay that I just submitted to the Next System Project essay competition where I propose an entirely new way of constructing a political economy so that we are not dependent on oil or on money as debt. (More of this later, I have just entered it into their international competition)

Ahmed says that because on 1 Jan 2018 there are new regulations coming into force in the finance industry, there will be a massive collapse shortly after that. He called it in 2008 and he is calling it now.

So while you are reading soothing headlines about how the economy is ‘in recovery’ or angsting over Donald Trump’s appointment of Exxon Mobil chief as Secretary of State or yet another climate change denier to a key position, think about your preparation for next year. The economy can't recover, given its present structure and its geophysical limitations. Where will you get your food? Cash? Petrol? Will your local authority be able to maintain a good supply of drinkable water or a sewerage system if they are in increasing debt? What about power?

Now there will be those who say this is wonderful for climate change. Yes it may be the only thing that makes our planet habitable. But it is an awful way for billions of us to learn. Actually the people who will be best off will be those who are already scraping a subsistence living. But that is another matter.

If only half the today’s global oil supply is available to Tim when he is 30, what is the future for your grandchildren? Or your old age? Can you devote an hour of your precious time to getting a handle on the reality of all this? We are so privileged in New Zealand and have had it so good for so long. I have missed out on a share price boom I know. Yes I got the timing wrong. Yes I have been a doomster. But please think for yourself now. You are educated, you probably have unlimited data for your computer, use it. Plan now for a massive, tightly interconnected, global financial collapse now. You might have a year.

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.


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'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.

Official report on Oil Prices and Transport Sector Resilience suppressed by Brownlee and Joyce

Yes we have had an official Government report called Oil Prices and Transport Sector Resilience in Nov 2009. This unsigned report had to be ferreted out by the wonderful Thames-based Dennis Tegg, who blogs so responsibly on the topic of peak oil. http://oilshockhorrorprobe.blogspot.co.nz/2011/08/new-zealand-at-greater-risk-from-oil.html. Our unique vulnerability on many fronts is described in the report. Gerry Brownlee and Steven Joyce apparently don't believe an informed public is going to be useful for their oil friendly and lignite friendly agendas! The road transport lobby is no doubt also doing some effective lobbying to bend their ears. There is another report, the one written by Clint Smith for the Parliamentary Library in Oct 2010. http://www.parliament.nz/en-NZ/ParlSupport/ResearchPapers/4/6/a/00PLEco10041-The-next-oil-shock.htm and to date is still on their website. It is excellent. And of course there is a report commissioned by NZ Transport Authority from 2008 which was never given much airtime. It was 148 pages long. And during January Australia suppressed its long and comprehensive report on peak oil too. The Minister of Defence is also turning a deaf ear to military reports overseas and neglecting to commission a report for our country's security. Like the others he has his head firmly in the sand. When a US CNA Military Advisory Board Report on peak oil came out last year, calling for a 30 percent reduction in US oil use over ten years to reduce "grave national security risks",  I wrote to our Minister of Defence, Wayne Mapp, to find out whether he had seen it and asking under the Official Information Act for copies of all reports on oil, and the implications for security that he had received. He replied that he hadn't. No wonder we have seen all this rush for deep sea oil exploration and lignite production in Southland. Tag Oil in early January spoke of the potential to build thousands of oil wells in the largely untouched region of New Zealand, and said that New Zealand could become the Texas of the South. This was repeated by MPs and Ministers. The dangerous and resource intensive practice of fracking continues. So widespread is the local concern, even the Christchurch City Council has asked for a moratorium on fracking.