Wednesday, September 27, 2006

Economics: Avoiding the Y2K Fallacy

The end of the age of cheap fossil fuels heralds a total revolution in economic affairs worldwide. For the last three hundred years, the key to prosperity has been the replacement of human skill with mechanical energy. The steam-powered factories of 18th century England heralded an economic order in which technological progress and soaring rates of fossil fuel extraction went hand in hand, and success went to those who pushed mechanization into new economic sectors – replacing sails with steam, farm horses with tractors, local theaters with movies and TV, folk culture with mass-produced pop culture, and so on.

Hubbert’s peak marks the limit of this process. Mechanization depends on massive infusions of cheap energy, and that combination of abundant energy at low cost is exactly what won’t be available in the future. If the last three hundred years funneled wealth to those who could exploit fossil fuels to the fullest and build centralized, technologically driven economic structures, the next three hundred years will see exactly the opposite; success will go to those who get ahead of depletion curves by reducing their reliance on fossil fuels further than others, and relying instead on human skills and sustainable, low-intensity energy inputs.

These changes won’t take place overnight, though. Hubbert’s peak occurs when approximately half the world’s accessible petroleum has been pumped out, and so the slope down from it will more than likely parallel the slope up to it. This means that in 2030, for example, the world will be producing about as much oil as it produced in 1980, and very significant amounts of coal, natural gas, hydroelectricity, and other energy sources will also be available. All that energy will still be available to power factories, fuel transportation, and fill other economic roles. It will be more expensive, less reliable, and spread more unevenly among a larger world population, but it will still be there.

Thus the survivalist fantasy that peaking oil production will lead to sudden collapse can’t be justified. What we face instead, as I’ve argued elsewhere, is a long period of economic contraction and technological decline. There will be plenty of bumps and potholes on the long road down, to be sure. Systems failures like the one that accompanied Hurricane Katrina last year, and reduced large portions of coastal Louisiana and Mississippi to a Third World level from which they show no signs of recovering, are likely to be regular occurrences. Still – and this has to be grasped in order to make any sense at all out of the future – systems failures don’t automatically spiral out into total collapse.

This point has been notably lacking in many discussions of the economic impact of peak oil. It’s commonly argued, for example, that the financial shock imposed by rising energy costs will cause the entire global economy to come apart at the seams, leaving people unable to get food and other necessities and turning them into the marauding hordes of the standard survivalist fantasy. This is a classic example of what I call the Y2K fallacy, and revisiting the Y2K fiasco will cast some light on where current speculations about peak oil have run off the rails.

In the late 1990s, as my readers will doubtless remember, computer experts began to warn that many older computer systems had no way to process year-numbers beginning with a 2 rather than a 1, and could crash when the calendar rolled over from 1999 to 2000. Early surveys of the problem showed that a very large number of systems could be affected, especially in banking, telecommunications, and government. By the beginning of 1998 or so, it was clear that a major mess was in the making unless something was done.

This real and serious problem, though, quickly got blown out of proportion by the apocalypse lobby – the sizeable number of people for whom faith in the imminent collapse of civilization is an emotional necessity. By 1999, survivalist visions of social collapse and mass death via Y2K spilled out of this subculture and percolated through American society. I knew many people who confidently expected the end of civilization as we know it on New Years Eve of 1999, and waited all night in their basements for the blackouts, systems failures, and rampaging mobs that never came.

Some pundits have used these failed predictions to argue that the whole Y2K crisis wasn’t real in the first place, but this misstates the whole lesson of the experience. The threat was real; the apocalypse lobby simply missed the four most important words in the prediction – “unless something was done.” Faced with a credible threat, a hard deadline, and a clear course of action, people responded predictably by doing something about the situation. Sales of Y2K-compliant computers and software soared off the charts, and software jockeys made money hand over fist reprogramming old machines. Some of us used simpler fixes; I simply reset the calendar on my old and non-compliant computer to December 31, 1949, and went through the rollover to January 1, 1950 with no trouble at all.

The fallacy that bedeviled the Y2K survivalists was the belief that government, business, and ordinary people, faced with an immiment threat and obvious responses to it, will sit on their hands and do nothing until catastrophe overwhelms them. This same odd belief can be found all through discussions of peak oil. As oil plateaus and then declines, energy prices will rise sharply; that’s the threat. The obvious response, which succeeded brilliantly in the 1970s, is to reduce energy use through conservation. This factor is already helping to drive swings in energy prices, as demand for petroleum and natural gas fails to meet speculators’ expectations.

The collision between declining fossil fuel production and increasing demand, in fact, is far more likely to cause drastic swings in the price of energy than the sort of sustained rise imagined by some peak oil theorists. As energy prices rise, speculators dive into the market, driving up prices further than actual shortfalls in production capacity would justify. Many energy consumers respond by cutting back on their energy use by means of lifestyle changes and conservation technologies, while others are simply priced out of the market. The result is that demand drops, stockpiles rise, and prices start to slide. The speculators dive out of the market, driving down prices further than actual declines in demand would justify, and the cycle begins again. The resulting whipsaw movements in the price of energy can cause plenty of economic damage all by themselves, but there again it’s possible to respond to volatility constructively – for example, by stockpiling fuel when it’s cheap and drawing down those stockpiles when prices spike.

The same logic needs to be applied to other aspects of our economic situation. The United States today, as many people have pointed out, is a spendthrift debtor nation, borrowing more than $2 billion a day from overseas to pay for imports that far exceed its exports and a standard of living that can’t be supported by its anemic manufacturing and resource-extraction base. These factors are unsustainable, and major shifts in the world economic order are inevitable as the resulting imbalances work themselves out. Those who claim that the result will inevitably be social collapse and a Road Warrior future, though, haven’t been paying attention to world economic affairs. Over the last fifty years or so, quite a few nations have borrowed and spent their way into fiscal crisis. Some responded with austerity and periods of recession; some inflated their currencies, went into hyperinflation, and came back out of it; some repudiated their foreign debts and weathered the international reaction; others simply muddled through. All of them survived the crisis and rebuilt afterwards, and so will the United States.

Most people nowadays, it has to be said, underestimate the resiliency of the modern nation-state. A US government faced with a severe economic crisis has plenty of options. It can respond to a market crash by flooding the economy with essentially free credit, as Japan did after the 1990 stock debacle. It can respond to currency collapse by abandoning its old currency and issuing a new one with solid backing, as Germany did in the 1920s to end its bout of hyperinflation. It can manipulate markets, nationalize industries, enact wage and price controls, levy punitive tariffs and embargoes, subsidize basic necessities for the population, and impose rationing of fuel and food. If necessary, it can declare martial law and use the military and National Guard to restore civil order. All of these things have taken place in many other countries in the last half century or so, when governments have faced the possibility of chaos. Any or all of them could readily happen here – and for that matter, some already have.

There are still very rough times ahead, to be sure. After a quarter century of reckless borrowing and waste fueled by absurdly extravagant use of the world’s finite energy resources, America is likely to face a period of contraction as bad as the Great Depression, and an economic breakdown on the scale of the one that engulfed Russia after the collapse of the Soviet Union is far from impossible. Still, the United States still existed after the Depression, Russia still exists today, and millions of people came through each of these economic crises with their lives, families, homes, and livelihoods intact.

Thus we can expect the next few decades to see a great deal of economic volatility and wrenching change, and quite probably some very hard times for many people. Energy costs will be impossible to predict as prices spike and crash, trending slowly but very unevenly upwards, and economic sectors dependent on stable access to energy will face a very rough road indeed. On average, those people and industries that require more energy will do worse than those that can make do with less, and those professions that meet actual needs will do much better than those devoted to the mass production of the unnecessary. Two weeks from now, I’ll make some suggestions about how individuals can prepare to deal with the new economic world of the deindustrializing future. Before that, though, it’s necessary to take a second look at the economy and draw some rarely noticed distinctions between the real economy of goods and services and the fictive economy that currently dominates the way goods and services are produced, distributed and sold.

17 comments:

Eligere said...

A wonderfully astute commentary, as always. I look forward to your posts every week.

To your point about fuel inefficient technologies/industries disappearing, I think this has already happened. The Concorde was in service from 1976 until 2003. The reasons for the British Air and Air France decisions to discontinue service rather than care for or replace the aging fleet, are disputed. 9/11 is often mentioned, but none of the 9/11 flights was a Concorde, nor would they have been easy or attractive targets. At between $6000 (discounted) and $12,000 round trip, tickets were still selling well, and the flights were profitable. But regular flights were more profitable, largely because they were far more fuel efficient. The Concorde burned 6 gallons of jet fuel per mile and carried 100 passengers; regular flights burn 5 gallons of fuel per mile and carry 400 passengers.

So that's one example of a retreat from technology prompted, I believe, by the escalating cost of energy.

Nnonnth said...

You have a reader for life!

Can't wait for next week's episode... I know so few who can see the truth about what they do for a living, and whether it actually amounts to anything real at all. The media's 'magical trance', as you put it, is so spellbinding...

Thank goodness you've been thinking about these things, while I was just sitting and meditating! I really don't *trust* most of the lobbies and NGA's to have the correct, practical point of view - perhaps you will talk about this some more sometime? They all seem to've watched 'Star Wars' one too many times, to be convinced that being bravely against 'the man' is the effective response.

Some quiet work to ensure a liveable future would be far better, that's what you're suggesting. I do not want governments to take action on my behalf, I want to act myself - without turning into a survivalist nincompoop. Then if governments do fall into line with reality, they will be welcome - but to rely on them now, in their current state, would be absurd.

If you have any further comments that demarcate that point of view - so well put forward in the book review essay to which you link here - I'd love to hear them. I cannot see it as a coincidence that the rise of alternative spiritualities is accompanying all this. Clearly respect for the earth is amongst the most important changes of worldview our society has to take on board - the rhythms of the seasons and the realities of nature must be deeply understood.

But I think there is even more to it than that. One cannot escape the fact that the mainstream religions are playing a part in the chaos. This is in some sense a huge time of spiritual awakening too. The fact that it all comes together makes for a great time to be a magician!

Thanks again and I will continue to read.

T.R. Elliott said...

Your assessment corresponds exactly with mine. A few years ago, I participated in peakoil.com, but finally grew weary of the obsession over there with doom, death and destruction--which seems to attract the depressed, the displaced, the anti-social, and--unfortunately--a few racists and xenephobes. It grew boring. Years later, I'm not sure that it has changed.

That said, I do think we are in for some tough times. I am concerned about the reduction in our rights as the government looks for ways to deal with oil depletion. And I am concerned about nationalistic and even fascistic responses to oil depletion.

But I'm not buying a composting toilet just yet.

I'll pass this post on to others. Definitely a must read. And BTW, Ashland is a beautiful city. Passed through there in July.

Adrynian said...

Your clear-eyed vision of the future of (de-)industrial society is, as always, refreshing. It certainly beats the depressing, "We're all gonna die!" approach and shows people hope.

My concern, however, and I believe someone else mentioned this in a comment for a previous post, is our debt-based currency. What I haven't yet been able to wrap my head around is how our national currencies are going to be worth anything once the prospect of GDP growth disappears.

They depend on (the promise of) growth to encourage people to borrow them. And, while I've read people naysaying the following point, it also seems that they depend on either growth or inflation to allow people to pay for the cost of borrowing them in the first place - by further increasing the $-supply sufficiently to enable paying back principle + interest (since the interest isn't lent into existence and must come from someone else's principal, which can either be justified by growth or created via inflation). (I'm thinking of the 11th round, if anyone knows what I'm talking about.)

The consequence of this seems to be that we will have to redesign our medium of exchange or our economies will implode in a Great Depression of massive proportions. If people don't think the economy can grow (because there aren't the energy supplies), they won't borrow to invest in that growth and the economy will stagnate (I think).

Furthermore, in the US, for example, 70% of the economic activity is in the form of consumer purchasing. If the end of consumerism is nigh, what effect will this have on everything I mentioned above (i.e. prospects for economic -growth, or even -activity in general)?

I don't expect you to have all the answers, but this is a problem I've been worrying at for a while now, and I'm curious to hear your thoughts on the matter.

Adrynian said...

As one further comment, my own personal preference on the medium-of-exchange front is local currencies that function like a time-stamped scrip to encourage their circulation.

Municipal governments (I'm in Canada), or regional coalitions of them, collect the time-tax and spend it into existence on various social services, infrastructure investment projects, and outreach programs (e.g. supplement teachers' & municipal workers' wages, develop community gardens employing the homeless, fund soup kitchens, etc.).

I favour a time-tax, otherwise known as "negative interest" or "demurrage" of approximately 2%/week (that is, the money has a weekly expiry date & every week the paper scrip, or if it were done electronically it could be made a continuous cost of an equivalent amount, would have to be "renewed" at a cost of 2% of its face value). (That is, you're taxing the money, not the spending of it: if economic activity (P) equals the amount of money in circulation (M) times its average rate of circulation (V) - i.e. P=MV - then you're taxing M, not P as per a sales tax.) (This was used successfully in some communities for a while during the Great Depression in Germany, Austria, and the US; possibly other places, as well.) I put the demurrage at ~2%/week because this allows every dollar in the economy to pass through the municipal governments hands at least once over the course of a year, giving it direct and rapid control over any possible inflation that may occur if they over spend it into circulation.

Businesses can participate or not as they prefer and can state a participation rating (from 0-100% acceptance of the local currency for a given transaction) which will act as a gauge for how "local" their business is (i.e. how much they purchase locally, themselves). The intention is that over time the more local businesses will gain a competitive advantage as local currency gains popularity and more people are looking for more ways to spend it, thus encouraging further relocalization of the economy with all its attendant benefits of improved local employment, investment, etc.

This would overcome the problems of debt-based currency in a world of declining energy and consumption, and should help to rebuild local communities and economies.

Unfortunately, I'm not convinced that the time is right for such a currency, since it has a tax on it and people generally like to avoid taxes, even useful ones. It also qualifies as a "bad money", which can work in its favour to spread its usage if it has the full backing of authority (i.e. "bad money drives out good," look it up on Wikipedia), but will work against its adoption without such backing.

RAS said...

Hi,
Would you be willing to provide us with a list of resources we can go to in order to find more info on some of these things? Maybe in the preparation post two weeks from now. That would be really appreciated.
Thanks again for your commentary!
-RAS

RAS said...

Hi,
Would you be willing to provide us with a list of resources we can go to in order to find more info on some of these things? Maybe in the preparation post two weeks from now. That would be really appreciated.
Thanks again for your commentary!
-RAS

Gareth Doutch said...

JMG,
Since coming across peak oil about 2 yrs ago, I've always wondered where on Earth the survivalist "mad max" scenarios come from. Of course it's common sense that should collapse occur, it would be temporary in nature. It's not difficult to imagine the army being deployed to keep some order in the meantime. And that's just scratching the surface. Once the problems are known and fully understood by large amounts of people, are we going to keep wasting our resources? I don't think so.

By the way, there's a short critique on the front page of powerswitch that you might be interested in.

Puma said...

The only thing I have to take issue with here is that the comparison between Y2K and Peak Oil is not valid - the two situations are so qualitatively different as to not warrant it. Y2K was essentially a technological byte problem, literally created by the very people who then were able to solve it (and quickly) by simply re-structuring the existing framework.

Oil, on the other hand, is a finite resource based in the Earth - and is featured in every single aspect of life in every "developed" country - there is literally nothing (products, production, transportation, support, packaging, dependency, credit, media, growth, consumption, waste) that is not endemically affected by oil, its price, its availability, its politics. It is also not something we can just... fix. Peak Oil is simply a fact of life - as you mentioned previously, it is not a problem, but a predicament. We have never experienced anything like this before. We don't have anything really to compare it to, and we cannot simply restructure the Earth to suit our desires, no matter how often the politicians say otherwise.

'Many energy consumers respond by cutting back on their energy use by means of lifestyle changes and conservation technologies, while others are simply priced out of the market."

When you are talking about demand destruction, the problem I bring up is highlighted further. When someone is "simply priced out of the market" (of energy) it sounds all neat and market-correction until you realize that what it really means is that the poor family next door cannot pay to heat their home this winter, and some of them may literally die because of it. And when we fluctuate our way towards millions of such families, "survivalism" will most certainly become an issue.

t.r. elliot, why wait to buy a composting toilet? They work just fine.

adrynian brings up an essential point: our fiat currency. Funny how a sort of perfect storm of Peak Oil, global warming, economic depression, political crisis and Muslim and Christian jihadism all seem to be culminating at the same time.

John, have you read any Catherine Austin Fitts?

John Michael Greer said...

All,

Good heavens, quite a flurry of comments. Many thanks!

Eligere, you're right on the money -- the Concorde was touted as "the wave of the future." Well, indeed it is, but not in the way its promoters thought; it's a high-water mark, and the tide is going out.

Nnonth, thanks for your enthusiasm! Don't dismiss meditation, though -- it's one of the few routes out of the trance of collective consciousness. I do have some things to say about social issues, and the self-defeating behavior of the protest industry, but that'll hit the blog as time permits.

T.R., by all means get that composting toilet ASAP -- they're clean, odor-free, and do wonders for your vegetable garden.

Adrynian, I'll be touching on the problems of a fictive economy based on exchanging unpayable IOUs in next week's post. The currency bubble is only one of many aspects of this problem.

RAS, I'll see what I can do, but the internet really isn't my home turf -- if someone else can post a good resource for this, I'd be grateful.

Gareth, I agree that there's likely to be some radical changes in resource use once the reality of depletion really sets in. People have been extravagant because every authoritative voice insisted it's a good thing, but this used to be a country of cheapskates and penny pinchers, and it will be again.

Puma, of course peak oil and Y2K aren't the same. Y2K was a problem; peak oil is a predicament. The same fallacy, though, has shaped responses to both, and we can make constructive responses to a predicament, too. Equally, you're right that "demand destruction" equals impoverishment and a great deal of human suffering. That can't be prevented at this point, and a lot of people are going to experience extremely hard times. The more people take steps to conserve energy, on the other hand, the less of the demand destruction will have to come about the hard way. Thus (part of) my insistence that now's the time to insulate, weatherstrip, and get that passive solar retrofit in place.

John Michael Greer said...

Nnonth,

When you have the time, drop me an email via www.aoda.org -- I'd welcome the chance to chat with someone else in the esoteric community who's paying attention to this stuff

gree said...

John, your writings are much welcomed as we so need sociological analysis of the nexus of problems Puma identifies.Unfortunately your catabolic theory points to a future worse in the long run than some survivalists imagine.

In both this article & your Deindustrialization article I believe you miss on an issue that I believe might change your analysis . Namely that Hubbert's Peak will decline parellel to it's upslope. The primary reason is Hubbert based his mathematical theory on vertical drilling. This is no longer the case & the horizional drilling decline rates are much greater for oil wells ( Yibal, North Sea, & Cantrell are ex. of this).Also horizontal drilling gives greater flow rates, effectively adding to the up side of Hubbert's Peak; hence taking away from the right side of the curve. Add to this the tendency of hoarding/conserving in times of perceived scarcity and this increases decline rates some.Another factor is that Hubbert's Model was developed during periods of stability & economic growth - not what is expected on the downslope.

I worry that the increased decline rates will cause significantly more social instability & wars, even nuclear wars. You are right nation-states will not disappear overnight.

A shorten time frame of mitigating depletion will matter re preps. For example I currently think about electrifying a car; quite an investment. At this point I believe peak will be fairly abrupt-a trasit of horizonal drilling- & evident in the next few years so I think I'll wait to see what kind of trends toward stability we are headed for.

I also am just learning about our global economy- higher decline rates intensify my concern about it dramatically failing & the financial consequences for my family & friends.

Thanks for your confrontation of the survialist fantasy, a tendency I may be having; though I only filled up for Y2K.

Thanks again!

Obliterati said...

Interesting that you mention the U.S. is borrowing $2 billion a day. I just heard a report a short time ago that the war in Iraq is costing $2 billion a day. Makes me profoundly sad to think what that money could do in the way of solid preparation for what's coming. Let alone the obscene waste of it all. Any hope for a sustainable future will have to come at the state and local level, because our leaders have utterly failed us. And that's why commentaries like this are so valuable.

Meanwhile, I'm already seeing stories about a 3% decline in oil produciton and riots over power failures in the third world....

Obliterati said...

Begging everyone's pardon, that's $2 billion a week.

Puma said...

now's the time to insulate, weatherstrip, and get that passive solar retrofit in place.

The trouble I see ahead is not for folks like me, with access to land and a house and such weatherstripping, gardening, etc. I was brought up on a rural farm with animals, wood heat, self-sufficient garden and all. I am living here again now, and I am truly blessed that my town supports hunting, community gardens, CSAs, and farmers markets. I have a little money, some opportunities, and many skills. I am extremely fortunate.
What I see are many, many, millions of people living in large cities who have no such options... Chicago, Detroit, NYC, Los Angeles, etc. People whose food and home and security depend entirely upon working oil-based status quo; and not just the poor ones. The wealthy are just as dependent upon a working oil furnace in their huge suburban home as the city slum-dweller depends on the bus remaining cheap. And very few are aware yet of what is coming.
While you and I and a few others who are able to can prepare and mitigate the effects of demand destruction to the best of our ability, I cannot see how it will even put a dent in what will happen to those millions and millions of others caught in the trap.

Colex said...

Some interesting and fair points about the 'Peak' issue.

There are however some real issues with it, and you have pointed them out yourself by using the Y2K example.

If a problem is imminent then action can be taken to remedy that problem. What action is taken and when is the key.

Software vendors faced with a lead time of a few years simply had to change code and re-install it on the infrastructure that existed. It could also arguably been one of the greatest windfalls for the industry outside of the dotcom boom.

The peak issue isn't a software glitch. It highlights an issue with the very basis of the infrastructure itself. Y2K would have been a far more serious affair if it had turned out every single computer had needed to be replaced in the space of a few years.

Of course action can be taken to minimize such effects. As i said above the key is what action is taken and when. The Y2K issue had a good enough lead time to deal with the problem. As noted, if the Y2K issue had been more fundamental then it may have turned out that we might not have quite had enough time to deal with it, without feeling some of the consequences.

This is really where we are with Peak Oil. All kinds of actions can be taken to lesson it's impact, which as you rightly say, would then forestall and slow the whole peaking process down. However, despite alot of talk, there is very little being done on a large enough scale right now. And what is being done and being proposed is far too late in the process. Our lead time is simply not long enough.

I do not think, as some do, that we are going to sink into some mad max type world, but I am very concerned about our future. We are so utterly dependent on delocalized systems that any squeeze on them will have profound implications. I have no idea what the future holds and what it's nature may be and i think it is one of the great failings of some peak proponents to paint such a grim world. Nobody can truly do that, but the great irony is that if enough is not done soon enough, then it will certainly endanger us all.

If I have to draw a single fault with this analysis, it is that it actually gives a tacit go ahead for business as usual to the people who need to make changes to their lifestyles so this thing does not come to pass.

Nnonnth said...

Just in reply to Puma, you're right that some people will have an advantage - there's a crazy swing effect where all those who seem disadvantaged right now by their limited access to energy are going to see that as an advantage before too long.

However, I think the good Archdruid's point is that those who learn faster can help prepare and experiment for those who are a little slower, which is where the idea of organizing by communities comes in.

We can't wait for top-down intitiatives I'm sure, but bottom-up ones don't have to be limited to a home-by-home effort. After we've put on our own oxygen masks, we can help those around to do the same... it's all about responsibility for one's fellow creatures in the end, isn't it?

The first person in a neighbourhood to do this or that is the groundbreaker, whilst the thousandth is going to be in a follow-on situation with (hopefully) alot of the more obvious mistakes made for them.

Those with more savvy, courage, initiative, etc. will obviously in this scenario have to be a little responsible for those who lack these attributes...