The Crash Course: The Unsustainable Future of Our Economy, Energy, and Environment (34 page)

Any one of these events will prove to be a difficult strain on our national economy, but what happens if two of them arrive simultaneously? What about three? It’s not hard to appreciate that potentially enormous risks lie along this timeline.

Each of these key trends or threats will take years, if not decades, of careful planning and adjustment to mitigate. And yet we find them all parked smack in front of us, without any serious national discussions or planning, as if they weren’t even there. With every passing day, we squander precious time while the problems grow larger and more costly to remedy, if not becoming thoroughly intractable. The mark of a mature adult is someone who can manage complexity and plan ahead. In my opinion, with few exceptions, the current political and corporate leadership of this country is neither managing nor planning well. That needs to change, and soon. It’s time to return to the habit of living within our natural and economic means. We need to set priorities, set a budget, and stick to both.

This Time
Is
Different

I can hear the critics now:
Doomsayers have been predicting the end of the world since the beginning of time, and the doom has never happened.
Or perhaps,
What’s the difference between the story that you have laid out and the one that Thomas Malthus expounded upon back in the late 1700s?
¹
For starters, we have access to a lot more data than Malthus could ever dream of. Where he had access to a limited number of physical books to refer to, we can happily web-surf and spreadsheet our way through more energy data in day than Malthus could manage in a lifetime.

Second, in Malthus’s time, the laws of thermodynamics were incomplete and rudimentary, and something we take for granted, the germ theory, had to wait another 90 years to be fully accepted. Hopefully it’s not too much of a stretch to suggest that we’ve progressed in our understandings of things somewhat since Malthus’s time, and our circumstances are quite different from those in 1798.

Lastly, I am not predicting doom, only massive change. Whether someone interprets that as a crisis or an opportunity has nothing to do with facts and data, but psychology. Both of the listed objections fall under the same logical fallacy (inductive): “Because “A” hasn’t happened before, “A” can’t (or won’t) happen in the future.”

What truly is different this time is that collectively, as a species, we have never before faced declining energy flows. Never. So we’re about to enter completely uncharted waters. All we have are snippets and fragments from history to suggest what happens to localized cultures that run low on food or fuel, but these are poor analogues to our own globalized, just-in-time, highly complex, multibillion-person system of economic organization and delivery.

As we squint into the next few decades and ponder the numerous challenges converging on a very narrow strip of time, we would do well to consider the risks and question just what might happen if they converge to form the economic equivalent of a rogue wave.

¹
In 1798, Thomas Malthus postulated that the human population’s geometric growth would at some point exceed the arithmetic returns of the earth, principally in the arena of food. To paraphrase, he recognized that the exponential growth of human numbers would meet with the constraints imposed by a finite world. Because this has not yet happened, some have claimed perpetual victory over the entire concept of limits. It should be noted that Thomas Malthus had no way of knowing that oil and coal would dominate the energy landscape for the next 200-plus years.

CHAPTER 24

Closing the Book on Growth

Exponential economic growth is in its final throes. The only question is whether we recognize this early, on our own terms, or later, as a consequence of a series of final and regrettable collapses that will result in enormous suffering to humans and ecosystems.

The economic predicament as I’ve laid it out goes like this:

The only sure conclusion from this line of thinking is that someday our current model of economic growth will end and something new will take its place. It’s only a question of when. Of course, any child could tell you that nothing can keep growing forever, and we’ve always known somewhere, perhaps deep down, that our current model was unsustainable. The end of the growth paradigm is now making its presence felt as the world economy and financial systems lurch from rock to rock, seemingly immune from the magic money incantations and spending potions that have always worked in the past. The predicament of stagnant economic growth resulting in financial chaos can only be “solved” by increasing the flow rate of energy (and other resources) through our economy. It cannot be solved by pouring more money into a congealing economic cauldron.

What happens when an economy that
must
grow is being fueled by an energy source that
cannot
grow? My prediction has always been that the economy would begin to wobble and collapse, debts would prove to be unserviceable in total and begin to default, and monetary policy would lose traction and cease to be effective, as it is finally revealed that money is merely a tertiary abstraction that gets its meaning from real forms of wealth. My secondary prediction has always been that the monetary and fiscal authorities would attempt to solve this predicament by printing money out of thin air and spending wildly in an attempt to keep things moving along.

This isn’t an indictment of capitalism or any particular “–ism” at all. I’m an equal-opportunity critic who places under indictment any particular “–ism” that seeks perpetual growth. Ditto for any political party, religion, economic model, or any other social organizing structure that seeks endless growth in any form. It really does not matter to me in the slightest whether someone calls their perpetual growth paradigm Marxism or Capitalism or Socialism or whether they hail from a country that is located south of the equator or north of it. Perpetual growth of resource consumption is mathematically impossible. Sooner or later the growth must stop; the only unknowns are when and under what terms.

I focus on the economy because this is where the most immediate impacts to our daily lives will surface, but the warning signs have been available for some time to those in the fields of mining, petroleum engineering, oceanology, ecology, farming, climatology, fishing, and every other specialty that taps into or studies the earth—our primary source of wealth. If you care about your future prosperity and access to wealth, then an initial focus on the economy is the right place to start.

And so on. The point here isn’t to be alarmist over the fate of the planet and its species (there are plenty of more rigorous books in which that can be addressed), but merely to illustrate that signs abound, for anyone who cares to look, that the age of growth is drawing to a close. We’re not closing it by ourselves on our own terms; nature is doing it for us, which is somewhat concerning because nature doesn’t do bailouts.

As we scan these lists, my hope is that reasonable and prudent people will arrive at the conclusion that our current economic approach to the world and trends in our use of resources are unsustainable, and that something should be done. Given the scope and enormity of the implied challenges and the speed with which they appear to be arriving, the sooner actions are taken, the better. Again, my purpose here is not to sow fear or breed depression; it’s quite the opposite—to nudge you awake and prompt you toward individual and collective actions.

Your first challenge, then, is to accept the implications of the data that I’ve presented—that hard, physical limits aren’t some vague condition of the far-off future; they are concrete and immediate concerns. The story that many take for granted is drawing to a close, and a new one is beginning. There may be some hard times along the way as we adjust. Perhaps not everyone will successfully make the transition. But I know deep down that we can live within our means and create any sort of a future that we desire—except, of course, one that looks exactly like the past 20 years.

It’s time to close the book on growth and open a new chapter.

CHAPTER 25

Future Scenarios

By now your head may be spinning. You’ve absorbed a lot of information in the prior pages. Perhaps you can feel the first edges of the three Es touching, but they haven’t yet knit together in your thoughts. It has taken me years to deepen and hone my appreciation for this material. It’s weighty, but it’s also of utmost importance.
How do we take that next step and integrate this material into our thoughts, minds, and hearts so that we can take effective actions to change ourselves willingly, before outside factors force change upon us?

Scenario 1: A Slow Tumble

It is October of 2014, and the U.S. and European economic leaders are meeting for the second time in six months for another summit on how to combat the persistent economic weakness that has stumped and embarrassed central bankers and politicians alike. Unemployment has remained stubbornly high—well over 10 percent in both economic arenas—and successive rounds of stimulus, both monetary and fiscal, have perplexingly failed to have any lasting impact on either employment or final demand.

Factions and rifts are starting to develop within and across the various political and ideological camps. Nerves are fraying. One school of thought, led by the U.S. central bank, believes that debt overhanging the markets is to blame, and wants to remove the debt by purchasing even more debt off the open markets. The theory is that with cash instead of debt, the financial centers will push the funds into the economy, which will then sputter back to life.

On the other side is a group that has grown weary of trying the same thing, but with increasingly bigger and bolder steps, without success. They quietly observe that the definition of insanity is trying the same thing over and over while expecting a different result each time. They also note with growing alarm that debt levels are now well past levels that have historically ever been paid back.

For their part, the markets, especially the bond markets, have become impatient and are showing signs of severe strain, with aggressive sell-offs and rallies beginning to resemble the violent lurching of a fast-moving car that has just lost its grip on a wet road. The whipsaws take out a couple of sizable hedge funds, creating new opportunities for the central banks to ride to the rescue and bail out the broken bets of the well-monied risk players. Public opinion of such bailouts is at an all-time low, so these interventions are now carried out in as much secrecy as possible.

The data the summit participants have before them is truly puzzling. Asia, especially China, is still enjoying economic growth, whereas the developed world is mired and sinking. Some point out that China isn’t burdened with the same debt loads as the developed world, assuming, therefore, that this must be the root of the problem. Others note that China produces actual
things
, while the developed world has become overly dependent on financial
services
that produce wealth by virtue of their ability to shuffle paper back and forth, so perhaps the problem is fundamentally one of production. Still others note that a command economy like China’s might have some advantages after all.

On day two of the meeting, an energy analyst responsible for one small piece of the data landscape quickly recounts her part to the assembled teams: Global oil production, while down from last year, is still sufficient to supply the markets, because the developed world is using less oil as it sorts through its economic troubles. China continues to import more coal and now accounts for 55 percent of world consumption of this resource, which, again, isn’t an issue at present for the developed economies because their own demand is down. Because there are no major issues over energy supplies at present, the participants quickly turn their attention back to the pressing matter of jump-starting the economies of the developed world.

Ideas are bandied about, but finally, inevitably, the decision is made: They must be bolder than before—a true crisis calls for true leadership. It’s time to double down on the amount of thin-air money that is printed up and distributed into the economy through a complicated variety of quantitative easing efforts and governmental fiscal stimulus.

The markets go wild—for a while. In nine months, the efforts wear off, the economy resumes shrinking, and yet China continues to consume more and more energy. The developed world remains stuck in an economic rut, puzzled as to why fiscal and monetary policy no longer seem to be working. They decide, boldly, that next time they’ll have to pull much more aggressively on the fiscal and monetary levers than ever before, because the problem must certainly be one of insufficient quantity. They soon do this in marvelously coordinated fashion, with every media outlet faithfully repeating the prepared talking points, but once again, the results prove to be disappointing.

All are stumped, all are mystified; the tried-and-true theories have failed again. More money, more liquidity, more spending . . . but it has not worked this time as it has in the past. What could be the problem?

Unemployment continues to climb. Individual U.S. states are nearly fully insolvent, due to a combination of excessive pension promises that are now coming due and falling state revenues. Whole industries, especially in the discretionary sectors, fare especially poorly, even as basic goods and services manage to neither grow nor shrink. It’s almost as if the simpler industries are somehow more robust than the complicated ones. Along the way, there are numerous false rallies and signs of economic life, which give hope but soon wither.

Finding the true bottom takes 15 long years. When the bottom finally arrives, the economies of the developed world have been reduced by anywhere from 20 percent to 50 percent, government budgets are finally reduced to bring them in line with the actual pace of economic activity, and the citizens of the developed world look back on this period as the Great Destruction. Stock markets in the developed world, which have been trading as if they were a single market for the past 10 years and sharing the ups and downs without any distinction between them, finally separate and begin trading somewhat independently, reflecting the prospects of each country more accurately. The most heavily indebted countries, those that lived most fully beyond their means for the longest, suffer the greatest corrections in their domestic stock markets.

Maddeningly, not every country participates in the despair, with some, particularly energy-rich Brazil and the commodity-exporting nations of Australia and Canada, performing significantly better in a relative sense, although Canada does have to expend considerable resources in tightening up its long border against economic refugees from the south, which drags down its overall performance.

Throughout the Great Destruction, uncertainty and fear continue to rule.
Will the financial system suffer a systemic collapse? Which governments will mindlessly print, and which will face the music? Where is the risk, and where are the safe harbors (if any)? How will $600 trillion in notional value derivatives be settled? Are capital controls about to be imposed by any country? Will war break out?
The rumors swirl, uncertainty builds, nerves fray, and fear settles like a thick mat of thorns across the land. Gold emerges as the best-performing asset during these times.

Throughout the entire period, oil remains firmly bid and even creeps up, as exploding demand from China and India more than consumes the surplus left by retreating demand in the West. The elevated price somewhat bolsters exploration and development activities, but liquidity and credit problems in the developed world prove to be like sand in the gearbox, preventing these activities from progressing to their full potential. Accordingly, oil supplies remain tighter than they otherwise might, and this proves sufficient to maintain a firm price floor on oil in particular and energy in general.

The basic pattern, so easy for some to see, eludes detection by the monetary authorities in the OECD central banks, whose training does not extend to fields of energy or basic science. Those countries with increasing flows of energy are doing well, while those with decreasing flows are struggling. It takes another decade for this idea to rise up high enough that it can find a seat at the polished mahogany table at the center of the 2024 meeting.

Scenario 2—Peak Oil Recognition and a Hard Landing

While structural debt problems persist throughout 2010 and 2011, they prove to be less of a threat than initially feared. Quantitative easing by various central banks, along with government stimulus spending, apparently does the trick to stave off fiscal woes, and the developed economies lurch to life and eventually begin to trot.

Markets rebound, global trade picks up momentum, elections continue to reward incumbents, the FIRE sector (Finance, Insurance, Real Estate) returns to its former glory days by dominating corporate earnings with 40 percent of the entire take, and people everywhere breathe a sigh of relief. (“Whew! The emergency is over!”) Everyone hurries back to business as usual.

Oil use ticks up by 1.6 million barrels of additional consumption in 2011 over 2010, taking the total to 87.6 million barrels per day, which is easily met by the oil producers. However, in 2012, the trend takes total consumption to 89.2 million barrels per day, requiring that new production records be set. Unfortunately, these new demands can’t be met.

Production difficulties, notably in Mexico and Saudi Arabia, combine with rising domestic demand to squeeze exports. Despite official pronouncements that supply issues are only temporary, oil traders and other astute insiders seem troubled by the fact that, for a variety of reasons, less oil seems to be making it to market than in prior years. These glitches, although constantly spun by the U.S. Department of Energy as temporary, are sufficient to drive oil well beyond $147/barrel, the previous record.

A combination of rising internal demand in several key oil-exporting nations and the decision by some countries to export less of their oil (as they prefer to hold it in reserve for future generations) leads to a far more rapid drop-off in the total amount of oil available for purchase on the global markets than most analysts expected. Compounding the predicament, the lighter and sweeter grades of oil are preferentially withheld, forcing a glut of heavier and less desirable grades on the world market. Tuned for the sweeter grades, refineries are unable, and in many cases unwilling, to invest in the expensive retrofits required to process the heavier grades of oil, leading to the widest-ever spreads recorded between the prices for sweet versus sour grades.

Already on edge over the highly volatile and uncertain oil prices, the world is shocked when, in February 2012, the energy minister for Germany announces during an interview on the BBC that Peak Oil is real and that Germany has been quietly preparing for its eventual emergence on the world stage through a combination of efficiency measures, transportation strategies, and industrial realignments. Internal documents detailing German responses to Peak Oil surface from multiple branches of the German government, ranging from the military to the interior ministry. Peak Oil shifts from an eventual worry to a present reality seemingly overnight.