Peak Oil Perspectives
Peak Oil Perspectives

Why can’t we get ourselves out of this sticky mess?

By Roger Diamond

The news is oozing with opinions on the Eurozone crisis, debt defaults, bailouts and why eating baklava is about to be banned. Although there is plenty of merit in getting stuck into the details of easing the pain of recession and finding short term solutions to employment, liquidity and keeping the monetary system alive, I will outline what I think are the ultimate causes of these problems.

For several years now, the world has been stuck at lower levels of economic growth than would be desired. Desired by those in debt (and that’s pretty much all of us – even if YOU aren’t in debt personally, your government is, and they provide you with essential services), who need to grow profits/tax earnings in order to pay off both interest and capital of their debts. Moreover, the low level of economic growth is especially worrying as it is in spite of huge injections of cash (the bailouts to banks) into various national economies. This has made us all even more indebted to the future. Why, despite these bailouts, are we still not able to get economic growth up enough?

Economic growth is measured in currency units, but the movement of currency is merely a reflection of actual economic productivity. Actual productivity requires resources. It does not matter how much money you have in the bank, how much cash is under your bed or how many pieces of paper proclaim your wealth; if you have no resources, that wealth ceases to be relevant, it is unable to be circulated or put into action. Underpinning any economic activity is real activity and real activity requires resources: energy, water, raw or processed goods and their derivatives, such as information and services.

Energy largely comes from fossil fuels and processed sunlight (by plants and animals, who we have made into commodities), water comes from the natural environment, and raw materials and their processed products come from the earth. There are a few complications and exceptions to this such as desalination and renewable energy, but these also require non-sustainable energy inputs for construction, maintenance and replacement. The information and service economy, although apparently lighter on resources than, say, agriculture, is deceptive in that substantial resources are in fact consumed in these sectors – just think of business air travel, consumer electronics and telecomms. They are big users of the basics: energy and minerals particularly.

Conventional oil production globally has been steady for a few years now, hovering just above 80 million barrels per day. Although other energy resources have been on the increase, most notably natural gas (some from shale gas) and tar sands, these resources do not deliver the same returns on investment as plain old oil. This means that although there have been increases in absolute fossil fuel output, the amount of energy needed to produce that fuel is more than if it had been conventional oil. In essence (French pun intended), we work more but get paid less. And that’s why we’re stuck.

We have a huge debt burden hanging over us that requires increased earnings and profits to pay off, yet our ultimate resource for doing work and making economic activity – energy – is dwindling. Optimists will point in the direction of coal, nuclear, and maybe even renewables but these energy sources have the problems of being finite (first two), also dwindling in energy return (dirtier coal and lower grade uranium deposits), and not actually being renewable. Renewables are a whole lot better than fossil fuels, but have their own basket of problems.

In short, relying on increasing economic activity to drive our way out of muddy debts and sticky deserts may not work, given the likelihood that our primary sources of energy are peaking in production. A change in the economic system, including fundamental financial reforms, aimed strongly at banking and the financial industry (investing, trading and playing currency, stock and other markets) is needed to allow nations, corporations and individuals any hope of a debt free future. It might also help to make the world a little fairer. Wouldn’t that be nice?

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    • http://hismastersvoice.wordpress.com/ The Creator

      Yes and no. The current system obviously needs to be changed if capital is to be freed up from unproductive activities into productive activities — specifically, renewable energy and more energy-efficient production. However, you have to start with changing the political system. There is money available, but it is being spent badly because the political agenda demands it.

    • HD

      So if your argument is that economic growth is driven by oil (energy) why would financial reforms make a difference?

      Any way, economics is essentially about the efficient allocation of scare resource and capital. More with less is economic progress. Unfortunately in the average persons understanding of economics, economic growth is measured by such things as jobs and wages. This is folk economics and not the economic way of thinking.

      As you point out there might very well be alternatives and more efficient ways of meeting our energy needs.

      Regarding your comment about the financial crisis and the bailouts, some of the problems include:

      (1) Banks are sitting on the money and not spending
      (2) The above could be because of regime uncertainty (amount of new legislation being proposed/ banking reforms) and the fact that the Fed is allowing them to earn interest on the money it is pumping in the economy
      (3) Fiscal policy also matters – both the US/EU are good example. Fiscal and monetary policy need to work together
      (4) The bankers and financial sector don’t want to take the bad medicine and is looking to debt ridden governments (tax payers) to pay them out – on many accounts the real economy is not doing so badly, especially outside the west.
      (5) Structural adjustment is not being allowed to take place (politics)

      In short I think there are some very good reasons, apart from oil, for the slow growth and recovery.

    • ian shaw

      Debts are like paper money, i.e. not backed by tangible things, only promises.and emotions.

    • jandr0

      Roger, I like some of your thinking. Energy (as a resource) is a key factor of production, and if it is constrained, it will definitely impact the economy (of the world).

      As usual, there are two options: increase supply and/or reduce demand.

      1. In increasing demand, we do have a challenge with fossil fuel reserves, and with the increasing cost of their extraction. As to renewables, I am as yet unconvinced by evidence of the viability in terms of cost of production – specifically the energy production efficiencies that can be obtained (much debate around the Spanish, German and other programs). Frankly, for energy, the most likely candidate I’ve come across is the thorium reactor (and it seems China has seen the light and is investing heavily!).

      2. As to decreasing demand, there are at least two components: The style (i.e. life styles) of consumers (both public and private sector), and the number of consumers. Calculations and projected savings I’ve seen on life style demand reduction does not look good – even low energy-intensive houses, offices, transport et al still consume a lot of energy. With regard to numbers, China pops up again as the country that has most actively managed its population numbers (my bunny-hugging greenies are highly averse to addressing this component).

      As to other solution, I get the feel of a cop-out in your last paragraph – references to “a change in the economic system” is very vague. I propose we need to break the back of…

    • Judith

      Right now, we need new ways of doing things. Ways that harness people power and value people’s efforts to enhance their lives. The banking and finance methodology has removed power from people in the running of their own lives. It has committed immense fraud on those in the bottom of the economy by undermining their values.

      Change is overdue and will be extremely unsettling when it happens

    • jandr0

      Judith says: “The banking and finance methodology has removed power from people in the running of their own lives. It has committed immense fraud on those in the bottom of the economy by undermining their values.”

      I somewhat agree, but not completely.

      Firstly, it is not only banking and finance. What about the military-industrial complex? What about property development schemes? What about government bureaucrats (flight tickets for friends + family, tenderpreneurs, rent-seeking)? What about used-car dealers? The list goes on, although (to be fair) each area has its share of stand-up folks in it as well (I know of at least one bank that refused – on principle – to partake in the debt collateralisation that wiped out so many big banks).

      The lesson is that it is NOT just banking and finance. I believe the individual gullibility and greed (which capitalists are so often lambasted with) of the man/woman in the street played a large role.

      Secondly, as mentioned above: Government is just as involved! So I am amazed that so many people are thinking government will solve the problem – they are actually part of the problem! (Look up rational choice theory for some thoughts around this.)

      As I wanted to say earlier (before Thought Leader’s incorrect “characters available” count lopped of my last statement), we need to break the back of CORPORATISM.

      I believe that can only be done if Joe Public drops their gullibility, blind loyalty and pop-idol political support.

    • pongoland

      Roger is right.

      Economic growth is unsustainable on a finite planet.

      The world economic system is a giant pyramid scheme built on debt and dependent on exponential economic growth.

      The peaking of conventional oil has made growth far more difficult, so the whole system is headed for collapse.

      Our only hope is to adopt a steady state model, reducing the resources we use and the waste we create.

      But there’s no profit in that, so it will be opposed by every fibre of the corporatists’ collective being.

      Check out steadystate.org for some realistic, radical economic insights.

    • http://www.cindynel.co.za peter

      Wrong heading here Roger. It should read “Why we can’t………..” instead of “Why can’t we?” as this post actually answers the question rather than posing it. Just maybe without a serious rethink on how we do things and what our real objectives are we will not resolve this sticky mess. Just maybe we have a terminal situation here,like a cancer patient hoping for a miracle cure. The chances are slim at best.
      In Afrikaans, the saying goes ” tot so ver!” Maybe the fact that we keep on making the same mistakes over and over simply means that we cannot possibly expect different results. Are we the next “so-called” civilization to disappear from this planet? More than likely and the planet does not care. We just cannot afford to screw up any more. Greed and wanton destruction of our limited resources to satisfy or “wants”, not our needs, is sure to lead to our demise. We need not concern ourselves with the tragic circumstances which we leave our children and grandchildren to inherit as it is unlikely that they will survive what is to transpire anyway. Another great mistake which we make is that we teach our kids to be like us ( our education therefore lacks vision ) and we should try a little harder to understand the malice and resentment which they feel toward us. We have let them down badly and the saddest thing of all is that we seem not to care.

    • MLH

      But the steady state model depends on a relatively stable population with agricultural and banking models that are effective within that population. South Africa produces sufficient food some years…the problem then is that a large proportion of her population cannot afford to buy that food. This makes it clear that those unemployed people do need some form of work that will offer enough to sustain themselves, without necessarily vastly growing the economy.
      Which makes a case for training them initially to build and maintain their own homes, starting community smallholdings and formalising traditional saving systems (stokvels). None of this conflicts with ANC policy, where the government supplies taxpayer money to help initiate processes. Some other form of payment for services rendered is necessary; if one RDP home were built for every owner-paid home, something relevant could emerge.
      Were the state to provide the land for smallholdings (at no cost), more people could find employment and improve their agricultural skills. Once people have money in their pockets, they would afford their own food, begin to make use of banks and own their own assets.
      The one undetermined point is that people should plan to only add their own number to the population: one for one. It’s clear that this strategy would need some government intervention, but for such a good reason, the poor might well be prepared to comply if approached in the right manner.

    • http://none Lyndall Beddy

      America has got vastly rich by living in ever increasing debt for decades, funded by the rest of the world being stupid enough to go off gold as a money standard and onto the dollar, of which Americans can print as many as they like ever since they unlinked the dollar fom being backed by the gold in Fort Knox.

      On top of which the Reserve Banks and politicians have allowed banks to lend money they don’t have (called gearing) which means that commercial banks also print money.

      For thousands of years money was stable and real- the banks loaned to borrowers the REAL money of savers and took a share of the interest. Now they lend computer generated, non-existant, money – and the result is rampant inflation.

      And the Eurozone crisis started in Ireland and Iceland – both of whom had bought American debt (sub-prime mortgage loans), which the whole world believed had been backed by the USA government – until the chips were down and the USA could not pay!

    • http://www.sane.org.za Yaj

      Excellent pece, Roger.
      Pongoland and Lyndall Beddy are quite correct.
      Ultimately we need monetary reform to a social/public credit system with full reserve banking.
      We could start with launching a deposit-taking publicly owned network of banks which provide low-cost credit specifically ear-marked for development of renewable energy infrastructure, mass public transit,local organic farming, local food processing, local manufacturing of clothing, other goods and services etc., and ‘green’ housing development – in a nutshell for “green economy”development and not consumption-motocars etc,
      Next, we need a universal basic income in the form of local currencies and /or TEQs ( tradable energy quotas)

    • africalover

      To all
      I agree but not radical enough.
      When will we understand that productivism is leading us to environmental catastrophe, and that the whole situation is aggravated by the fact that profit-oriented banks and finance are dictating to states ?

    • http://none Lyndall Beddy

      One of the reasons that America has been attacking Iran since Roosevelt and Churchill deposed their democratically elected government because they wanted to nationalise oil, is that it is the ONLY non Arab, non Opec, and non Sunni but Shia, large oil producer and DOES NOT SELL ITS OIL IN DOLLARS or through Opec!

    • http://www.sane.org.za Yaj

      a steady-state or degrowth economy is what we need but can only be achieved through radical democratic monetary reform