Energy and food constraints will collapse global economic recovery
We may rail against the regulators, politicians, and others who failed to understand and manage past risks, but we are just as culpable for our failure to engage with severe, well-signposted, imminent ones. Impassioned arguments over bank nationalisation, battered government finances and the austerity-stimulus debate consume us today, but in reality may be little more than a Lilliputian tussle over the fag-end of our globalised economy. But it seems we cannot see our own predicament.
Recent reports from sources as diverse as Lloyds Insurance and Chatham House, the UK Peak Oil Task Force, and US and German military think-tanks are the latest in a long list of warnings that we are at, or close to, a peak in global oil production. Peak oil refers to the time of the maximum rate of global oil production after which terminal decline sets in.
In a 2005 report for the US Department of Energy, the analyst Robert Hirsch wrote that: The peaking of world oil production presents ... the world with an unprecedented risk management problem ... The economic, social and political costs will be unprecedented ... Timely, aggressive risk management will be essential. He suggested we would need at least twenty years pre-peak to manage those risks, an estimate that some who study these risks think optimistic. Hirsch then gave his advice to Forfas (State body for risk assessment) for their study on Ireland's oil dependency.
Yet here we are, five years later, with a high probability that we are around the peak and no attempt at risk management. Nothing! Certainly some political and public figures have mentioned peak oil, though clearly with limited understanding and always as a longer term issue. In its five year strategy, published this year, the Sustainable Energy Authority of Ireland ignores it entirely. The Economic and Social Research Institute (ESRI), those cardinals of the status quo, recently published some very limited work on the implications of (just) high oil prices for the Irish economy, but only when Siemens Ireland prodded them into doing so.
Ireland is not unique in ignoring the subject, though things are changing elsewhere. The UK's Observer recently reported that government ministers were far more concerned about peak oil than they had admitted and were involved in secret talks between the The Department of Energy and Climate Change, The Ministry of Defence, and the Bank of England.
The standard retort to the threat of peak oil is that rising oil prices will encourage substitutes, new technologies, and conservation. While these are presented as truths, they are in fact contingent observations born out of the energy surpluses that facilitated economic growth over the last two centuries. We have neither the time nor resources to adapt, and economies cannot pay arbitrarily high oil prices. Indeed, economies may never again be able to afford the high oil prices we saw three years ago.
More particularly, it matters little what technologies are in the pipeline, the potential of wind power in some choice location, or that the European Commission has a target: if a severe economic and structural collapse occurs before their enactment, then they may never happen.
Even those who claim to be enacting policy to manage the implications of peak oil are clearly confused. Large-scale grid upgrades, electrification of transport, smart energy technology, and wave power are probably a waste of money and effort. The assumptions contained in their planning and technology are predicated on a stable globalised growth economy.
So what might peak oil mean? The recently leaked German army report, drawing upon research by The Risk/ Resilience Network and Feasta, argues: Investment will decline and debt service will be challenged, leading to a crash in financial markets, accompanied by a loss of trust in currencies and a break-up of value and supply chains-because trade is no longer possible. This would in turn lead to the collapse of economies, mass unemployment, government defaults and infrastructure breakdowns, ultimately followed by famines and total system collapse.
They are not referring to what we currently perceive of as fragile states, but to advanced complex societies, finely integrated into the global economy. Indeed, it is the de-localisation of our basic welfare and the integration and complexity of the globalised economy that magnifies our risks. A systemic collapse is posited that would leave no area of life unaffected and overwhelm the ability of governments to manage.
So how are we to understand such large impacts from what might seem to be small declines in global oil production? The first thing to be aware of is that peak oil is not a simple transport and petrochemical problem, but a systemic predicament. All systems; life, economies and civilisations require flows of concentrated energy to maintain their structure and to allow growth. If we do not maintain the flows of energy through the systems we depend upon, they decay.
As humans, energy in the form of food allows us to live. Our civilisation and the economy that supports it similarly need flows of energy to function. The crucial difference is that once humans reach maturity their energy intake stabilises, while our globalising economy has adapted to continuous growth and thus, rising energy flows. Declining oil production will force a continual economic contraction. That is, unless we could deploy efficiency measures and substitutes at the correct scale, quality and with appropriate timing to counter the effects of declining oil production; a very long shot.
Oil also has an impact on the most non-discretionary of purchases, namely food. Food production is already becoming strained as ecological degradation, water constraints, and the burgeoning effects of climate change push against a rising population and changing diets. But the most significant development of the Green Revolution of the 1950's and 1960's was to put food production on a fossil fuel platform. This expanded food production and drove down prices. The result was population expansion which drove more ecological degradation and resource demands. The result is that now even more people are dependent upon an even less diverse and more fragile resource base. Declines in oil production are likely not only to reduce global food production, but to undermine the economic systems that made food accessible and affordable.
While we may directly understand our economic position through our work or shopping, or through the psychodrama of national economic argument, our actual welfare is maintained through our integration with the globalised economy. The things we rely upon such as our food, IT systems, banking, monetary stability, transport, electricity services and the viability of our own jobs are dependent upon trillions of productive efforts and economic transactions which criss-cross the planet.
There are two sides to this myriad network of exchange. The first is the goods and services produced, which always require energy and resource flows. The second side is the flow of money and credit that enables the transactions. Money has no intrinsic value, you cannot eat or wear it, but it makes a claim on real things. And credit, from the Latin root to believe is indeed also an act of faith.
Credit is at the foundation of our monetary and economic system, and by extension the complex supply-chains that integrate a globalised economy. People only lend because they expect that you can service the principal plus interest into the future. While this makes sense in a growing economy, it becomes untenable in a terminally contracting one. In other words, reduced energy flows cannot maintain the economic production required to service debt. Debt outstanding cannot be repaid in real terms, leaving only default and hyper-inflation.
Of course the debt-burden and deficits of many countries are already unsustainable. Furthermore, in our integrated globalised economy the profligate and parsimonious are tied together. A contagious default of some Euro-zone countries could initiate deep trouble for the UK and US economies (and vice-versa); imperilling German banks and Chinese exports. So the global economy could begin to topple before we see spikes in oil prices.
Alternatively, if we can, through faith, even more borrowing and stimulus, hold up the economy just a little longer, we are going to hit declines in oil production. Oil and food prices may rise, contracting the economy and making the un-sustainability of our debt-burden obvious even to the most clueless.
In either case, many of the economic implications may be similar. The effects of de-leveraging would drive reductions in energy demand, not constraints on production. Food, energy, debt servicing and other essentials would take up more and more of peoples' available and declining purchasing power. Businesses will close and jobs will be lost in the discretionary economy. Already-battered banks will lose capital, and sky-high interests rates will reflect their negative perception of the future credit worthiness of the economy. Asset prices will fall, and the cost of debt servicing will rise relative to the shrinking money supply in the economy. Defaults, bank runs, mass unemployment and collapses in government finances will ensue. Purchasing power will drop further, more jobs are lost, and so on. This processes are well-understood debt deflation dynamics.
Crucially, energy demand could fall dramatically and with that prices. The lack of affordable credit, low and volatile prices, and an overhang of spare capacity in oil, gas and coal production will dry up investment in new production including renewable energy. The result is that if growth were to pick up again some decade hence, it would again be constrained by reduced purchasing power and much lower energy caps. The latter will be set by natural decline in established production, lack of investment in new production, and the decay of energy and other infrastructure through years of non-use and lack of maintenance.
It takes the technical, social, infrastructural, and economic resources of an optimised globalised economy at its peak to extract and and use our current energy flows, and even then oil production cannot be maintained. There may indeed be plenty of fossil fuels left in the ground, but following a major systemic collapse, most may remain there as that capacity dies away.
Ultimately the deflationary pressures will start to give way to currency re-issues, currency devaluations, inflation and hyper-inflation. Bank intermediation, credit, and confidence in money holding value are the foundation of the complex trade networks upon which we rely. With their failure we could see supply-chain collapse.
The risks extend to the complex infrastructures such as the grid and IT networks, transport, sewage and water. Their dependence on large economies of scale, the purchasing power within economies, and continual re-supply through highly complex resource intensive and specialised supply-chains will be challenged. Furthermore their co-dependency may mean that failure in one will cause cascading failure.
Finally, the integration and complexity of the globalised economy means that no country will avoid some level of collapse. The principal risk management challenge is not about how we introduce the energy infrastructure and conservation measures to maintain those systems, but about how we deal with the consequences of their collapse.
We are not talking about abstract consequences in an abstract future. They are growing real-time risks that may have a rapid on-set. This is an urgent societal issue, and although there are many things we can do if we accept the risks, we cannot say we were not warned.
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