After capitalism, what comes next? For a start, ethics

31 07 2015

Jenny Cameron, University of Newcastle; Katherine Gibson, University of Western Sydney, and Stephen Healy, University of Western Sydney

If the comments generated by the recent publication of excerpts from Paul Mason’s forthcoming book, Postcapitalism: A Guide to Our Future, are anything to go by, its release at the end of the month should kick up a storm.

Mason’s book is about a seismic economic shift already underway, one that is as profound as the transformation from feudalism to capitalism. In the excerpts, Mason observes that:

… whole swaths of economic life are beginning to move to a different rhythm.

The shift is evidenced by developments such as collaborative production and the sharing economy. Mason attributes this economic transformation to advances in information technology, particularly the global networks of people and ideas that are now possible.

Such large-scale pronouncements inevitably generate an equally strong pushback, albeit in very different ways. For example, some comments on the published excerpts align with Fredric Jameson’s observation that sometimes for the Left:

… it is easier to imagine the end of the world than to imagine the end of capitalism.

Other comments are more aligned with climate-change denialism and the sentiment that “it is easier to desire the end of the world than to desire the end of capitalism”.

For those of us who research and practise in the area of what might be called “diverse economies”, Mason’s provocations are welcome. They help to shed light on the array of economic activities that are usually ignored in discussions about economics and they provide an opportunity to debate our economic future.

Enabling but not guaranteeing a better future

Mason’s is a technologically focused vision of transformation. Information technology provides both the catalyst and the means for transitioning from capitalism to a new post-capitalist world. This world will be characterised by “a new way of living” and “new values and behaviours” as unrecognisable to us today as the gritty world of belching factories and waged work would have been to the landed gentry and tenant farmers of pre-industrial Europe.

But there is one important difference between Mason’s post-capitalism and the capitalist and feudal systems that preceded it. The reshaped economic system will, according to Mason, offer hitherto unrealised economic freedoms and liberties with:

… the whole of human intelligence one thumb-swipe away.

There is no doubt that information technology is transforming the lives we can now lead. But technology does not in and of itself guarantee a better future. The much-vaunted “successes” of the sharing economy do not necessarily improve the precarious and exploitative working conditions of those who sign up. For instance, drivers are finding this with Uber, the app-based ride-service that is networked across 58 countries and had, in December 2014, an estimated value of US$41 billion.

Where information technology is generating better futures it seems to rest on explicit ethical commitments that are developed independent of online apps and cyber networks.

For example, in Japan, Fureai Kippu (literally “ticket for a caring relationship”) is based on a commitment to caring for the elderly. Volunteers earn “time credits” by providing care to elderly people. They can transfer these credits to relatives or friends who need care, or they can save the credits for their own future use.

Fureai Kippu emerged in the 1980s, building on a tradition of volunteerism and reciprocal assistance. Technological advances have enabled the network to spread geographically. There are now schemes in London, Los Angeles and Switzerland, and credits earned in these locations can be transferred to relatives or friends elsewhere, including Japan.

Mayumi Hayashi talks about the successes of Fureai Kippu in providing elderly care in Japan.

Technology is augmenting relations of care for others. Technology does not bring these relations into being.

The ethics of the new economies

In our research on the diverse economic practices that exist outside the purview of mainstream economics, we find people are forging new types of economies around six ethical concerns:

  • What do we need to survive well?
  • What happens to surplus, or what is left over after our survival needs have been met?
  • How do we act responsibly to those whose inputs help us to survive well (whether other people or the environment)?
  • How much and what do we consume in order to survive well?
  • How do we care for the commons – the gifts of nature and intellect that we rely on?
  • How do we invest so that future generations can also live well?

For us, these are the different rhythms around which new forms of economic life are taking shape. Like Mason we see these new forms as the building blocks of a “post-capitalist” world (as we wrote about almost ten years ago in A Postcapitalist Politics). Unlike Mason, we see innovations in information technology and networking as supporting rather than driving the economic changes that will be needed.

Our route to post-capitalism foregrounds the ethical dimensions of economic life, and how technologies and regimes of governance might:

  1. Foster less “me”- and “now”-focused subjects of history;
  2. Support more responsible interactions with the ecologies in which we live.

Mason rightly points out that post-capitalism calls forth new types of human beings. He looks to:

… young people all over the world breaking down 20th-century barriers around sexuality, work, creativity and the self.

While we too welcome the widespread acceptance of transformations that feminist and queer politics initiated, there is a worrying undertone of hyper-individualism and libertarianism if we limit ourselves to these examples.

We find glimpses of post-capitalist subjects on a wider canvas of how people are transforming the ways they take responsibility for other humans and “earth others” (or what Pope Francis calls our common home). Think, for example, of the workers in Argentina who, after recovering rundown factories in the 2000s, said things such as:

The factory isn’t ours. We are using it, but it belongs to the community … The profits shouldn’t go to us … but to the community.

We find glimpses in how the people of Norway manage their sovereign wealth fund by foregrounding the well-being of future generations. As one Norwegian economist explained:

We cannot spend this money now; it would be stealing from future generations.

Instead funds are invested for the future and increasingly in investments, such as clean-energy technologies, that will also benefit environmental futures.

Technology and networks in themselves are not liberation. But they can serve to sensitise us to the indivisible nature of people and planet, and to amplify our capacities to empathise, work together and find a way forward on a planet that is damaged, but not beyond repair. In our view, this is the post-capitalism our present circumstances require.

The Conversation

Jenny Cameron is Associate Professor, School of Environmental and Life Sciences at University of Newcastle.
Katherine Gibson is Professor of Economic Geography, Institute for Culture and Society at University of Western Sydney.
Stephen Healy is Senior Research Fellow, Institute for Culture and Society at University of Western Sydney.

This article was originally published on The Conversation.
Read the original article.

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Human domination of the biosphere: Rapid discharge of the earth-space battery foretells the future of humankind

27 07 2015

Chris Harries, a follower of this blog, has found an amazing pdf file on XRayMike’s blog that is so amazing, and explains civilisation’s predicaments so well, I just had to write it up for you all to share around.  I think that the concept of the Earth as a chemical battery is simply stunning…….. the importance of this paper, I think, is epic.

The paper, written by John R. Schramskia, David K. Gattiea , and James H. Brown begins with clarity…

Earth is a chemical battery where, over evolutionary time with a trickle-charge of photosynthesis using solar energy, billions of tons of living biomass were stored in forests and other ecosystems and in vast reserves of fossil fuels. In just the last few hundred years, humans extracted exploitable energy from these living and fossilized biomass fuels to build the modern industrial-technological-informational economy, to grow our population to more than 7 billion, and to transform the biogeochemical cycles and biodiversity of the earth. This rapid discharge of the earth’s store of organic energy fuels the human domination of the biosphere, including conversion of natural habitats to agricultural fields and the resulting loss of native species, emission of carbon dioxide and the resulting climate and sea level change, and use of supplemental nuclear, hydro, wind, and solar energy sources. The laws of thermodynamics governing the trickle-charge and rapid discharge of the earth’s battery are universal and absolute; the earth is only temporarily poised a quantifiable distance from the thermodynamic equilibrium of outer space. Although this distance from equilibrium is comprised of all energy types, most critical for humans is the store of living biomass. With the rapid depletion of this chemical energy, the earth is shifting back toward the inhospitable equilibrium of outer space with fundamental ramifications for the biosphere and humanity. Because there is no substitute or replacement energy for living biomass, the remaining distance from equilibrium that will be required to support human life is unknown.

To illustrate this stunning concept of the Earth as a battery, this clever illustration is used:

Fig1

That just makes so much sense, and makes such mockery of those who believe ‘innovation’ can replace this extraordinary system.

It took hundreds of millions of years for photosynthetic plants to trickle-charge the battery, gradually converting diffuse low-quality solar energy to high-quality chemical energy stored temporarily in the form of living biomass and more lastingly in the form of fossil fuels: oil, gas, and coal. In just the last few centuries—an evolutionary blink of an eye—human energy use to fuel the rise of civilization and the modern industrial-technological-informational society has discharged the earth-space battery

So then, how long have we got before the battery’s flat?

The laws of thermodynamics dictate that the difference in rate and timescale between the slow trickle-charge and rapid depletion is unsustainable. The current massive discharge is rapidly driving the earth from a biosphere teeming with life and supporting a highly developed human civilization toward a barren moonscape.

The truly surprising thing is how much I’ve been feeling this was the case, and for how long…..  the ever lowering ERoEI of the energy sources we insist on using are merely signal of entropy, and it doesn’t matter how clever we are, or how innovative, entropy rules.  People with green dreams of renewables powered EVs and houses and businesses simply do not understand entropy.

Energy in Physics and Biology

The laws of thermodynamics are incontrovertible; they have inescapable ramifications for the future of the biosphere and humankind. We begin by explaining the thermodynamic concepts necessary to understand the energetics of the biosphere and humans within the earth-space system. The laws of thermodynamics and the many forms of energy can be difficult for non-experts. However, the earth’s flows and stores of energy can be explained in straightforward terms to understand why the biosphere and human civilization are in energy imbalance. These physical laws are universal and absolute, they apply to all human activities, and they are the universal key to sustainability

The Paradigm of the Earth-Space Battery

By definition, the quantity of chemical energy concentrated in the carbon stores of planet Earth (positive cathode) represents the distance from the harsh thermodynamic equilibrium of nearby outer space (negative anode). This energy gradient sustains the biosphere and human life. It can be modeled as a once-charged battery. This earth-space chemical battery (Fig. 1) trickle charged very slowly over 4.5 billion years of solar influx and accumulation of living biomass and fossil fuels. It is now discharging rapidly due to human activities. As we burn organic chemical energy, we generate work to grow our population and economy. In the process, the high-quality chemical energy is transformed into heat and lost from the planet by radiation into outer space. The flow of energy from cathode to anode is moving the planet rapidly and irrevocably closer to the sterile chemical equilibrium of space

Fig2

Fig. 2 depicts the earth’s primary higher-quality chemical and nuclear energy storages as their respective distances from the equilibrium of outer space. We follow the energy industry in focusing on the higher-quality pools and using “recoverable energy” as our point of reference, because many deposits of fossil fuels and nuclear ores are dispersed or inaccessible and cannot be currently harvested to yield net energy gain and economic profit (4). The very large lower-quality pools of organic energy including carbon compounds in soils and oceanic sediments (5, 6) are not shown, but these are not currently economically extractable and usable, so they are typically not included in either recoverable or nonrecoverable categories. Although the energy gradients attributed to geothermal cooling, ocean thermal gradients, greenhouse air temperatures, etc., contribute to Earth’s thermodynamic distance from the equilibrium of space, they are also not included as they are not chemical energies and presumably would still exist in some form on a planet devoid of living things, including humans. Fig. 2 shows that humans are currently discharging all of the recoverable stores of organic chemical energy to the anode of the earth-space battery as heat.

Most people who argue about the viability of their [insert favorite technology] only see that viability in terms of money.  Energy, to most people is such a nebulous concept that they do not see the failures of their techno Utopian solutions…….

Fig3

Living Biomass Is Depleting Rapidly

At the time of the Roman Empire and the birth of Christ, the earth contained ∼1,000 billion tons of carbon in living biomass (10), equivalent to 35 ZJ of chemical energy, mostly in the form of trees in forests. In just the last 2,000 y, humans have reduced this by about 45% to ∼550 billion tons of carbon in biomass, equivalent to 19.2 ZJ. The loss has accelerated over time, with 11% depleted just since 1900 (Fig. 3) (11, 12). Over recent years, on average, we are harvesting—and releasing as heat and carbon dioxide—the remaining 550 billion tons of carbon in living biomass at a net rate of ∼1.5 billion tons carbon per year (13, 14). The cause and measurement of biomass depletion are complicated issues, and the numbers are almost constantly being reevaluated (14). The depletion is due primarily to changes in land use, including deforestation, desertification, and conversion of vegetated landscapes into barren surfaces, but also secondarily to other causes such as pollution and unsustainable forestry and fisheries. Although the above quantitative estimates have considerable uncertainty, the overall trend and magnitude are inescapable facts with dire thermodynamic consequences.

The Dominant Role of Humans Homo sapiens Is a Unique Species.

The history of humankind—starting with huntergatherers, who learned to obtain useful heat energy by burning wood and dung, and continuing to contemporary humans, who apply the latest technologies, such as fracking, solar panels, and wind turbines—is one of innovating to use all economically exploitable energy sources at an ever increasing rate (12, 15). Together, the biological imperative of the Malthusian-Darwinian dynamic to use all available resources and the social imperative to innovate and improve human welfare have resulted in at least 10,000 years of virtually uninterrupted population and economic growth: from a few million hunter-gatherers to more than 7 billion modern humans and from a subsistence economy based on sustainable use of plants and animals (i.e., in equilibrium with photosynthetic energy production) to the modern industrial-technological-informational economy (i.e., out of equilibrium due to the unsustainable unidirectional discharge of the biomass battery).

Fig. 4 depicts the multiplier effect of two large numbers that determine the rapid discharge rate of the earth‐space battery. Energy use per person multiplied by population gives total global energy consumption by humans. According to British Petroleum’s numbers (16), which most experts accept, in 2013, average per capita energy use was 74.6 × 109 J/person per year (equivalent to ∼2,370 W if plotted in green in Fig. 4). Multiplying this by the world population of 7.1 billion in 2013 gives a total consumption of ∼0.53 ZJ/y (equivalent to 16.8 TW if plotted in red in Fig. 4), which is greater than 1% of the total recoverable fossil fuel energy stored in the planet (i.e., 0.53 ZJ/40 ZJ = 1.3%). As time progresses, the population increases, and the economy grows, the outcome of multiplying these two very large numbers is that the total rate of global energy consumption is growing at a near-exponential rate.

fig4

ANY follower of this blog should recognise the peak in the green line as a sure sign of Limits to Growth…. while everything else – population and energy consumption – is skyrocketing exponentially, fooling the techno Utopians into a feeling of security that’s equivalent to what one might feel in their nice new modern car on its way to a fatal accident with no survivors……. everything is going just fine, until it isn’t.

Ironically, powerful political and market forces, rather than acting to conserve the remaining charge in the battery, actually push in the opposite direction, because the pervasive efforts to increase economic growth will require increased energy consumption (4, 8). Much of the above information has been presented elsewhere, but in different forms (e.g., in the references cited). Our synthesis differs from most of these treatments in two respects: (i) it introduces the paradigm of the earth‐space battery to provide a new perspective, and (ii) it emphasizes the critical importance of living biomass for global sustainability of both the biosphere and human civilization.

Humans and Phytomass

We can be more quantitative and put this into context by introducing a new sustainability metric Ω Ω = P BN [1] which purposefully combines perhaps the two critical variables affecting the energy status of the planet: total phytomass and human population. Eq. 1 accomplishes this combination by dividing the stored phytomass chemical energy P (in joules) by the energy needed to feed the global population for 1 y (joules per year; Fig. 5). The denominator represents the basic (metabolic) energy need of the human population; it is obtained by multiplying the global population N by their per capita metabolic needs for 1 y (B = 3.06 × 109 joules/person·per year as calculated from an 8.4 ×106 joules/person·day diet). The simple expression for Ω gives the number of years at current rates of consumption that the global phytomass storage could feed the human race. By making the conservative but totally unrealistic assumption that all phytomass could be harvested to feed humans (i.e., all of it is edible), we get an absolute maximum estimate of the number of years of food remaining for humankind. Fig. 5 shows that over the years 0–2000, Ω has decreased predictably and dramatically from 67,000 to 1,029 y (for example, in the year 2000, P = 19.3 × 1021 joules, B = 3.06 × 109 joules/person·per year, and N = 6.13 × 109 persons; thus, Ω =1,029 y). In just 2,000 y, our single species has reduced Ω by 98.5%. The above is a drastic underestimate for four reasons. First, we obviously cannot consume all phytomass stores for food; the preponderance of phytomass runs the biosphere. Second, basing our estimate on human biological metabolism does not include that high rate of extrametabolic energy expenditure currently being used to feed the population and fuel the economy. Third, the above estimate does not account that both the global human population and the per-capita rate of energy use are not constant, but increasing at near-exponential rates. We do not attempt to extrapolate to predict the future trajectories, which must ultimately turn downward as essential energy stocks are depleted. Finally, we emphasize that not only has the global store of phytomass energy decreased rapidly, but more importantly human dominance over the remaining portion has also increased rapidly. Long before the hypothetical deadline when the global phytomass store is completely exhausted, the energetics of the biosphere and all its inhabitant species will have been drastically altered, with profound changes in biogeochemical function and remaining biodiversity. The very conservative Ω index shows how rapidly land use changes, NPP appropriation, pollution, and other activities are depleting phytomass stores to fuel the current near-exponential trajectories of population and economic growth. Because the Ω index is conservative, it also emphasizes how very little time is left to make changes and achieve a sustainable future for the biosphere and humanity. We are already firmly within the zone of scientific uncertainty where some perturbation could trigger a catastrophic state shift in the biosphere and in the human population and economy (31). As we rapidly approach the chemical equilibrium of outer space, the laws of thermodynamics offer little room for negotiation.

THIS, is the really scary bit………..  collapse, anyone?

fig5

Discussion

The trajectory of Ω shown in Fig. 5 has at least three implications for the future of humankind. First, there is no reason to expect a different trajectory in the near future. Something like the present level of biomass energy destruction will be required to sustain the present global population with its fossil fuel‐subsidized food production and economy. Second, as the earth‐space battery is being discharged ever faster (Fig. 3) to support an ever larger population, the capacity to buffer changes will diminish and the remaining energy gradients will experience increasing perturbations. As more people depend on fewer available energy options, their standard of living and very survival will become increasingly vulnerable to fluctuations, such as droughts, disease epidemics, social unrest, and warfare. Third, there is considerable uncertainty in how the biosphere will function as Ω decreases from the present Ω = ∼1,029 y into an uncharted thermodynamic operating region. The global biosphere, human population, and economy will obviously crash long before Ω = 1 y. If H. sapiens does not go extinct, the human population will decline drastically as we will be forced to return to making a living as hunter‐ gatherers or simple horticulturalists.

The laws of thermodynamics take no prisoners. Equilibrium is inhospitable, sterile, and final.  I just wish we could get through to the people running the planet.  To say this paper blew me away is the understatement of the year, and parsing the ‘good bits’ for this post doesn’t really do it justice.  It needs to be read at least twice in fact, and if you can handle the weight, I’d urge you to read the entire thing at its source https://collapseofindustrialcivilization.files.wordpress.com/2015/07/pnas-2015-schramski-1508353112.pdf

How many of us will “return to making a living as hunter‐ gatherers or simple horticulturalists” I wonder……. We are fast running out of time.





Warning From Scientists — Halt Fossil Fuel Burning Fast or Age of Superstorms, 3-20 Foot Sea Level Rise is Coming Soon

26 07 2015

robertscribbler

First the good news. James Hansen, one of the world’s most recognized climate scientists, along with 13 of his well-decorated fellows believe that there’s a way out of this hothouse mess we’re brewing for ourselves. It’s a point that’s often missed in media reports on their most recent paper — Ice Melt, Sea Level Rise, and Superstorms. A paper that focuses on just two of the very serious troubles we’ll be visiting on ourselves in short order if we don’t heed their advice.

The way out? Reduce global carbon emissions by 6% each year and manage the biosphere such that it draws carbon down to 350 ppm levels or below through the early 22nd Century. To Hansen and colleagues this involves a scaling carbon fee and dividend or a similarly ramping carbon tax to rapidly dis-incentivize carbon use on a global scale. Do that and we might be relatively…

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Nine Reasons Why Low Oil Prices May “Morph” Into Something Much Worse

24 07 2015

As oil price collapse to under $50……… by Gail Tverberg, orginally posted here.

Why are commodity prices, including oil prices, lagging? Ultimately, the question comes back to, “Why isn’t the world economy making very many of the end products that use these commodities?” If workers were getting rich enough to buy new homes and cars, demand for these products would be raising the prices of commodities used to build and operate cars, including the price of oil. If governments were rich enough to build an increasing number of roads and more public housing, there would be demand for the commodities used to build roads and public housing.

It looks to me as though we are heading into a deflationary depression, because the prices of commodities are falling below the cost of extraction. We need rapidly rising wages and debt if commodity prices are to rise back to 2011 levels or higher. This isn’t happening. Instead, Janet Yellen is talking about raising interest rates later this year, and  we are seeing commodity prices fall further and further. Let me explain some pieces of what is happening.

1. We have been forcing economic growth upward since 1981 through the use of falling interest rates. Interest rates are now so low that it is hard to force rates down further, in order to encourage further economic growth. 

Falling interest rates are hugely beneficial for the economy. If interest rates stop dropping, or worse yet, begin to rise, we will lose this very beneficial factor affecting the economy. The economy will tend to grow even less quickly, bringing down commodity prices further. The world economy may even start contracting, as it heads into a deflationary depression.

If we look at 10-year US treasury interest rates, there has been a steep fall in rates since 1981.

Figure 1. Chart prepared by St. Louis Fed using data through July 20, 2015.

In fact, almost any kind of interest rates, including interest rates of shorter terms, mortgage interest rates, bank prime loan rates, and Moody’s Seasoned AAA Bonds, show a fairly similar pattern. There is more variability in very short-term interest rates, but the general direction has been down, to the point where interest rates can drop no further.

Declining interest rates stimulate the economy for many reasons:

  • Would-be homeowners find monthly payments are lower, so more people can afford to purchase homes. People already owning homes can afford to “move up” to more expensive homes.
  • Would-be auto owners find monthly payments lower, so more people can afford cars.
  • Employment in the home and auto industries is stimulated, as is employment in home furnishing industries.
  • Employment at colleges and universities grows, as lower interest rates encourage more students to borrow money to attend college.
  • With lower interest rates, businesses can afford to build factories and stores, even when the anticipated rate of return is not very high. The higher demand for autos, homes, home furnishing, and colleges adds to the success of businesses.
  • The low interest rates tend to raise asset prices, including prices of stocks, bonds, homes and farmland, making people feel richer.
  • If housing prices rise sufficiently, homeowners can refinance their mortgages, often at a lower interest rate. With the funds from refinancing, they can remodel, or buy a car, or take a vacation.
  • With low interest rates, the total amount that can be borrowed without interest payments becoming a huge burden rises greatly. This is especially important for governments, since they tend to borrow endlessly, without collateral for their loans.

While this very favorable trend in interest rates has been occurring for years, we don’t know precisely how much impact this stimulus is having on the economy. Instead, the situation is the “new normal.” In some ways, the benefit is like traveling down a hill on a skateboard, and not realizing how much the slope of the hill is affecting the speed of the skateboard. The situation goes on for so long that no one notices the benefit it confers.

If the economy is now moving too slowly, what do we expect to happen when interest rates start rising? Even level interest rates become a problem, if we have become accustomed to the economic boost we get from falling interest rates.

2. The cost of oil extraction tends to rise over time because the cheapest to extract oil is removed first. In fact, this is true for nearly all commodities, including metals. 

If costs always remained the same, we could represent the production of a barrel of oil, or a pound of metal, using the following diagram.

Figure 2

If production is becoming increasingly efficient, then we might represent the situation as follows, where the larger size “box” represents the larger output, using the same inputs.

Figure 3

For oil and for many other commodities, we are experiencing the opposite situation. Instead of becoming increasingly efficient, we are becoming increasingly inefficient (Figure 4). This happens because deeper wells need to be dug, or because we need to use fracking equipment and fracking sand, or because we need to build special refineries to handle the pollution problems of a particular kind of oil. Thus we need more resources to produce the same amount of oil.

Figure 4. Growing inefficiency

Some people might call the situation “diminishing returns,” because the cheap oil has already been extracted, and we need to move on to the more difficult to extract oil. This adds extra steps, and thus extra costs. I have chosen to use the slightly broader term of “increasing inefficiency” because it indicates that the nature of these additional costs is not being restricted.

Very often, new steps need to be added to the process of extraction because wells are deeper, or because refining requires the removal of more pollutants. At times, the higher costs involve changing to a new process that is believed to be more environmentally sound.

Figure 5

The cost of extraction keeps rising, as the cheapest to extract resources become depleted, and as environmental pollution becomes more of a problem.

3. Using more inputs to create the same or smaller output pushes the world economy toward contraction.

Essentially, the problem is that the same quantity of inputs is yielding less and less of the desired final product. For a given quantity of inputs, we are getting more and more intermediate products (such as fracking sand, “scrubbers” for coal-fired power plants, desalination plants for fresh water, and administrators for colleges), but we are not getting as much output in the traditional sense, such as barrels of oil, kilowatts of electricity, gallons of fresh water, or educated young people, ready to join the work force.

We don’t have unlimited inputs. As more and more of our inputs are assigned to creating intermediate products to work around limits we are reaching (including pollution limits), fewer of our resources can go toward producing desired end products. The result is less economic growth. Because of this declining economic growth, there is less demand for commodities. So, prices for commodities tend to drop.

This outcome is to be expected, if increased efficiency is part of what creates economic growth, and what we are experiencing now is the opposite: increased inefficiency.

4. The way workers afford higher commodity costs is primarily through higher wages. At times, higher debt can also be a workaround. If neither of these is available, commodity prices can fall below the cost of production.

If there is a significant increase in the cost of products like houses and cars, this presents a huge challenge to workers. Usually, workers pay for these products using a combination of wages and debt. If costs rise, they either need higher wages, or a debt package that makes the product more affordable–perhaps lower rates, or a longer period for payment.

Commodity costs have been rising very rapidly in the last fifteen years or so. According to a chart prepared by Steven Kopits, some of the major costs of extracting oil began increasing by 10.9% per year, in about 1999.

Figure 6. Figure by Steve Kopits of Westwood Douglas showing trends in world oil exploration and production costs per barrel. CAGR is

In fact, the inflation-adjusted prices of almost all energy and metal products tended to rise rapidly during the period 1999 to 2008 (Figure 7). This was a time period when the amount of mortgage debt was increasing rapidly as lenders began offering home loans with low initial interest rates to almost anyone, including those with low credit scores and irregular income. When debt levels began falling in mid-2008 (related in part to defaulting home loans), commodity prices of all types dropped.

Figure 6. Inflation adjusted prices adjusted to 1999 price = 100, based on World Bank

Prices then began to rise once Quantitative Easing (QE) was initiated (compare Figures 6 and 7). The use of QE brought down medium-term and long-term interest rates, making it easier for customers to afford homes and cars.

Figure 7. World Oil Supply (production including biofuels, natural gas liquids) and Brent monthly average spot prices, based on EIA data.

More recently, prices have fallen again. Thus, we have had two recent times when prices have fallen below the cost of production for many major commodities. Both of these drops occurred after prices had been high, when debt availability was contracting or failing to rise as much as in the past.

5. Part of the problem that we are experiencing is a slow-down in wage growth.

Figure 8 shows that in the United States, growth in per capita wages tends to disappear when oil prices rise above $40 barrel. (Of course, as noted in Point 1, interest rates have been falling since 1981. If it weren’t for this, the cut off for wage growth might even be lower–perhaps even $20 barrel!)

Figure 8. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

There is also a logical reason why we should expect that wages would tend to fall as energy costs rise. How does a manufacturer respond to the much higher cost of one or more of its major inputs? If the manufacturer simply passes the higher cost along, many customers will no longer be able to afford the manufacturer’s or service-provider’s products. If businesses can simply reduce some other costs to offset the rise in the cost in energy products and metals, they might be able to keep most of their customers.

A major area where a manufacturer or service provider can cut costs is in wage expense.  (Note the different types of expenses shown in Figure 5. Wages are a major type of expense for most businesses.)

There are several ways employment costs can be cut:

  1. Shift jobs to lower wage countries overseas.
  2. Use automation to shift some human labor to labor provided by electricity.
  3. Pay workers less. Use “contract workers” or “adjunct faculty” or “interns” who will settle for lower wages.

If a manufacturer decides to shift jobs to China or India, this has the additional advantage of cutting energy costs, since these countries use a lot of coal in their energy mix, and coal is an inexpensive fuel.

Figure 9. United States Percentage of Labor Force Employed, in by St. Louis Federal Reserve.

In fact, we see a drop in the US civilian labor force participation rate (Figure 9) starting at approximately the same time when energy costs and metal costs started to rise. Median inflation-adjusted wages have tended to fall as well in this period. Low wages can be a reason for dropping out of the labor force; it can become too expensive to commute to work and pay day care expenses out of meager wages.

Of course, if wages of workers are not growing and in many cases are actually shrinking, it becomes difficult to sell as many homes, cars, boats, and vacation cruises. These big-ticket items create a significant share of commodity “demand.” If workers are unable to purchase as many of these big-ticket items, demand tends to fall below the (now-inflated) cost of producing these big-ticket items, leading to the lower commodity prices we have seen recently.

6. We are headed in slow motion toward major defaults among commodity producers, including oil producers. 

Quite a few people imagine that if oil prices drop, or if other commodity prices drop, there will be an immediate impact on the output of goods and services.

Figure 10.

Instead, what happens is more of a time-lagged effect (Figure 11).

Figure 11.

Part of the difference lies in the futures markets; companies hold contracts that hold sale prices up for a time, but eventually (often, end of 2015) run out. Part of the difference lies in wells that have already been drilled that keep on producing. Part of the difference lies in the need for businesses to maintain cash flow at all costs, if the price problem is only for a short period. Thus, they will keep parts of the business operating if those parts produce positive cash flow on a going-forward basis, even if they are not profitable considering all costs.

With debt, the big concern is that the oil reserves being used as collateral for loans will drop in value, due to the lower price of oil in the world market. The collateral value of reserves works out to be something like (barrels of oil in reserves x some expected price).

As long as oil is being valued at $100 barrel, the value of the collateral stays close to what was assumed when the loan was taken out. The problem comes when low oil prices gradually work their way through the system and bring down the value of the collateral. This may take a year or more from the initial price drop, because prices are averaged over as much as 12 months, to provide stability to the calculation.

Once the value of the collateral drops below the value of the outstanding loan, the borrowers are in big trouble. They may need to sell some of the other assets they own, to help pay down the loan. Or, they may end up in bankruptcy. The borrowers certainly can’t borrow the additional money they need to keep increasing their production.

When bankruptcy occurs, many follow-on effects can be expected. The banks that made the loans may find themselves in financial difficulty. The oil company may lay off large numbers of workers. The former workers’ lack of wages may affect other businesses in the area, such as car dealerships. The value of homes in the area may drop, causing home mortgages to become “underwater.” All of these effects contribute to still lower demand for commodities of all kinds, including oil.

Because of the time lag problem, the bankruptcy problem is hard to reverse. Oil prices need to stay high for an extended period before lenders will be willing to lend to oil companies again. If it takes, say, five years for oil prices to get up to a level high enough to encourage drilling again, it may take seven years before lenders are willing to lend again.

7. Because many “baby boomers” are retiring now, we are at the beginning of a demographic crunch that has the tendency to push demand down further.

Many workers born in the late 1940s and in the 1950s are retiring now. These workers tend to reduce their own spending, and depend on government programs to pay most of their income. Thus, the retirement of these workers tends to drive up governmental costs at the same time it reduces demand for commodities of all kinds.

Someone needs to pay for the goods and services used by the retirees. Government retirement plans are rarely pre-funded, except with the government’s own debt. Because of this, higher pension payments by governments tend to lead to higher taxes. With higher taxes, workers have less money left to buy homes and cars. Even with pensions, the elderly are never a big market for homes and cars. The overall result is that demand for homes and cars tends to stagnate or decline, holding down the demand for commodities.

8. We are running short of options for fixing our low commodity price problem.

The ideal solution to our low commodity price problem would be to find substitutes that are cheap enough, and could increase in quantity rapidly enough, to power the economy to economic growth. “Cheap enough” would probably mean approximately $20 per barrel for a liquid oil substitute. The price would need to be correspondingly inexpensive for other energy products. Cheap and abundant energy products are needed because oil consumption and energy consumption are highly correlated. If prices are not low, consumers cannot afford them. The economy would react as it does to inefficiency. In other words, it would react as if too much of the output is going into intermediate products, and too little is actually acting to expand the economy.

Figure 12. World GDP in 2010$ compared (from USDA) compared to World Consumption of Energy (from BP Statistical Review of World Energy 2014).

These substitutes would also need to be non-polluting, so that pollution workarounds do not add to costs. These substitutes would need to work in existing vehicles and machinery, so that we do not have to deal with the high cost of transition to new equipment.

Clearly, none of the potential substitutes we are looking at today come anywhere close to meeting cost and scalability requirements. Wind and solar PV can only be built on top of our existing fossil fuel system. All evidence is that they raise total costs, adding to our “Increased Inefficiency” problem, rather than fixing it.

Other solutions to our current problems seem to be debt based. If we look at recent past history, the story seems to be something such as the following:

Besides adopting QE starting in 2008, governments also ramped up their spending (and debt) during the 2008-2011 period. This spending included road building, which increased the demand for commodities directly, and unemployment insurance payments, which indirectly increased the demand for commodities by giving jobless people money, which they used for food and transportation. China also ramped up its use of debt in the 2008-2009 period, building more factories and homes. The combination of QE, China’s debt, and government debt together brought oil prices back up by 2011, although not to as high a level as in 2008 (Figure 7).

More recently, governments have slowed their growth in spending (and debt), realizing that they are reaching maximum prudent debt levels. China has slowed its debt growth, as pollution from coal has become an increasing problem, and as the need for new homes and new factories has become saturated. Its debt ratios are also becoming very high.

QE continues to be used by some countries, but its benefit seems to be waning, as interest rates are already as low as they can go, and as central banks buy up an increasing share of debt that might be used for loan collateral. The credit generated by QE has allowed questionable investments since the required rate of return on investments funded by low interest rate debt is so low. Some of this debt simply recirculates within the financial system, propping up stock prices and land prices. Some of it has gone toward stock buy-backs. Virtually none of it has added to commodity demand.

What we really need is more high wage jobs. Unfortunately, these jobs need to be supported by the availability of large amounts of very inexpensive energy. It is the lack of inexpensive energy, to match the $20 per barrel oil and very cheap coal upon which the economy has been built that is causing our problems. We don’t really have a way to fix this.

9. It is doubtful that the prices of energy products and metals can be raised again without causing recession.

We are not talking about simply raising oil prices. If the economy is to grow again, demand for all commodities needs to rise to the point where it makes sense to extract more of them. We use both energy products and metals in making all kinds of goods and services. If the price of these products rises, the cost of making virtually any kind of goods or services rises.

Raising the cost of energy products and metals leads to the problem represented by Growing Inefficiency (Figure 4). As we saw in Point 5, wages tend to go down, rather than up, when other costs of production rise because manufacturers try to find ways to hold total costs down.

Lower wages and higher prices are a huge problem. This is why we are headed back into recession if prices rise enough to enable rising long-term production of commodities, including oil.





Dan Britt – Orbits and Ice Ages: The History of Climate

23 07 2015

This video was posted on Peak Prosperity.  It’s over three years old now, but it’s an excellent talk that may clarify a lot of questions for DTM readers.  Enjoy…..





Mark Cochrane on the Washington State drought

21 07 2015

Glenda and I visited the state of Washington in the NW of the US way back in 1979.  It was lush and green, much like Tasmania. Peppered with lakes and snow topped mountains, it was one of the highlights of our trip.  Now read what Mark has to report following his camping holiday there just recently….

Just checking in to say that I haven’t disappeared completely. I finally bugged out on a vacation worthy of the name for the first time in 5 years and dragged my family all over the Pacific Northwest. Kudos to T2H for such excellent reporting on the plethora of news about the drought all throughout western North America. Not to mention cooking up a mean burger!

Having just driven over 10,000 km throughout the region I can attest to the extensive drought and the impacts of the all but absent snow pack from the last year. The heat wave we went through was like nothing I had previous seen in the area. From 40.5 degrees in Missoula, MT to 39 in Yakima, WA, 39+ in the Columbia River Gorge and 41 in central Oregon. Everything was crispy and primed to burn. The only upside of the heat was the lack of any wind to drive a fire. Over on the Olympic peninsula I was shocked to see all of the brown grass everywhere. Something I never saw when I lived out there. I was out to the National Park (temperate rain forest) but didn’t see the recently discovered fire that is working through those ancient forests. Lakes were low everywhere and many rivers were down. I was shocked to see that the sturgeon are now dying around the Bonneville dam and upriver as we visited it and were impressed with  the fish management that they are doing.

Eastern Washington was dry but one thing that was clear is that no one is lacking for irrigation water yet. Driving across the state looks like one long fountain every day. Up on Mount Rainier I can anecdotaly say that the birds seem thirsty. They were big on robbing grapes from us and couldn’t care less about chips and such from our picnic! The Nisqually river was pathetically low for this time of year which is more a function of the lack of snow than the melting glacier. Clear blue skies in Seattle and all along the Washington and Oregon coast was appreciated but damned odd. My family now thinks that is normal but I assured them it is not.

One highlight of our trip was facilitated by Adam [from Peak Prosperity] who put us in contact with Paul and Elizabeth of Singing Frogs Farm so that we could visit them in person. If anyone hasn’t already listened to their podcast I highly recommend it (link). Everything I saw there with my own eyes bears witness to what they speak about. Add me to the list of people who hope that they will be asked to return and cover other aspects of their remarkable operation in detail. Water management being one obvious key aspect of interest. We speak about many disturbing and downright depressing topics on this thread and the PP site so it is much appreciated to have something so positive and inspiring to discuss. It is a much better model for farming.

By way of contrast we also drove across the Central Valley with its amazing array of agriculture and serious water stress issues. There was plenty of irrigation and little sign of anyone lacking water but there were no end of placards and billboards expressing the gravity of the issues for the economy and jobs. I was amazed to see new orchards of almonds still being planted at this point though since my impression was that more were being plowed under. One very scary part of the experience for me was driving through miles and miles of endless crops and never once having a single insect hit my windshield. An endless buffet but it is still an insect desert. They’ve killed everything which makes you wonder just how much pesticide is being used. Also, if bugs can’t even eat the stuff, should we?





Global Wildfire Danger Increases Caused By Climate Change

20 07 2015

Another guest post from Mark Cochrane

In a recent paper in Nature Communications, Jolly et al (2015) report on “Climate-induced variations in global wildfire danger from 1979-2013”.

Climate strongly influences global wildfire activity, and recent wildfire surges may signal fire weather-induced pyrogeographic shifts. Here we use three daily global climate data sets and three fire danger indices to develop a simple annual metric of fire weather season length, and map spatio-temporal trends from 1979 to 2013. We show that fire weather seasons have lengthened across 29.6millionkm(25.3%) of the Earth’s vegetated surface, resulting in an 18.7% increase in global mean fire weather season length. We also show a doubling (108.1% increase) of global burnable area affected by long fire weather seasons (>1.0 σ above the historical mean) and an increased global frequency of long fire weather seasons across 62.4millionkm2 (53.4%) during the second half of the study period. If these fire weather changes are coupled with ignition sources and available fuel, they could markedly impact global ecosystems, societies, economies and climate. (full paper)

If you prefer lighter reading, here is an article reporting on the work

Wildfires Are Happening More Often and in More Places

Average fire season length has increased by nearly a fifth in the last 35 years, and the area impacted has doubled

What this paper basically shows is that conditions are getting drier for longer periods of time in regions that currently have burnable vegetation. This doesn’t necessarily mean that we will have more wildfires but it certainly sets the seen for worse ones. Some places are getting better conditions but many more are getting worse conditions for possible wildfires. If the climate were stable you would expect there to be a rough balance between the area of places getting milder and those getting more toasty. This is definitely not the case (Figure a – below). On top of this, the frequency with which very long fire seasons (basically extended severe dry periods) are occurring across the Earth is increasing, more than doubling in the last 35 years (Figure b – below). Any place that is red on either map is at risk for more extensive or severe wildfires. Being red on both maps is not a recipe for ecological happiness…

Full disclosure, this is actually my own research, I’m the second author. The work was funded by NASA as part of one of my research grants. It may not look like much but it represents four years of work crunching lots of numbers into usable form that could then be analyzed and interpreted. Science in action (sometimes feels like inaction).

Mark

a shows areas with significant trends in fire weather season length from 1979 to 2013. b shows regions that have experienced changes in the frequency of long fire weather seasons (>1σ above historical mean) during the second half of the study period (1996–2013) compared with the number of events observed during the first half (1979–1996). Areas with little or no burnable vegetation are shown in grey (NB) and NC indicates areas with no significant change. Reds indicate areas where fire weather seasons have lengthened or long fire weather seasons have become more frequent. Blues indicate areas where fire weather seasons have shortened or long fire weather seasons have become less frequent.