The Crash Course: The Unsustainable Future of Our Economy, Energy, and Environment (35 page)

Within a few weeks, a number of countries announce that they are no longer exporting their oil and that they have nationalized the resource to preserve it for future generations. Chaos erupts in the oil markets. Oil prices shoot up to previously unimaginable heights. First $200 per barrel, then $300. People keep thinking,
It can’t go any higher; it’s not worth it
. . . but it turns out that oil is, indeed, “worth” a lot more than that. And so it goes higher, to $300 and then $400, in fits and starts, sometimes gaining or losing as much as $10 a barrel in a single tick of the trading tape. Volatility reigns.

Fuel rationing quickly occurs in the most dependent of importing countries, including the United States, Japan, and much of Europe. Fuel triage plans already in place
¹
call for the military, food suppliers, and emergency services to get first dibs; mass transit is next in line. Hapless automobile commuters find themselves second-from-dead-last on the priority list, just barely edging out recreational users. Unable to get to work on their individual fuel allotment, many turn to carpooling, while others, especially in the United States, discover just how little spare capacity exists in the mass transit system. Embarrassed city and regional planners and administrations promise rapid enhancements to the mass transit system and are shocked when the bus and train car suppliers inform them of already-existing multiyear waiting lists.

The worst impacts result from fuel shortages wreaking havoc on finely tuned just-in-time delivery systems for all sorts of industries and sectors. Spot shortages erupt in numerous supply chains, leading to a variety of unpredictable delays in an enormously wide range of services and products. Grape growers in Chile find themselves with mountains of unsellable product, computer manufacturers can only run their assembly lines for brief periods when key components finally show up, airlines cancel flights headed to airports that cannot guarantee fuel service on a plane-by-plane basis. Systems that were highly cost-effective are suddenly exposed to be lacking the necessary inventory buffers to smooth over initial glitches in product supplies. Faced with shortages, companies in nearly every industry attempt to build their individual inventories to create a buffer for their operations, but discover massive shortages everywhere they turn. The highly cost-effective lean-inventory practices of the 1990s and 2000s turn out to be enormously brittle constructs, unable to meet even minor surges in demand with any sort of grace, let alone the massive surge in inventory demand now being felt.

The world has never before faced such a profound shock to its critical infrastructure. Economic growth is no longer possible, at least not in the old style, and it slowly dawns on the capital markets that growth might never be coming back. The entire future has to be repriced, leading to massive losses in the stock indexes and in long-dated bond funds as growth premiums are stripped out of their valuations. In response to concerns that whole portions of the debt markets might enter default, interest rates shoot up, crushing the economic recovery and leading to an immediate debt spiral that results in a fiscal crisis of unimaginable proportions in the United States, Japan, and other oil-dependent, developed economies that entered this period bearing massive official debt structures.

Perversely, many so-called undeveloped economies fare far better, as they are already less dependent on oil for their day-to-day functioning and have lower debt loads. Having experienced development late in the global game, they benefit from the twin advantages of modern systems built primarily around the latest, most fuel-efficient technologies and a populace with low expectations for energy usage, resulting in a far lower per-capita energy dependency.

To deal with the sudden needs of a collapsing fiscal situation that results from mounting interest-rate costs, along with the need for more and more export dollars to compete for what oil remained on the world spot markets, the United States and Japan resort to even more outright printing of money beginning in 2013. The Fed’s balance sheet swells with new acquisitions, while Europe, still fearing the inflationary demons of its past, remains far more restrained in this regard. Europe’s per-capita energy-use profile, measuring just half that of the United States at the start of this crisis, proves to be an enormous advantage.

Japan fares even worse. Importing 99 percent of its petroleum needs, saddled with more official debt than any other nation, and strained by severe demographic realities, two decades of profligate yen printing boomerang with a vengeance. The persistent efforts by Japanese authorities to debase their currency suddenly and unexpectedly bear fruit that rots before it can be savored. The yen plummets, as no one has any use for hundreds of trillions of yen from an export-dependent island nation that now lacks the fuel needed to manufacture and export a surplus of products. Japan’s internal production and consumption collapse alongside the yen. Many there look wistfully back on “the lost decade,” recalling better times.

Throughout 2012 and 2013, gold soars as systemic financial instability strikes fear into the hearts of investors and wealthy individuals. Various sovereign nations attempt to print their way out of their economic difficulties. Faith in all things paper is lost to varying degrees; nobody knows where the risks lie, which claims will be honored, or what to do. The U.S. markets, long thought to be the deepest and most trustworthy in the world, suffer a mortal blow: A number of legitimate trades that were dangerous to the financial health of a major, well-connected bank were unilaterally reversed by the stock exchanges with the blessing of the SEC, to the benefit of the bank but the detriment of all the parties on the other side of the trade. While an expedient move at the time, the long-term damage is 100 times larger; capital begins to flee U.S. borders, necessitating capital controls from which the U.S. financial markets never truly recover.

In 2014, interest rates are finally hiked in efforts to defend the dollar, but it is too little, too late. What follows next in 2015 shocks the world to its financial core: Faith in the U.S. dollar, having dwindled to the point that it is no longer revered as a store of wealth, loses its reserve currency status
²
in March of that year. The U.S. government is suddenly forced to issue new debt denominated in a basket of currencies that doesn’t include the dollar, consisting instead of the Chinese renminbi; Brazilian real; euro; and Canadian, New Zealand, and Australian dollars. Forced to denominate its debts in foreign currencies, the United States must reduce its trade deficit to zero almost immediately. U.S. citizens rapidly discover the dramatic difference between living above your means and living within your means. Domestic production must now exceed domestic consumption—an enormous swing in the fortunes of a people long accustomed to the opposite arrangement.

U.S. federal and state government budgets are finally slashed, leading to profound but necessary economic pain. Other world governments follow suit. At the first signs of this shift toward financial prudence, some investors who previously invested in gold begin transitioning away from the yellow metal and back into productive enterprises, which now stand a chance of flourishing under a more solid and sound monetary system. These investors are among the fortunate few who managed to preserve a relatively large portion of their wealth during the turbulent years of Oil Shock III. The keyword is “relatively,” as no one is better off than before; everyone has taken a hit, but some just took more of a hit than others.

In the postanalysis, it is revealed that many members of the U.S. government had been tempted to wage a war to try and salvage the situation. Several plans were developed whereby the United States would secure much of the Middle East’s and Venezuela’s oil production and then protect the transport of that oil to U.S. soil. Some even mention Canada as a preferred target, noting its proximity, rich resources, and weak military.

However, in every war game attempted by the staff at West Point, no way is ever found to both secure the oil resources at their source and protect them during extended shipments across the sea. The resources just don’t exist. In every war scenario, it proves nearly impossible to defend the required number of ship convoys from attackers equipped with modern missile technology. No simulations are ever successful for more than a few months, and the ideas are dropped, despite a number of vigorous proponents.

In the end, the reality of Peak Oil takes the world by storm, although the evidence has been in plain sight for decades. There’s nothing left to do but rapidly realign expectations, ideas, and hopes around this new reality. Some places, just like some people, manage this transition more gracefully than others. Large fortunes are made and even more massive ones are lost; the past becomes like a fairytale to many who continue wonder how such abundant wealth could ever have existed at all. In the future, stories of roads so packed with cars that they couldn’t move are told to wide-eyed children who wonder to what extent their grandparents are exaggerating the truth.

As usual, the solutions adopted in the aftermath of this crisis are those that happened to be most convenient, and much of the world reverts to “backed” money of some form or another. In the case of oil producers, the backing is oil. For others, it’s gold. A few smaller, more culturally coherent countries are able to use unbacked fiat currencies effectively, but only because strict and inviolable legal constructs are deployed to remove human weaknesses from the management of these currencies.

The changes are so profound that humanity divides itself into two new eras: BO and AO.
Before Oil
and
After Oil
.

Through all of this, as oil zooms to formerly unimaginable heights, old lessons about energy are relearned. The folly of poorly insulated houses built to face streets, instead of south, is rather painfully revealed, as is the practice of developing exurbs far from food, work, play, and even water. House prices follow new rules, where proximity and energy efficiency replace “grand entryway” and “granite countertops” as the coveted, desirable, must-have features. Houses with active and passive solar designs command premiums as monthly energy bills are prominently factored into the cash-flow streams of buyers alongside principal, interest, taxes, and insurance. The resulting acronym changes the popular pronunciation for this stream of payments from “pity” (PITI) to “piety” (PIETI).

The Midwest of the United States, long an importer of diesel and a nearly complete exporter of ethanol, rapidly increases its local use of ethanol, creating a regional energy advantage rivaling that enjoyed by the Gulf Coast and Alaska. Not surprisingly, the regions with controllable access to energy fare far better economically than other regions, but those with both food and fuel do the best of all.

Localities everywhere discover the importance of having local control over as many of the key staples of life as possible. Land-use zoning laws are rapidly amended to protect local land suitable for crops. Eminent domain is utilized to support the rapid reintroduction of certain parcels back into local production.

As with any economic shock that creates shortages, this energy shock changes perceptions and behaviors profoundly. When the dust finally settles, it’s clear that the old economy has shattered, a consumer culture has been replaced by a culture of thrift, and a new set of values with careful stewardship at their core has emerged.

Scenario 3: The Undulating Plateau

After wallowing about in the early part of the twenty-teens, the world economy finally responds to money printing and takes off. It moves grudgingly at first, but then faster and faster, as the global economy feeds off low oil prices, which cratered during the prior period of economic weakness. Naturally this economic resurgence causes oil demand to spike, but supplies of oil are somewhat pinched due to several years of underinvestment in field discovery and maintenance. The shortages, while not overly severe, serve to cause relatively large jumps in the price of oil, which unfortunately puts a crimp in the economic recovery. The “undulating plateau” goes through its first complete cycle.

Falling economic activity once again leads to a decline in the price of oil, which in turn sparks another economic recovery a bit later on. On this next leg up, the economy, again benefitting from reduced oil prices, dusts itself off and gets going again. However, this time the world has slightly less total oil production capacity than before, due to the combined effects of depletion in existing fields and a lack of investment in new and existing oil fields. Because there’s slightly less oil in each succeeding leg of the cycle, the economy can neither attain nor exceed its prior heights, as the energy simply isn’t there. This dynamic is represented in
Figure 25.1
, where we see that the economy rebounds to a lower and lower height on each leg of the cycle as it cycles back and forth across slowly declining oil supplies.