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Islands in an Expanding Sea

APEC leaders in HawaiiThe following is the text of an address by Richard Heinberg to the Moana Nui Conference in Honolulu, November 12, 2011. Honolulu was concurrently hosting the Asia Pacific Economic Cooperation (APEC) Conference; as a response to that secretive international trade meeting, the International Forum on Globalization and Pua Mohala Ka Po collaborated to organize Moana Nui.

Expansion of trade depends not just upon favorable trade rules, but financial and monetary integration between nations, as well as the availability of affordable transport fuels. I will argue that current APEC negotiations to increase trade within the Pacific region are a hollow exercise because the preconditions necessary for expanded commerce are disappearing. The peoples of this region therefore need to develop alternative economic plans and strategies.
1. The global economic context
The global economic context for the current APEC meetings is not being described publicly in plain, understandable terms by policy makers. That context consists of the slowing, ending, and reversal of the economic growth that was seen in most nations during the past few decades. This reversal of growth is happening due to the convergence of two factors: the deflation of history’s biggest credit bubble, and the depletion of the fuel that made the economic miracle of the 20th century possible. That fuel, of course, is oil.
The world’s petroleum is not about to run out, as the oil industry never tires of reminding us. However, we are indeed seeing flat-lining of production of the cheaply produced, easily accessible crude that has heretofore enabled continuing growth in world economic activity. World crude oil production has failed to increase significantly for the past seven years, while prices have doubled and tripled. The cost to the industry to develop new oil production capacity has soared from $20 per barrel just a few years ago to roughly $85 today.
Meanwhile, high oil prices have become a drag upon general economic expansion. This occurred previously in the 1970s; but now the situation is different: no moderation in prices, and consequent economic rebound, appears to be in the offing. Modern economies can slowly adjust to rising oil prices, but costs of production are rocketing more quickly than economies can adapt. Older industrial nations, such as the U.S. and members of the E.U., are particularly slow to respond; China appears more readily able to withstand higher prices, and so demand for oil is shifting away from North America and Europe toward Asia.
At the same time, the amount of oil available for export is shrinking: many oil producers are seeing rising domestic demand, so even if their total production remains constant or increases gradually, the portion they are able to export is decreasing. Thus competition for oil imports is ratcheting up, and China appears to be outbidding America and Europe. 
Oil is also implicated in the credit crisis. During the 20th century, cheap oil helped enable higher rates of production of goods. The problem, then, was of over-production, and it was solved by the development of the modern advertising industry and the expansion of consumer credit—which has in turn led to the current Debt Spiral, which can be described as follows. This will require a few paragraphs, but they constitute a highly distilled overview of a very complex situation; and without a background understanding of the Debt Spiral, it is hard to see just how futile the APEC talks really are.
Money is debt. If that statement seems curious or shocking, I urge you to read David Graeber’s recent book Debt: The First 5,000 Years, which details this inherent and universal identity. During the 20th century, the process whereby money is created came to be delegated almost entirely to commercial banks, which call money into existence when they make loans.
Economic growth requires ever more money, and therefore more debt. However, it is possible for debt to grow faster than GDP; this is generally a strategy for pushing consumption forward in time (consume now, pay later).
In the U.S., as globalization took hold in the 1980s, workers found themselves competing with their counterparts in Mexico and then China; the result was stagnation in hourly wages for American workers. In order to consume more (as they were constantly being urged to do by ubiquitous advertising messages), households took on more debt. The financial industry helped out with new products—credit cards, subprime mortgages, home equity lines of credit—that made it ever easier for consumers to borrow. As a result, debt has grown faster than GDP in almost every year since 1980.
For the debtor, a bank loan is an obligation to repay; for the bank, that same loan is an asset. As consumer debt grew during the 1980s, ’90s, and 2000s, so did the assets of the financial industry, which found ways to leverage those assets through securitization and the selling of derivatives. As this happened, the burgeoning financial industry also acquired greater political power by contributing strategically to political candidates; it capitalized on that power by successfully lobbying for the deregulation of banking. In addition, presidents began routinely appointing financial industry representatives to run the Treasury and relevant regulatory agencies.
Financial deregulation in turn led to a series of credit bubbles (a housing bubble in the late 1980s, a dot-com bubble in the late 1990s, another housing bubble in the 2000s), each larger than the previous one. But in an important sense, the entire exercise of debt expansion constituted one big bubble.
If debt is growing faster than salaries, interest payments take up an ever-larger share of income. This is effectively a time bomb at the heart of the economy. Growth in total debt cannot continue for long if incomes are not also rising. With the collapse of the U.S. housing bubble in 2007-2008, the bomb detonated as trillions of dollars in home equity value held by American households vanished over the course of a few months. The banks suddenly found that a large portion of their assets were worthless.
The bursting of the U.S. real estate bubble led to defaults, foreclosures, unemployment, declining income, and sharply lowered household net worth. American consumers were now in no position to take on more debt even if they wanted to.
This meant that, in order to keep the economy from imploding, government had to step in and become the borrower and spender of last resort. Government borrowed to stimulate consumption, but also to bail out the banks and to help them hide their “toxic” assets—many of which consisted of second mortgages and home equity lines of credit based upon house values that were now purely fictional.
But as government borrowed and spent, tax revenues were declining. This created a situation in which high levels of government debt became problematic. As government payments increase relative to tax income, investors may grow nervous and demand higher rates of interest on government bonds. This has become an especially nasty problem for smaller nations that already had high debt levels prior to the crisis—such as Greece, Ireland, Portugal, and Italy—but it also plagues states, counties, and cities. 
In order to make bond purchasers happy, governments now must cut back on spending. But in a situation where unemployment is high, this simply causes the domestic economy to contract, further eroding tax revenues. Hence the Debt Spiral, from which there is likely no exit short of default and financial-economic meltdown.
In sum, as of today there exists a line of dominoes stretching from Athens to Rome to Wall Street to Washington to Beijing. When those dominoes are done toppling, more trillions in debt will have been defaulted upon, and the world’s banking system may lie mostly in wreckage.
Debt is based on trust—the trust that loans will be repaid. With widespread defaults, trust will decline within the international economic arena. Global economic integration—symbolized in APEC, the Euro, and the international currency and bond markets—is headed for a historic reversal. A crash could come sooner or later, and it could be milder or harsher (depending on the actions of governments and central banks), but the general trend of events is inevitable.
2. Growing competition for resources driven by increasing consumption and scarcity
Competition for oil in the Pacific region is perhaps best exemplified in recent events in the South China Sea. Estimates of commercially extractable oil there range from 28 billion barrels upward, and the region is believed to have commercial gas and other mineral deposits as well. While many nations claim rights to resources 200 miles from their coastlines, China has posted exclusive exploration and extraction rights to the entire South China Sea, right up to the three-mile territorial waters of Vietnam, Malaysia, and the Philippines. Small nations have no prospect of facing down China, but tension increases nevertheless.
In July 2010, at a meeting of Asian countries in Hanoi, Secretary of State Hillary Rodham Clinton declared that the United States would support smaller nations in resisting Beijing’s efforts to dominate the Sea, and stated that that the peaceful resolution of competing sovereignty claims to the disputed region constitutes a U.S. “national interest.” Chinese Foreign Minister Yang Jiechi characterized Clinton’s comments as “an attack on China.”
China is at the same time exceeding its domestic coal production capabilities. This winter, China is projected to see nationwide power shortages, as power companies post losses due to soaring coal prices. The nation now burns half the world’s coal—roughly 3.5 billion tons annually, with the amount growing at about 7 percent annually. China has begun importing coal from Australia and Indonesia; however the entire global coal trade is only 700 million tons, an amount that China could absorb with only a few years of growth in coal consumption. Even the U.S. is now considering exporting coal to China. But since U.S. domestic supplies are not as robust as generally assumed, this would be an exercise of dubious practical value for both parties.  Higher coal prices, supply shortfalls, and infrastructure bottlenecks are inevitable.
Competition is also heating globally up for a wide range of minerals—including copper, rare earths, indium, gallium, uranium, and bauxite. Until 2000, mineral commodity prices were generally falling as increasing amounts of cheap energy were used to dig deeper, refine lower grade ores, and globalize exploration, extraction, and trade. But as oil prices have lofted, prices of minerals have risen too. During the past decade, China was able to corner the global market on rare earths through lowest-cost production; Beijing then announced that exports of the strategic minerals would be restricted. Today other nations are working to again ramp up their mining of rare earths, but prices will inevitably rise. Meanwhile, China’s example is likely to be followed by other nations, leading to export tariffs in some instances, and in others to efforts on the part of powerful resource importers to exert control over domestic policies in weak, resource-rich countries. 
Hawaii from space3. Vulnerability of Pacific island nations to energy scarcity
 Historically, the promise of economic development has been tied to increased energy production and consumption. Thus the dawning era of energy scarcity spells the end of conventional economic development. But how will this shift find expression among nations of the Pacific?
Each country has its own problems and prospects. Two nations in particular—the U.S. and China—will dominate most narratives of the unfolding drama. However, a more nuanced view of the situation can be gained by focusing on energy resource importers, as exemplified by Indonesia; and energy importers, as exemplified by the state of Hawaii.
Indonesia has a long history as an oil exporter, and has been invaded and exploited for its petroleum. Indeed, conflict oil from what was at that time the Dutch East Indies was the fulcrum of the war in the Pacific from 1941 to 1945. Today, this country’s oilfields are largely depleted and the nation has become a net importer. As a founding member of OPEC, Indonesia sold most of its oil for between $10 and $20 per barrel; recently it resigned from OPEC and now must import oil at the current world price of $112 per barrel. The country’s domestic food production is substantial, yet it is a net importer of all of its major staple food commodities, including rice, maize, cassava, soybeans, and sugar. Agriculture is the country’s largest employer, but manufacturing (mostly for export) provides the biggest source of income.
Hawaii, in contrast, imports 85 percent of its food. For the U.S. as a whole, food travels an average of 1500 miles from farm to plate; for Hawaii, average food mileage is double that figure. About 90 percent of Hawaii’s electricity is derived from burning bunker oil, naphtha, or diesel fuel—all of it imported. Tourism is one primary engine of the economy, with many salaries relying directly or indirectly on a steady stream of kerosene-gulping jets full of tourists carrying wallets crammed with debt-dollars, arriving daily. The other main economic driver for the state is federal military spending. Altogether, Hawaii’s economy is especially poorly adapted to the currently emerging reality of scarce oil and credit.
Indonesia and Hawaii demonstrate several distinct kinds of vulnerability to the world’s emerging financial and resource constraints. While Indonesia suffers to a significant degree from what has been called the “resource curse,” Hawaii exports little other than coffee, macadamia nuts, and apparel, while importing nearly all its energy and most of its food. One set of islands is an independent nation, while the other is a distant extension of the world’s current global superpower. Much of Hawaii’s resource dependency is effectively hidden by U.S. military spending, a substantial subsidy to its domestic economy, while Indonesia spends to maintain an army to put down armed separatist movements.
Many threads could begin to unravel in both Indonesia and Hawaii as oil and coal prices soar, if the world economy relapses, and especially if competition between China and the U.S. heats up.
4. Responses
The only really meaningful response to these emerging trends for Pacific nations, be they resource importers or exporters, would be to bolster regional economic self-sufficiency and reduce dependence on resource imports and exports. Contrary to the globalizing doctrine of APEC, economic survival in the era of depletion and deleveraging calls for local resilience, local resistance, local conservation of resources, and local sovereignty over resources.
If the industrial model of development based on cheap, abundant fossil fuels is winding down, and the debt-led financial model of development also is finished, then what comes next? Trends may be clear, but not outcomes.
The U.S., Europe, and China face severe threats. It is obviously a time of considerable danger for smaller nations as these great powers thrash about in desperation and compete for dominance, and as their economies dis-integrate.
But with peril comes opportunity. Smaller nations may find that this period of global financial turmoil presents an opening to seize greater self-determination and economic self-sufficiency. This would be advisable from several standpoints. The Pacific never really offered a proper growth medium for globalization, given the distances between nations and the disparities of their economies. The region is dominated by two leviathans (the U.S. and China) and several second-tier big fish (Japan, Korea, Indonesia, Malaysia, Australia, Chile); most other countries are tiny minnows by comparison, and cannot realistically defend their own trading or cultural interests.
As larger economies stagnate and decline, people in the Pacific must learn to live within ecological limits, providing their own food and other basic necessities. Indigenous peoples in the Pacific islands did this for centuries. Their cultural traditions must come to be viewed not as an impediment to urbanization and economic expansion, or as curiosities to be preserved for the sake of tourism, but as a viable and enduring basis for sustainable economic organization.
Cheap oil, easy credit, and expanding trade effectively shrank the Pacific Ocean during the 20th century. Peak oil and peak debt will re-expand the Pacific, as transportation becomes less affordable and international commerce less certain. The process will certainly be hazardous for people who have come to depend both on imported food and fuel, and on foreign markets for their products. However, small nations and indigenous communities should not miss any opening to repudiate the failing APEC model and regain economic and cultural self-determination.
Image credit: NASA enhanced space view of Hawaiian islands

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