Hitting the brick wall

SUBHEAD: The riskiest behaviors perpetuate the status quo at our peril. We need to act before we hit the brick wall.
Definancialization, Deglobalization & Relocalization By Dmitry Orlov on 16 June 2009 in ClubOrlov - (http://cluborlov.blogspot.com/2009/06/definancialisation-deglobalisation.html) Image above: Your average solid brick wall. [Editor's note: This is the opening of a lengthy talk transcribed and available in its entirety through the link above. This talk was presented at The New Emergency Conference in Dublin, on June 11, 2009.] 1. Good morning. The title of this talk is a bit of a mouthful, but what I want to say can be summed up in simpler words: we all have to prepare for life without much money, where imported goods are scarce, and where people have to provide for their own needs, and those of their immediate neighbors. I will take as my point of departure the unfolding collapse of the global economy, and discuss what might come next. It started with the collapse of the financial markets last year, and is now resulting in unprecedented decreases in the volumes of international trade. These developments are also starting to affect the political stability of various countries around the world. A few governments have already collapsed, others may be on their way, and before too long we may find our maps redrawn in dramatic ways. 2. "Sustainability" -- what's in a word? In a word, unsustainable. So what does that mean, exactly? Chris Clugston has recently published a summary of his analysis of what he calls "societal over-extension" on The Oil Drum web site. Here is a summary of his summary, in round numbers. I don't want to trifle with his arithmetic, because it's the cultural assumptions behind it that I find interesting. The idea is that if we shrink our ecological footprint by an order of magnitude or so, that should make the whole arrangement sustainable once again. This is expressed in financial terms: here we are lowering the GDP of the USA from, say $100 thousand per capita per annum, to, say $10 thousand. Clugston draws a distinction between making this reduction voluntarily or involuntarily: we should make it easy on ourselves and come along quietly, so that nobody gets hurt. I find the idea that Americans will voluntarily lower their GDP by a factor of 10 rather outlandish. We keep the same system, just shut down 9/10 of it? Wouldn't that make it a completely different system? This sort of sustainability seems rather unsustainable to me. 3. My plan I would like to offer a more realistic alternative. Everybody should have one US Dollar, for purely didactic purposes. This way, all Americans will be able to show their one dollar to their grandchildren, and say: "Can you imagine, this ugly piece of paper was once called The Almighty Dollar!" And their grandchildren will no doubt think that they are a little bit crazy, but they would probably think that anyway. But it certainly would not be helpful for them to have multiple shoe-boxes full of dollars, because then their grandchildren would think that they are in fact senile, because no sane person would be hoarding such rubbish. 4. An unpalatable alternative Clugston offers an alternative to the big GDP decrease: a proportionate decrease in population. In this scenario, nine out of 10 people die so that the remaining 10% can go on living comfortably on $100 thousand a year. I was happy to note that Chris did not carry the voluntary/involuntary distinction over to this part of the analysis, because I feel that this would have been in rather questionable taste. I can think of just three things to say about this particular scenario. First, humans are not a special case when it comes to experiencing population explosions and die-offs, and the idea that human populations should increase monotonically ad infinitum is just as preposterous as the idea of infinite economic growth on a finite planet. The exponential growth of the human population has tracked the increased use of fossil fuels, and I am yet to see a compelling argument for why the population would not crash along with them. Second, shocking though this seems, it can be observed that most societies are able to absorb sudden increases in mortality without much fuss at all. There was a huge spike in mortality in Russia following the Soviet collapse, but it was not directly observable by anyone outside of the morgues and the crematoria. After a few years people would look at an old school photograph and realise that half the people are gone! When it comes to death, most people do in fact make it easy on themselves and come along quietly. The most painful part of it is realising that something like that is happening all around you. Third, this whole budgeting exercise for how many people we can afford to keep alive is a good way of demonstrating what monsters we have become, with our addiction to statistics and numerical abstractions. The disconnect between words and actions on the population issue is by now is almost complete. Population is very far beyond anyone's control, and this way of thinking about it takes us in the wrong direction. If we could not control it on the way up, what makes us think that we might be able to control it on the way down? If our projections look sufficiently shocking, then we might hypnotise ourselves into thinking that maintaining our artificial human life support systems at any cost is more important than considering its effect on the natural world. The question "How many will survive?" is simply not ours to answer. 5. What's actually happening Back to what is actually happening right now. There seems to be a wide range of opinion on how to characterise it, from recession to depression to collapse. The press has recently been filled with stories about "green shoots" and the economists are discussing the exact timing of economic recovery. Mainstream opinion ranges from "later this year" to "sometime next year." None of them dares to say that global economic growth might be finished for good, or that it will be over in "the not-too-distant future" -- a vague term they seem to like a whole lot. There does seem to be a consensus forming that last year's financial crash was precipitated by the spike in oil prices last summer, when oil briefly touched $147/bbl. Why this should have happened seems rather obvious. Since most things in a fully developed, industrialised economy run on oil, it is not an optional purchase: for a given level of economic activity, a certain level of oil consumption is required, and so one simply pays the price for as long as access to credit is maintained, and after that suddenly it's game over. Fran├žois Cellier has recently published an analysis in which he shows that at roughly $600/bbl the entire world's GDP would be required to pay for oil, leaving no money for putting it to any sort of interesting use. At that price level, we can't even afford to take delivery of it. In fact, at that price level, we can't even afford to pump it out of the ground, because the tool pushers, roughnecks and roustabouts that make oil rigs work don't drink the oil, and there would no longer be room in the budget for beer. And so, the actual limiting price, beyond which no economic activity is possible, is certainly a lot lower, and last summer we seem to have experimentally established that to be around $150/bbl. which is something like 25% of global GDP. We may never run out of oil, but we have already run out of money with which to buy it, at least once, and will most likely do so again and again, until we learn the lesson. We will run out of money to pump it out of the ground as well. There might still be a few gushers left in the world, and so there will be a little bit of oil left over for us to fashion into exotic plastic jewelry for rich people. But it won't be enough to sustain an industrial base, and so the industrial age will effectively be over, except for some residual solar panels and wind generators and hydroelectric installations. I think that the lesson from all this is that we have to prepare for a non-industrial future while we still have some resources with which to do it. If we marshal the resources, stockpile the materials that will be of most use, and harness the heirloom technologies that can be sustained without an industrial base, then we can stretch out the transition far into the future, giving us time to adapt. 6. Key points I know that I am running the risk of overstating these points and oversimplifying the situation, but sometimes it is helpful to ignore various complexities to move the discussion forward. I do believe that these points are all true, roughly speaking. Global GDP is a function of oil consumption; as oil production goes down, so will global GDP. At some point, the inability to invest in oil production will drive it down far below what might be possible if depletion were the sole limiting factor. Efficiency, conservation, renewable sources of energy all might have some effect, but will not materially alter this relationship. Less oil means smaller global economy. No oil means a vanishingly small global economy not worthy of the name. We have had a chance to observe that economies crash whenever oil expenditure approaches 1/4 of global GDP. Attempts at economic recovery will cause oil price spikes that break through this ceiling. These spikes will be followed by further financial crashes and further drops in economic activity. After each crash, the maximum level of economic activity required to trigger the next crash will be lower. Financial assets are only valuable if they can be used to secure a sufficient quantity of oil to keep the economy running. They represent the ability to get work done, and since in an industrialised society the work is done by industrial machinery that runs on oil, less oil means less work. Financial assets that that are backed with industrial capacity require that industrial capacity to be maintained in working order. Once the maintenance requirements of the industrial infrastructure can no longer be met, it quickly decays and becomes worthless. To a large extent, of oil means end of money. Now that the reality of Peak Oil has started to sink in, one commonly hears that "The age of cheap oil is over". But does that mean that the age of expensive oil is upon us? Not necessarily. We now know (or should have learned by now) that once oil rises to over 25% of global GDP, the world's industrial economy stalls out, and as soon as that happens, oil ceases to be particularly valuable, so much so that investment in maintaining oil production is curtailed. The next time industry tries to stage a comeback (if it ever does) it hits the wall much sooner and stalls again. I doubt that it would take more than just a couple of cycles of this market whiplash for all the participants to have two realizations: that they cannot get enough oil no matter how much they pay for it, and that nobody wants to take their money even for the oil they do have. Those who still have it will see it as too valuable to part with for mere money. On the other hand, if the energy resources needed to run an industrial economy are no longer available, then oil becomes just so much toxic waste. In any case, it is no longer about money, but direct access to resources. 8. Managing financial risk It will take some time for these realizations to sink in. In the meantime, we will no doubt keep hearing that we have a financial crisis on our hands. We must do something to shore up the banks, to deal with the toxic assets, to shore up our credit ratings and so forth. There are people who will tell you that this was all caused by a mistake in financial modeling, and that if we re-regulate the financial sector, this won't happen again. So, for the sake of the argument, let's take a look at all that. Financial management is certainly not my specialty, but as far as I understand it, it is mostly about assessing risk. And to do that, financial managers make certain assumptions about the phenomena they are trying to model. One standard assumption is that the future will resemble the past. Another is that various negative events are randomly distributed. For instance, if you are selling life insurance, you can be certain that people will die based on the fact that they have been born, and you can be reasonably certain that they will not all die at once. When someone dies it is unpredictable, when people in general die it is random, most of the time. And so here is the problem: the world is unpredictable, but classes of small events can be treated as random, until a bigger event comes along. It may seem like an obscure point, so let me explain the difference in a graphical way.
9. This is (pseudo) random
Here is a random collection of multicolored dots. Actually, it is pseudo-random, because it was generated by a computer, and computers are deterministic beasts incapable of true randomness. A source of true randomness is hard to come by. Even very good random noise generators can have higher-order effects. Small events are frequent, and therefore we can treat them as random, larger events are less frequent and rather unpredictable, and some of the really large events put an end to the careers of the statisticians trying to model them, and so we never find out whether they are random or not. To a layman, this is random enough, but eventually you run out of randomness and hit something very non-random.
10. This is not random but predictable
Like a brick wall. Now this is not random, even to a layman. This is like oil expenditure going to 1/4 of global GDP. That certainly wasn't random. But was it unpredictable? We had a few years of monotonically increasing oil prices, and the high prices failed to produce much of a supply response in spite of record-high drilling rates, investment in ethanol, tar sands, and so on. We also have some good geology-based models that accurately predicted oil depletion profile for separate provinces, and had a high probability of succeeding in the aggregate as well. So this is definitely not random, and it is not even unpredictable. So, at a higher level, what sort of mathematics do we need to accurately model the inability of our financial and political and other leaders and commentators to see it, or to understand it, even now? And do we really need to do that, or should we just let this nice brick wall do the work for us. Because, you know, brick walls have a lot to teach people who refuse to acknowledge their existence, and they are very patient with students who need to repeat the lesson. I am sure that the lesson will sink in eventually, but I wonder how many more full-gallop runs at the wall it will take before everyone is convinced.

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