Tweet
PEAK RESOURCE SUPPLY & WORLD ECONOMIC CRISIS
Looking Back on the Race to the Summit - by Andrew McKillop - Author & Consultant
July 3, 2008
Vintage Growth versus Limited Natural Resources
Later on, we can ask a few simple questions. Say that China and/or India attained even European rates of car ownership – around 450 cars per 1000 population in the EU-27 or more extremely the US and Canadian rate of over 700 – what would China and India’s oil consumption be, using the world average 9 barrels per car and per year? This question, it seems, is a lot too complex for G-8 leaders meeting in Osaka on 4 July 2008. Instead, they asked the world’s oil exporters to produce more oil and drive down the price, and the revenues they get “for the good of us all”. Maybe not exactly for the good of oil exporters, like G-8 Canada and Russia, even the most stupid exporter can conclude. Their best strategy is easy to describe: cap production, stretch resources, and keep prices – and revenues – high for as long as bloated OECD importers, and bloating Emerging Economy importers care to go on with their oil addiction.
The race is on! The old model of ‘stable non inflationary growth’ promised by New Economy gurus and defenders fell by the wayside around 2002-2004, replaced by what I call Petro Keynesian growth and now that model, too, is under imminent threat of cyclic and structural demise. In the old New Economy model, carefully selected paper asset classes in the Old Economy OECD countries – favorites were housing and property, Internet and tech stocks, health care, finance services - could be inflated and shuffled round the Old World’s Teflon stock exchanges, to the glory of almost all players. This was capitalism for the masses ! The model held right through the 1990s until around 2004, but was then, and totally replaced by Petro Keynesian growth. Following this systemic shock, the hopes of equities investing masses were dumped into ‘classic’ 1970s-style stagflation from mid-2008.
Petro Keynesian growth, we can note, is the driver for vintage-style growth of the so-called Emerging Economies, which also levered up world economic growth, including the sluggish OECD economies, to about 5%pa in 2005-2007, but certainly and surely less going forward.
The pressure on energy and natural resource supplies both caused and generated by Petro Keynesian growth, and by pent-up demand in Emerging Economies sets a full stop for the easy ride of guaranteed low inflation from cheap basic resource inputs to the growth process. These cheap resource inputs, while they lasted, also helped start the Emerging Economies lever up their industrial base, and launch their growth surge, through keeping a lid on interest rates through slowing global inflation. More important in some ways, inside the OECD ‘postindustrial’ countries, their long-term decline was masked by imported deflation and a tidal wave of cheap but classically industrial consumer goods from the Emerging Economies, to help maintain the illusion of ‘universal prosperity’.
The Petro Keynesian model cranked up economic growth through high and rising energy and natural resource commodity prices, high liquidity, low real interest rates, increasing worldwide solvency, and record high trade growth. Any faltering in the growth surge, however, triggers fast-mounting inflation worldwide, certainly not sparing the ‘postindustrial’ OECD countries, where falling growth ends with stagflation. Late summer 2008 marks a turning point for growth, but not necessarily for inflation, which can go on to exotic highs when, or if interest rates are raised in an atavistic flirt with textbook ideas on fighting inflation. Textbook theories might promise that after some ‘necessary pain’ when interest rates are hiked, Old Economy OECD countries can have a remake of the 1990s, returning to the imagined security of the previous New Economy model. This ignores the resource garrotte.
The resource garrotte in fact even applied in the 1990s New Economy era of slow economic growth, low inflation, high interest rates, cheap energy and cheap natural resources. By the early 1990s in the case of oil and gas, by 1995-96 in the case of certain food commodities, metals and minerals, prices were tending to break out on the upside, from time to time, but could always be talked back into their boxes. Today, some hope aloud, Volker-style early 1980s-model interest rate hikes, tilting the stagflated economy into all-out recession might be the only and final solution, bringing the world back to its senses after this ‘courageous medecine’ brings down inflation and oil prices. Today we can add: if it brings down oil prices, while also being sure that Volker-style interest rate medecine, today, would bring hyperinflation and be pretty much a final solution for the world value of many currencies, starting with the US dollar, but certainly not sparing the Euro and Yen. In turn, this would deliver no sure ticket to peace, harmony and tranquility, financial or other.
Systemic Problems
Resource supply shortage is now manifest both on the supply side, as well as the demand side. Approaching peak resource supply limits, to be sure, is a potent driver of natural resource prices, keeping one cylinder of Petro Keynesianism going. Until now in mid-2008 this garrot and its levering-up of resource prices in absolute terms, and relative to paper resources, was partly masked by the process also delivering strong growth impacts, and specially the key impact of intensified, force-fed global economic growth. As economic growth falters then shrinks, resource supply limits will take on a bigger and clearer role in challenging unsure economic, political and social models of ‘progress’.
The continuing process of resource rarefaction also brings us nearer to multiple break points in the current and recent, straight-line rush to peak output rates and capacities for a growing series of basic resources. These span an impressive range, stretching through water, soil resources, animal and plant gene stocks, world fish stocks, regional bioresources, mineral fertilisers, oil- and gas-source chemical bases, several key metals including tin, copper, platinum, gold, rare and strategic metals, iron ore and bauxite, food grains, vegetable oils, cotton, uranium, coal, natural gas and oil.
As we are forced to conclude, the real bases of the 1990s New Economy were a host of unrepeatable circumstances, for example the end of Soviet communism, and adoption by Chinese communists of ‘ultra-liberal’ export-led industrial growth policies. On the resource side, cheap oil was mightily aided by Russia’s industrial collapse, massive poverty and unemployment under ethanol-fuelled Yeltsin, liberating extra supply for importers. Global minerals and metals supply, in the late 1980s and 1990s, were in almost structural overcapacity, following breakneck growth of capacity in the 1970s. Not negligeable as another potent factor, world population in 1980 was around 2 billion persons less than today. In brief, a host of one-shot, once-only conditions made the New Economy possible.
To be sure, this fact is accepted as a debating chamber theme, and even climate change is accepted by many as ‘real’, but when comfortable economic models are shaken hard, unwise decisions are rather certain. Under extreme danger for steady-as-you-go growth of equity values, and linked pension plans, a kneejerk retreat into atavistic Volker-style early 1980s solutions is far from unlikely.
We can summarize by saying the reasons why the New Economy worked were special, and transient. Among these reasons we can highlight ultra-cheap basic resources, spanning all categories, from energy and metals to bioresources and water. Our problem is that now, in second semester 2008, its successor Petro Keynesian model, which is yet more resource-intensive than 1990s New Economy model, faces equally sharp limits to its credibility and survival value.
From Price Taker to Inflation Giver
Anybody producing Sunset Commodities, in New Economics mythology, could only be a Price Taker – because oversupply was ‘permanent and structural’. We can place a figure to this ‘permanence’, at about 15 to 18 years, from the later 1980s to around 2004. Cheap resources had a two-part heritage being mothered by heavy investment in new capacity during the 1970s, in the previous resources boom, and fathered by post-1980 semi-stagnation in the world economy, setting a tight lid on demand. Since that time, apart from about 2 billion persons added to world population, the oil-hungry world car fleet has grown by about 600 million units, and world oil consumption has grown by about 24 million barrels/day. World steel demand, for example, has nearly doubled since 1980.
Inside the Old Economy OECD countries, where “New Economy” was the buzzword among the invest-and-thrive middle classes, during the long decade of cheap oil and resources, this doctrine’s on-the-ground impact specially included an orgy of house price speculation, called ‘rational investing’. This lasted up to 20 years, in some countries. Attempts to keep the patient alive and blissfully ignore every sign of clinical death, from around 2004, included the US subprime rout.
In textbook fashion, perhaps, some of the paper capital from this long property boom was transferred to, and shuffled into a recurring series of non-property paper asset booms, through the 1990s. This reached ultimate highs in the dotcom/ hi-tech bubble and ‘communications related’ boom of 1998-2001. Today’s lookalike is the Alternate & Renewable Energy asset bubble. This promises, that is threatens an equally capricious, wasteful and non-productive allocation of resources, followed by a massive slump in popular interest and asset values.
Keeping manufactured products ultra-cheap, like the natural resources and energy needed to make, package and transport them was both necessary, and easy for a certain period. New Economics prescribed the delocalisation of almost any and all consumer good industries, and many services to emerging China, India, Turkey, Pakistan, Brazil, the Philippines, Morocco and any other low wage export platform, anywhere outside the Old World old economy. As to future competition for energy and natural resources from these emerging economies, the New Economy gurus had nothing to say. Maybe it was a long way down the line, maybe people in the emerging economies would turn to house price inflation and hamburger flipping as their mainstay activity, and become ‘lean and mean’ in per capita energy and resource demand, like postindustrial USA and France or Italy, or not-so-postindustrial Japan, South Korea or Germany. This refrain was often heard from great professors of the New Economy, always generous with brain-dead one-liners.
Time was up within a few brief years of vintage economic growth. To be sure, some New Economy gurus could perhaps imagine, and write that the emerging economies would not want to reproduce the Old Rich OECD model of hyper consumption. India, for example, would stay at 20 cars per 1000 population, and not try for the European average of around 500, or the high ground of US car owwnership, about 725 cars per 1000. Tata Corp’s ‘Nano’ car at a subatomic price of below 2500 US dollars clearly shows which way Indian car ownership will go – and grow.
The only bottom line in the short-term is ‘decoupled’ growth of energy and resource demand. Any shallow recession in the OECD North will have almost no impact on global oil or other resource prices. Stagflation, with a growing risk of hyperinflation remains a logical sequel inside the OECD North, but for some while yet the Petro Keynesian machine can in theory roar on at full power in the emerging South – if reserves of global oil and gas, and other key ‘quantitative growth model’ resource inputs stretch that far. This is far from sure and certain, and getting less so all the time.
Things Have to Change
OECD hyper consumption of energy and natural resources is an unfortunate but real world fact. This ‘quantitatve model of progress’ was at no time assumed to be permanent – as we are finding today, even the Arctic polar ice cap is not permanent. By the same token, why would hyper consuming societies be ‘durable’ when their basic resource inputs include so many non renewables, and theoretically renewable resources which in practice, due to extreme rates of demand are transformed into ‘one-shot’ depletables ? Today, in the OECD group, per capita consumption rates may be stagnant for some natural resources, others may be falling a little, notably per capita oil consumption in part due to distressingly high oil prices, and the simple physical difficulty of attaining 3 cars for every 4 persons. Rising food prices also pose a challenge: food spending is now the second-biggest item in average OECD household budgets, after oil, gas and electricity, but folks still need to eat.
To be sure, our decider political elites, who like their voters worry about climate change at weekends, now urge a redoubled effort to increase economic growth, if only to slow the growth of national debt. The Alternative & Renewable Energy asset bubble is therefore a handy new support for seeking ways to maintain, or increase consumption of cement, steel, hi-tech metals, silicon ingots, complex mechanical parts and assemblies, transport to site, construction services, and a panoply of downstream impacts. As usual and as ever, fiddling with the details while the temple burns is an old habit in dying empires. Grafting-on renewable energy gadgets to the fossil energy pyramid can change its shape, when viewed from the right distance, but does little to cut its height. OECD resource intensity per capita is still extreme, despite the ‘postindustrial’ name tag.
The inconvenient truth is simple and obvious: Per capita consumption rates of the OECD Old Rich countries cannot be replicated in the Emerging Economies. The current, heroic, flat-out attempts of Chinese and Indian, and other Emerging Economy leaderships to replicate the OECD urban industrial hyper consumption economic and social model will at some quite near-term stage be abandoned – or collapse. The options are simple, and breakpoint decision time is getting closer.
Simply taking demand for food and agrocommodities, one way of explaining the giddy upward rush of prices due to unstoppable demand growth is to do a back-of-envelope calculation of food demand growth due to 15 years of accumulated, break-neck industrial and urban growth in China, India, Brazil and Pakistan, Turkey, Bangladesh, Vietnam and other, smaller emerging economies. We can set the agrocommodities demand spiral as a context where about 1000 million persons, thanks to vintage economic growth moved up from 1 meal a day, to 2 meals a day. And where about 400 million persons who almost never ate meat or fish at all, now eat them at least once a week. This of course leaves another 900 million or 1000 million with no meal a day, potential Global Economy consumers more than interested in the idea of consuming more food, and right behind in the queue to get there.
We can make an unconvincing attempt to forecast massive growth of the truck, bus, motorcycle and car fleets of the Emerging Economies, in a 20 or 30-year growth fest like the 1950-80 Trente Glorieuse of the Old Rich OECD countries. This base of the decoupling theory is 100% ‘quantitative’, and currently the textbook model for Emerging Economy growth. During the Trente Glorieuse countries like Japan, Germany, Australia, France or Italy moved from under 50 cars per 1000 population, to around 400. China and India, and other emerging economies could, strictly in theory, replicate this feat, achieving OECD ‘postindustrial’ rates of 400 or 500 cars per 1000 population. This textbook ‘quantitative’ economic feat would bring the Emerging Economies to the same near-saturation car ownership we have today in the USA, Europe, Japan and South Korea. Not at all coincidentally, these are the most oil-intensive, CO2 emitting economies and societies of the planet. Political leaderships of these countries claim to be concerned about the ‘qualitative’ diseconomies of the quantitative model, for example supporting action against climate change.
Doing something about these challenges surely means close attention to quantitative indicators of hyper consumption. When we move on to look at per capita demand for refrigerators, microwave ovens, cellphones and PCs, air travel, plastic packaging, meat-based grain-intensive foods, water, steel, aluminium and cement, multi-lane highways and skyscraper buildings there really is No Limit to quantitative growth. Aspirants to this model of ‘universal prosperity’ are widely spread round the world – and most of them are very poor, at present.
To be sure, details such as real world quantitative supply capacities for natural resources are not attractive debating subjects for most world political leaderships. Even the consumer herd in the Old Rich OCED countries shows a marked tendency to only being interested in ‘ecology’ at weekends, in the evenings and on holiday. When these subjects start to hit their pocketbooks, they go into meltdown, seeking any way out of the mess that restores what they had before. Pressure for ‘classical solutions’ like self-generated recession through interest rate hikes and military-backed resource grab steadily mount, as gasoline and food prices rise.
Doctrinal Poverty and Staying Poor
One of the miracles of New Economy doctrine, which for a 20-year eyeblink in modern history had an almost total stranglehold on economic ‘thinking’ in the Old Rich OECD countries, around 1985-2000, was its real, but of course loudly denied dependence on the poor staying poor and the rich getting richer. Yet the same doctrine, when it collapsed and mutated to Petro Keynesianism, also sought the nearly instant exhaustion of world natural resource, notably the world’s oil and natural gas reserves, with the same claimed rationale of Universal Prosperity.
Consuming at least 500 billion barrels or about 40% of the world’s entire oil reserves in 20 years, through 1980-2000, in fact only kept most poor persons poor. Since 2000, at annual drawdown rate of about 30 billion barrels-per-year, this phenomenal consumption has only enabled a fragile and low-cost imitation of the Old Richworld OECD middle classes to be thrown together in China or India, and elsewhere in the ‘emerging world’. Even today, in China, there are only a few hundred Ferarri, even if numbers of local billionaires are growing quite fast.
World trade in manufactured products and services, driven by highly classic Ricardian comparative advantage has generated fantastic trade deficits and surpluses, the Twin Towers of the Petro Keynesian economy, and has generated the incredible FX reserves of China, as well as Japan, Saudi Arabia, UAE, Russia, Singapore and other present and former stars of the fragile growth bubble. In part fed by these imbalances, today’s inflation fireball hitting China and India, the GCC capital surplus oil exporters, Vietnam, ASEAN countries, Turkey and emerging East Europe will generate social conflict and, in many cases pressing demands for subsidised fuel and food. Later, their export markets can be wiped out, when or if inflation and monetary crisis leads them to sharp defensive revaluation of their moneys against the US dollar, Euro and Yen.
This will do less than nothing to improve the lot of the world’s poor. This, we can remember, is the the claimed headline objective of the Global Growth Economy, and its ‘regrettable’ real world propensity to exhaust global non renewable resources, and many theoretically renewable resources, destroy the environment, and irremediably change the world’s climate in an eyeblink of historical time. Even in the heartlands of New Economy doctrine, and its succeeding clones, poverty remained and remains more than alive and well . The ultimate oil intensive large-economy, the USA uses or mostly wastes around 25 barrels or oil per capita each year (world average 4.8 barrels/capita, 2007), but manages to achieve and maintain mass poverty in large swaths of its population. Entire sections of major cities in the USA are reserved for the poor and very poor, often at the 1 meal-a-day ‘threshold’ for shifting to Emerging Economy status, like large proportions of China’s or India’s populations from the mid-1990s.
Whatever the current price of oil, coal, soybeans, copper, tin, palm oil, rice, natural gas or wheat – at least for a short period of time forward from mid 2008 - the existing de facto model set by the Old Rich OECD countries and aimed at attaining, then maintaining the consumption of vast quantities of every conceivable natural resource is getting very near the end of its useful shelf life. For sure and certain, the ‘quantitiatve model’ of progress is now sometimes called out-dated and irrelevant by well-fed elite thinkers in the OECD ‘knowledge based’ societies, but as G-8 finance ministers in Osaka, Japan, in early July 2008 made it very clear, their main hang-up is getting more petroleum, quick and cheap. The “sagacious society” where ‘qualitative progress’ is the basic aim is good for TV talkshows, but it surely has thermodrynamic energy limits on its progression in the minds of deciders!
The current global finance and banking crisis, rampant inflation in the Emerging Economies, and increasing inflation in the OECD countries - an unsurprising result of faltering Petro Keynesian Growth - are possible harbingers of a quantum shift in economic and social goals. One or more grave geopolitical events, such as armed insurgency in Tibet, or sequels of the US bailing out of Iraq in early 2009, intensified confrontation with Iran due to its nuclear ambitions, Israel-Palestine conflict, and many other scenarios could trigger a sequence spelling a speedy end to the Petro Keyesian growth surge. One clear indicator of this would be a sharp drop, or collapse of world trade growth, signalling an imminent hard landing for the world economy.
What Happens Next
To some, perhaps, the Petro Keynesian model was a great idea at exactly the right time. It was perhaps even fun to destroy’s the world’s stock of lower-cost natural resources in a growth binge lasting only a few years, during which this successor to the New Economy delivered textbook quantitative economic growth. But universal prosperity was surely not one of its achievements, and a world of depleted natural resources and natural resources production capacity are its real sequels. Succeeding generations will have to patch together, then manage the suboptimal, depleted leftovers for the rest of time. The adjustment interval between the two models, from Petro Keynesian growth to a necessarily sustainable ‘distributed poverty’ model may be very short – and could be very violent.
Since late 2007 and only in part due to the ‘subprime’ crisis, which is now mutating further, from a liquidity crisis to something like a world solvency crisis, it is now unfortunately possible to set out credible worst-case scenarios for the world economy.
Natural resource shortage is surely one strand of this, in part due to the somber heritage of the New Economy model collapsing, or mutating into the Petro Keynesian model. Any example of Old Rich OECD per capita energy and resource demand is extreme, and the numbers for this extreme dependence are well known, for example average national Ecological Footprints.
With oil moving towards 150 US dollars-per-barrel, gold towards 1000 US dollars-per-ounce, the base metals off their 2007 highs, to be sure – the US economy is in ‘soft recession’ ! – but still an awful lot more expensive than in the 1990s, and agrocommodities still exploding in price, it is more than easy to laugh at those old and pathetic New Economy certitudes of the fast-receding 1990s. It is just as easy to ignore the warning signs of complete financial and economic meltdown that extreme resource and energy prices, roaring inflation, and out-to-lunch management of the global economy signal, when brought together.
As the critical depleting energy resource, whose price has run far out of hand in just a few years of growing demand versus stagnant supply, oil has taken the bulk of attention but there are a phalanx of other limited and strained natural resources. All are brought to crisis by a process where demand is growing at vintage rates, but supply is lagging far behind, and is often easy to characterise as having a completely opaque and somber outlook.
Keynesian growth of the 1950s and 1960s was a runaway success in the Old Rich OECD countries, then in their postwar bloom of reconstruction. Using tax-and-spend the process transferred wealth from higher-income groups, to the eager-to-spend less wealthy and poor, with Big Government operating the process and – when the machine began to falter – using government borrowing, and money depreciation to work the flagging miracle. The Oil Shocks of the 1970s dealt a heavy blow to the process, because external players – the OPEC oil exporters – invited themselves along to the party of North-South wealth transfer.
This OPEC-led wealth transfer was, we can note, the effective model for current Petro Keynesian growth, now including and covering every possible natural resource. We can, if we like, regard the New Economics interval, and its mostly-irrational, even hysterical Reaganomics and Thatcheromics as a rearguard attempt to turn back the tide. Ironically perhaps, this model easily mutated into Petro Keynesianism, featuring economic globalization and world trade growth, which in fact has in no way preserved wealth in the Old Rich countries, while the devastating drawdown of global natural resource stocks, and pitiless environment damage of this ‘quantitatve growth model’ will surely impoverish the adepts of quantitative progress and No Alternative economic doctrine, in the Emerging Economies.
No Limits ?
One direct sequel of the New Economy attempt to turn back the tide of economic history is the stunning result that ever rising prices of energy, mineral, metal and bioresources does not rapidly and surely produce or yield higher supply. In some cases and even worse, the direct result is the exact reverse. Supply stagnates, or falls as prices explode, and the process continues as prices run out of hand. The case examples are very easy to give, the evidence is massive, both in non renewable, and theoretically renewable asset classes.
This hangover from New Economics is another real threat to the global economy. World inflation is now powerfully supported by food price growth, the world finance and banking sector is now in crisis with a net fall in new financing, and the bank sector has an emerging solvency problem. IMF estimates of the world economic impact of the US-origin subprime crisis, which are rather surely underestimates, already extend to around 945 billion USD, about 1.5 times the value of OPEC’s total revenues in 2006, but about two-thirds revenues in 2008. The inflationary menace of limited or zero supply side response to exploding commodity prices, in a context of vast and fast-growing FX reserves in growth-hungry, large population countries can be easily appreciated and understood.
During the 1985-2000 heyday of New Economics, to be sure, real resource prices fell to bargain basement firesale lows, but supply conrtinued to stolidly increase, as suppliers appeared to have a death wish. For totally unrepeatable reasons, there really were producers of then-sunset resources like Gold and Oil, who could and did increase supply as prices continuously fell. That feast of cheap resources existed, New Economists though it was a permanent change of civilization, but the feast was short-lived.
Current energy and resource-intensive Petro Keynesian Growth of the global economy took over, at latest from 2000-2005, generating almost unlimited or ‘open-ended’ demand growth for fossil energy and mineral resources, and similar demand growth of food and agrocommodities, whose total supply is infrastructure, energy, climate and resource-constrained. These facts are increasingly hard to deny, and their real economy impacts on the real world now include the potential for an almost 1929-style global economic and financial meltdown.
On the demand side, the worst-possible scenario – demand growth increasing as prices rise - mirrors what has happened on the supply side – supply stagnating or shrinking as prices rise. This simple message has taken more than 5 years to get through to economic and political decision makers. Rising prices, in the Petro Keynesian growth model, do not weaken demand – until and unless some ‘threshold’ or ‘ceiling price’ is reached and held. For oil, the countdown is now quite fast, the real pain threshold may be above 150 USD/bbl, after which there can be conventional economic textbook and school manual price elasticity, that is falling demand with rising price. In fact, financial and economic collapse is the most likely and credible result, simply because the pain ceilings were pushed so high by Petro Keynesian growth.
This worst-case scenario on the demand side applied and applies not only to oil, but also to every base metal, precious metals, iron ore, bauxite, mineral fertilizers and cement, and now to all the Agro-commodities. Since 2005, with sometimes all-time inflation-adjusted price peaks attained in the Commodities sphere, demand has tended to stay rock steady, and often growing at ‘vintage’ rates.
Adjustment Scenarios and Radical Change of Values
In the same way that Peak Oil has ceased to be a ‘far out notion’ over recent years, in the same way that climate change has become a lot more than ‘credible’ over the last 5 – 10 years, continued and radical asset value change is sure and certain. Linkage between upstream commodity prices, and downstream equity values, as for previous and similar price growth in the energy and mineral commodities sector, can now be replicated in agro-commodities, that is initial close linkage becoming weaker, then disappearing as financial and economic crisis takes the driver’s seat.
Worldwide financial asset fragility since Summer 2007 is the key symptom of accumulated stress, and cause of future crisis. Asset fragility, and world inflation growing in almost direct proportion to falls in economic growth rates by region, may in fact trigger a much stronger recessionary interval than the current ‘consensus model’ of shallow recession in the US and Europe, and limited trimming-back of growth rates in Asia and the Emerging Economies. If this happened, Peak Oil would be headed-off for a couple of years, but not much more. Base metals, and the precious metals could fall somewhat in price, some agrocommodities would take quite big price hits, giving some ‘breathing space’ for the world economy, but collateral economic and financial damage would spiral.
To be sure, we are not likely in presence of any oil price collapse. Today, oil at 100 USD-per-barrel would be a gift, and this also applies to related prices for other minerals and energy commodities, and the agro-commodities. This fact signals the Petro Keynesian Growth process is likely facing severe limits on its lifetime, being nothing if not ‘quantitative progress’. The depth and intensity of the liquidity-solvency crisis, and related whole-sector finance crisis will determine the actual profile for the ‘recession slope’ hitting the OECD group.
Sustainable Resource Transition of the OECD Economy
In an easily measurable timeframe of no more than 2 or 3 years from now, by 2011 or 2012, OECD decision makers will have to ‘bite the bullet’ and accept, firstly, that Energy Transition is a serious, real-world challenge to the survival of their economies and societies. Cheap Oil has totally disappeared already, and will never return. Other fossil energy resources are in catch-up phases of price growth, spilling over to the whole resource complex. Cheap food and agroresources have gone the same way as cheap energy, and any respite due to a ‘short sharp cut’ in global economic growth is relatively unlikely, and extreme high risk for any apprentice sorceror wanting to bring it on.The multiple implications of this are treated by myself and various contributors to my book ‘The Final Energy Crisis’ (Pluto Books 2005 and 2008, ISBN 0745320929). They range from the economy, transport, food supply and habitat through to cultural values and how society deals with a radically changing future.
Models for change away from fossil fuel burning exist, including the Kyoto Treaty and possible transition programmes based on the IMF framework for Special Drawing Rights, for member countries confronted by short-term financial and budget crisis. The SDRs, as we know, are based on a complex formula including the member country’s size, economic conditions, and previous performance. On a directly comparable base, « Oil Drawing Rights » and « Natural Gas Drawing Rights » could be set and allocated, with oil and later natural gas removed from conventional market trading, and national consumption rates decided by an international secretariat holding all the powers needed to carry out its functions. In brief, the basic need to reduce energy intensity will become, or has become clear and this will entrain the creation of many new enterprises and activities not concerned with supply, but with energy demand.
The objective would be to achieve large cuts in oil and natural gas intensity, measured in barrels/capita/year, and boe/capita/year, in a short period of time. The timeframe, in fact, is shrinking as we move into full Peak Oil, with Peak Gas coming fast behind. Outline targets for demand compression, depending on country and the depletion rates accepted by oil and gas producer countries, could be as high as 5% or 6% per year, perhaps more, and would apply on a long-term or in fact ‘permanent’ basis.
The investment and revenue implications of International Energy Transition extending or replacing current and ineffective Kyoto Treaty attempts to achieve a shift from fossil to renewable energy, basically through supply-only measures, can be imagined. Some analyses of even limited Energy Transition in the OECD countries, published by McKinsey & Co and aimed at cutting oil intensity about 30% by 2020 generate very large spending forecasts, but with each year that Energy Transition is set back, needed spending will increase.
More important is that energy transition will be only one part of transition to the sustainable economy. This will require a system-wide reduction of resource intensity, rather than increased recycling and production of resources at lower unit energy intensity and lower unit environment impacts. The process will have to start in the OECD countries, indicating we have some way to go before this need is clear enough, accepted widely enough, before action starts – and time is short.
:confused:
Comment