A reality check on Renewable Energy

23 10 2018

Hat tip to my friend Shane who put me onto this TedX lecture…….  well worth sharing with your ecotopian friends! It does show how Australia – and Canada –  with very low population densities, are in not a bad position, except of course for the fact they are nowhere near the places with high densitity populations. You can’t beat arithmetics and physics…….

How much land mass would renewables need to power a nation like the UK? An entire country’s worth. In this pragmatic talk, David MacKay tours the basic mathematics that show worrying limitations on our sustainable energy options and explains why we should pursue them anyway. (Filmed at TEDxWarwick.) Lesson by David MacKay.

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America NOT great again…….

31 08 2018

One of the many things I see on TV news material that makes me shout at the screen is economic commentators raving about America’s booming economy……. nothing of the sort is happening. Economies are measured in dollars, and as debt grows exponentially, so does the money supply, and the throughput of money increases, and stupid moronic ‘economists’ whose only job is to make you all believe everything’s doing just fine will make you believe the increasing GDP is both good and a sign of growth…… Here’s an article that debunks all this fake news.

Go to the profile of umair haque

Let’s start at the beginning. The reason that crackpot American theories of economics are wrong is that they presume capitalism is the answer to everything. More jobs? Wages must rise! Hey presto! The economy fixes itself. Supply and demand, my dude — go capitalism!! But wait — what happens if those jobs are, well, not very good ones, because corporations don’t really have to compete, because its made of gigantic monopolies now, not mom-and-pop soda shoppes? If instead of being something more like stable middle class careers, with upward mobility, benefits, retirements, security, stability, meaning, belonging, and so forth, they are something more like jobs only in name — in reality, hollowed out? What happens if all that’s left in a “job” is the chance to work harder and harder every year, for shrinking income, opportunity, savings, a declining quality of life?

That’s exactly what’s happened in America. The “jobs” that are being created are not high quality ones. Like more or less everything else predatory capitalism creates, they are of astonishingly low quality. Not only are they concentrated in low-growth sectors, they’re composed of menial tasks, and they offer dead ends, not paths upwards, outwards, or forwards.

The result is the dismal litany of statistics that, by now, you should know all too well. It’s as alarming as it is astonishing. 80% of American live paycheck to paycheck. 70% have less than $1000 in savingsA third struggle to afford even healthcare, education, and shelter. As a result, America’s seeing what Angus Deaton calls “deaths of despair.” The suicide rate is skyrocketing, and longevity is falling, as people who can’t cope with the trauma appear to be simply giving up on life. It is no mistake to say that capitalism is killing Americans — and yet, Americans are tragically wedded to capitalism.

Yet at the same time, things have never been better for the ultra rich. They’ve captured more than 100% of gains over the last decade. The stock market is booming — but just 10% of Americans really own stocks, and maybe 1% earn a living from capital income. So, enjoying inequality that now puts classical Rome to shame, the mega rich quite literally have piled up fortunes so incredibly vast, there is literally nowhere left to put all the money — all the yachts, mansions, and lofts have been bought. That is why interest rates are permanently at zero: there is so much money piled up at the top of the economy, there is nowhere left to put it, except the one place it should go, which is right back to the people who need it: the middle class and poor, or if you like, the proletariat and the petite bourgeoisie in Marxist terms.

The result is an economy with an imploded middle class. That might sound trivial, but is crucial. A middle class is one of the defining creations of modernity — and what happens when a society loses its middle class is another defining creation of modernity — fascism. But we’ll get to that in a moment.

Remember Steve St Angelo describing the fracking industry cannibalising itself? Well this guy seems to think the entire US economy is doing this too…..

“Growth” has turned predatory. American economics supposes — because it assumes capitalism is the best solution to everything — that growth is always good. But growth is not always good. Not just because it eats the planet (though it does) — but in this case, for a more immediate reason. Capitalism isn’t just eating the planet. It’s eating democracy, civilization, truth, reality, the future, and you.

Read it all here.





The Price of Oil

10 02 2018

Another excellent article by Dave Pollard over at How to Save the World…..  my only criticism of this article is that he’s not factoring in collapsing ERoEI will have on the production side…..


The clueless gamblers that speculate on stock and commodity prices have been having a field day recently. Desperately chasing profits, like high-rollers who keep increasing their casino bets every time they lose, they have wiped billions out of share and pension values in a lemming-like panic about whether and when the colossally overpriced stock market is going to crash. And they have also pushed the price of oil up to near $70/bbl for the first time in several years. These speculators, who contribute nothing of any value to our economy, are some of the most destructive individuals on the planet, destabilizing markets on which many depend for their lives and livelihoods. (They also wreak havoc on land, real estate, food, and currency prices.) And many of them make millions in commissions and bonuses just rolling the dice for their employers and clients and praying that their lucky bets (mostly on prices rising perpetually) will continue.

A couple of years ago I wrote an article about the price of oil, explaining that the issue we’re going to face in the 21st century isn’t one of energy running out, but of affordableenergy running out. Just as, during great depressions and famines, masses of food is left rotting in the ground because no one can afford to buy it (or even retrieve it and give it away), having oil in the ground that costs $80/bbl to get to market (especially if governments run out of money for subsidies, or, god forbid, decide that oil companies should start to pay the huge external costs of their activities) is not especially useful when you can only afford, in an economy ruined by overexploitation, environmental degradation, excessive debt, inequality and waste, $30/bbl for it.

Before I go further, if you’re one of the many who have been persuaded that “peak oil is over” and that renewables and new technology will soon save us from energy collapse, you might as well not read this article. Instead, I’d suggest you read this, or this, or this, or any of the many other articles written by people who understand the laws of thermodynamics and how the economy actually works.

This time I thought I’d start with a review of oil prices in the past. The chart above plots the course of oil prices (in inflation-adjusted dollars) back to 1946. Green lines show supply curves; red lines demand curves, and the dots at intersections are annual average oil prices for those years. Follow the dots:

  1. 1946-72. Oil prices were remarkably stable at about $25/bbl (in current dollars) during this entire period. The world became dependent on OPEC. Virtually all global growth in real terms since 1946 is attributable to increasing use of oil. Almost none of it is ascribable to new technology (other than energy extraction technology) or “efficiencies” or “innovation” or “economies of scale”. That’s it. If you’re a believer in GDP or that growth is essential to the economy you might want to keep that in mind (and if you are invested in stocks or land or any other industrial resource, you’d better believe, because their “value” is all computed in terms of future growth in exchange value, production and profits). Between 1946 and 1972 the OPEC nations were in bed with the western corporatists (as they still are today, supporting them politically and militarily), fixing the price of oil at that price to ensure the economy could continue to grow, as required, endlessly.
  2. 1973-80. OPEC fights back, realizing that although they can make money at $25/bbl because of the size and ease of tapping their reserves, they have already pumped out more than half of it, and they have only a few decades’ worth left and nothing to support their economy when it runs out. So they constrain production, driving the price up to $60/bbl (1975) and then $110/bbl (1980). At that price they can set money aside for when their oil runs out, and avoid the massive humanitarian crises that the end of oil spells for them. But for the western corporatists, this is disastrous: their economies are in a shambles, with double-digit inflation ruining profits, and line-ups at the pumps.
  3. 1981-85. The western corporatists “convince” OPEC to turn the pumps back on, persuading them that there is a happy medium price for oil (more than the $25-30/bbl that makes exploration for new sources uneconomic, but less than the $75/bbl threshold beyond which the global economy cannot pay for it and hence cannot survive. By 1985, OPEC has increased supply so that, despite the new demand from expanding Asian countries, the price has settled back in the perfect $50-60/bbl range. Remember here that the amount of production and consumption of oil is so close (there’s no place to put much excess once it’s pumped, and there’s no margin for error if there’s a serious shortage) that any changes in production, intentional or not, have a huge impact on price.
  4. 1986-2002. At $60/bbl, there’s an incentive to put more into the market than you can sustainably continue to produce, and also an incentive to find new sources — and remember, a small increase in supply has a big impact on lowering price. From the late 1980s to 2002, the lingering effects of the early-1980s crash kept demand from increasing as it had been, and a number of (heavily subsidized, environmentally catastrophically damaging) new sources of “dirty” and “tight” (harder to extract) oil were found. As a consequence, prices tumbled back to the $30/bbl level. OPEC was not happy, but some of their own short-term-thinking members were opening the taps to try to bolster their struggling economies, and the new sources meant OPEC as a whole had less oligopoly power over supplies and hence prices.
  5. 2003-08. The low prices were unsustainable to many producers, especially those with higher production costs that ceased or curtailed exploring, and that, combined with increasing demand from third-world countries, began pushing prices up again, to $60/bbl in 2005 and $90/bbl in 2008. You remember 2008, the bubble year, right? Over-exuberance had enabled speculators to push the price of everything up to ridiculous levels, and oil was not spared. The crash of 2008 also weakened demand, as many people could not afford to pay for anything, including fuel. But everyone knew the $90/bbl couldn’t last, just as they knew it in 1980.
  6. 2009-17. Banking on continuing high oil prices, speculators jumped into fracking and other high-risk, costly (and heavily-subsidized) smaller-scale oil ventures. For the first time, people who can’t think further ahead than the next quarter’s profit report were saying that there was more than enough oil, and that peak oil was dead. More reasoned experts argued that the danger to our planet from climate change caused by burning oil now exceeded the danger of running out of it (we may well experience both in the years to come). But many of the new ventures depended on sustained high oil prices, and as supply rose, price inevitably dropped. This was exacerbated by a chronic global recession that (despite what you might read in the Wall Street press) has left 90% of the population with massively higher debts and less disposable income than they had back in the 1980s. That recession curtailed demand and added to the price slump that saw oil drop from $90/bbl in 2008 to $60/bbl in 2015 and then back to a near-ruinous (for producers) $40/bbl in 2016-17. Many of the new operators declared bankruptcy, but in the mean-time they (and the ongoing recession for all but the super-rich) had created a short-term oil glut. More people came to believe that oil would be abundant forever, at reasonable prices. Many OPEC countries’ governments, already struggling with unruly political movements, and a permanently unemployed youth workforce, were getting antsy.
  7. 2018. Surprise, surprise, the oil price has risen again, to as high as $70/bbl, though it seems to be hovering mostly around the ‘ideal’ (for producers and consumers) $60/bbl level. The problem is, that’s not quite as ideal as it used to be. The cost of bringing new oil to market has risen from very low-levels (near $15/bbl in the mid-20th-century OPEC countries, to $45/bbl for much “tight” oil extraction). So a very volatile $50-60/bbl price doesn’t provide much margin for producers in an economy that demands significantly increasing profits every year. And it’s expensive for consumers, who start to reduce consumption and turn to alternative sources of energy (where available) when prices move into that $50-60/bbl range.

So what does this mean for the future? The second chart, below, describes what I think we’ll see by the middle of this century. Here we go:

  1. 2018-2025: Just a guess, but there doesn’t seem to be any compelling short-term trend in supply or demand one way or another, so I’m guessing that we’ll have a few years of relative stability, with prices ranging from $40-80/bbl depending on producer actions, politics, climate change proclivities, carbon taxes and regulations, and the strange whims and misconceptions of speculators (damn I’d like to see a huge speculation tax on every do-nothing transaction gamblers put through).
  2. 2025-2050: In the medium term, all bets are off. I can see, as conventional sources of oil get depleted and new ones cost more and more, the cost of getting oil to market rising enough that any price under $70/bbl won’t be worth the risk. And I can see, as the real economy (not the economy-of-the-elite the NYT and WSJ reports on) continues to struggle and inequality widens to become a political and even military issue in many parts of the world, the affordable ceiling price for oil dropping to $40/bbl. So that means there is no “happy medium” that works for both producers and consumers — any price is either too low for producers (keeping/driving them out of the market) or too high for consumers (leading to hoarding, involuntary reductions in use (ie repo’d cars and foreclosed homes) — or both. So I see prices whipsawing between $30/bbl or less (when the economy is in especially bad shape) and $100/bbl or more during speculative frenzies, rationing (in black markets), severe shortages and short-lived “is the long depression over yet?” economic recoveries.
  3. 2050-2100: This is the period in which I’ve forecast economic and/or energy collapse and the onset of chronic serious climate change trends and events. I don’t think the US dollar will survive this, so it’s hard to set a price on anything in that currency. I do see it as a long era of scavenging, re-use, rationing, nationalization (until national governments collapse and leave energy management to struggling local communities), hoarding, black markets, and yes, even conservation at last.

Not a very rosy picture, but those who’ve studied the economy and have been following oil prices for a while tend to support much of this hypothesis. Ultimately, it’s the economy, (not so) stupid. The economy is the tail that wags the energy dog, but ultimately the global industrial economy is founded entirely on the preposterous and untenable requirement that growth must continue forever, and the only thing that has provided sustained growth for the past couple of centuries has been cheap hydrocarbons.

And I understand oil doesn’t keep very well.





Negative Interest Rates and the War on Cash (3)

9 09 2016

Here is Part 3 of Nicole Foss’ wonderful 4 part article on the collapse of money as we know it. Originally published over at the Automatic Earth where you can buy DVDs of Nicole’s talks…

What’s even more amazing is that this concept of traditional banking — holding physical cash in a bank vault — is now considered revolutionary and radical.

Part 1 is here

Part 2 is here

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Promoters, Mechanisms and Risks in the War on Cash

nicolefossBitcoin and other electronic platforms have paved the way psychologically for a shift away from cash, although they have done so by emphasising decentralisation and anonymity rather than the much greater central control which would be inherent in a mainstream electronic currency. The loss of privacy would no doubt be glossed over in any media campaign, as would the risks of cyber-attack and the lack of a fallback for providing liquidity to the economy in the event of a systems crash. Electronic currency is much favoured by techno-optimists, but not so much by those concerned about the risks of absolute structural dependency on technological complexity. The argument regarding greatly reduced socioeconomic resilience is particularly noteworthy, given the vulnerability and potential fragility of electronic systems.

There is an important distinction to be made between official electronic currency – allowing everyone to hold an account with the central bank — and private electronic currency. It would be official currency which would provide the central control sought by governments and central banks, but if individuals saw central bank accounts as less risky than commercial institutions, which seems highly likely, the extent of the potential funds transfer could crash the existing banking system, causing a bank run in a similar manner as large-scale cash withdrawals would. As the power of money creation is of the highest significance, and that power is currently in private hands, any attempt to threaten that power would almost certainly be met with considerable resistance from powerful parties. Private digital currency would be more compatible with the existing framework, but would not confer all of the control that governments would prefer:

People would convert a very large share of their current bank deposits into official digital money, in effect taking them out of the private banking system. Why might this be a problem? If it’s an acute rush for safety in a crisis, the risk is that private banks may not have enough reserves to honour all the withdrawals. But that is exactly the same risk as with physical cash: it’s often forgotten that it’s central bank reserves, not the much larger quantity of deposits, that banks can convert into cash with the central bank. Both with cash and official e-cash, the way to meet a more severe bank run is for the bank to borrow more reserves from the central bank, posting its various assets as security. In effect, this would mean the central bank taking over the funding of the broader economy in a panic — but that’s just what central banks should do.

A more chronic challenge is that people may prefer the safety of central bank accounts even in normal times. That would destroy private banks’ current deposit-funded model. Is that a bad thing? They would still have a role as direct intermediators between savers and borrowers, by offering investment products sufficiently attractive for people to get out of the safety of e-cash. Meanwhile, the broad money supply would be more directly under the control of the central bank, whereas now it’s a product of the vagaries of private lending decisions. The more of the broad money supply that was in the form of official digital cash, the easier it would be, for example, for the central bank to use tools such as negative interest rates or helicopter drops.

As an indication that the interests of the private banking system and public central authorities are not always aligned, consider the actions of the Bavarian Banking Association in attempting to avoid the imposition of negative interest rates on reserves held with the ECB:

German newspaper Der Spiegel reported yesterday that the Bavarian Banking Association has recommended that its member banks start stockpiling PHYSICAL CASH. The Bavarian Banking Association has had enough of this financial dictatorship. Their new recommendation is for all member banks to ditch the ECB and instead start keeping their excess reserves in physical cash, stored in their own bank vaults. This is officially an all-out revolution of the financial system where banks are now actively rebelling against the central bank. (What’s even more amazing is that this concept of traditional banking — holding physical cash in a bank vault — is now considered revolutionary and radical.)

There’s just one teensy tiny problem: there simply is not enough physical cash in the entire financial system to support even a tiny fraction of the demand. Total bank deposits exceed trillions of euros. Physical cash constitutes just a small percentage of that sum. So if German banks do start hoarding physical currency, there won’t be any left in the financial system. This will force the ECB to choose between two options:

  1. Support this rebellion and authorize the issuance of more physical cash; or
  2. Impose capital controls.

Given that just two weeks ago the President of the ECB spoke about the possibility of banning some higher denomination cash notes, it’s not hard to figure out what’s going to happen next.

Advantages of official electronic currency to governments and central banks are clear. All transactions are transparent, and all can be subject to fees and taxes. Central control over the money supply would be greatly increased and tax evasion would be difficult to impossible, at least for ordinary people. Capital controls would be built right into the system, and personal spending information would be conveniently gathered for inspection by central authorities (for cross-correlation with other personal data they possess). The first step would likely be to set up a dual system, with both cash and electronic money in parallel use, but with electronic money as the defined unit of value and cash subject to a marginally disadvantageous exchange rate.

The exchange rate devaluing cash in relation to electronic money could increase over time, in order to incentivize people to switch away from seeing physical cash as a store of value, and to increase their preference for goods over cash. In addition to providing an active incentive, the use of cash would probably be publicly disparaged as well as actively discouraged in many ways. For instance, key functions such as tax payments could be designated as by electronic remittance only. The point would be to forced everyone into the system by depriving them of the choice to opt out. Once all were captured, many forms of central control would be possible, including substantial account haircuts if central authorities deemed them necessary.

 

The main promoters of cash elimination in favour of electronic currency are Willem Buiter, Kenneth Rogoff, and Miles Kimball.

Economist Willem Buiter has been pushing for the relegation of cash, at least the removal of its status as official unit of account, since the financial crisis of 2008. He suggests a number of mechanisms for achieving the transition to electronic money, emphasising the need for the electronic currency to become the definitive unit of account in order to implement substantially negative interest rates:

The first method does away with currency completely. This has the additional benefit of inconveniencing the main users of currency-operators in the grey, black and outright criminal economies. Adequate substitutes for the legitimate uses of currency, on which positive or negative interest could be paid, are available. The second approach, proposed by Gesell, is to tax currency by making it subject to an expiration date. Currency would have to be “stamped” periodically by the Fed to keep it current. When done so, interest (positive or negative) is received or paid.

The third method ends the fixed exchange rate (set at one) between dollar deposits with the Fed (reserves) and dollar bills. There could be a currency reform first. All existing dollar bills and coin would be converted by a certain date and at a fixed exchange rate into a new currency called, say, the rallod. Reserves at the Fed would continue to be denominated in dollars. As long as the Federal Funds target rate is positive or zero, the Fed would maintain the fixed exchange rate between the dollar and the rallod.

When the Fed wants to set the Federal Funds target rate at minus five per cent, say, it would set the forward exchange rate between the dollar and the rallod, the number of dollars that have to be paid today to receive one rallod tomorrow, at five per cent below the spot exchange rate — the number of dollars paid today for one rallod delivered today. That way, the rate of return, expressed in a common unit, on dollar reserves is the same as on rallod currency.

For the dollar interest rate to remain the relevant one, the dollar has to remain the unit of account for setting prices and wages. This can be encouraged by the government continuing to denominate all of its contracts in dollars, including the invoicing and payment of taxes and benefits. Imposing the legal restriction that checkable deposits and other private means of payment cannot be denominated in rallod would help.

In justifying his proposals, he emphasises the importance of combatting criminal activity…

The only domestic beneficiaries from the existence of anonymity-providing currency are the criminal fraternity: those engaged in tax evasion and money laundering, and those wishing to store the proceeds from crime and the means to commit further crimes. Large denomination bank notes are an especially scandalous subsidy to criminal activity and to the grey and black economies.

… over the acknowledged risks of government intrusion in legitimately private affairs:

My good friend and colleague Charles Goodhart responded to an earlier proposal of mine that currency (negotiable bearer bonds with legal tender status) be abolished that this proposal was “appallingly illiberal”. I concur with him that anonymity/invisibility of the citizen vis-a-vis the state is often desirable, given the irrepressible tendency of the state to infringe on our fundamental rights and liberties and given the state’s ever-expanding capacity to do so (I am waiting for the US or UK government to contract Google to link all personal health information to all tax information, information on cross-border travel, social security information, census information, police records, credit records, and information on personal phone calls, internet use and internet shopping habits).

In his seminal 2014 paper “Costs and Benefits to Phasing Out Paper Currency.”, Kenneth Rogoff also argues strongly for the primacy of electronic currency and the elimination of physical cash as an escape route:

Paper currency has two very distinct properties that should draw our attention. First, it is precisely the existence of paper currency that makes it difficult for central banks to take policy interest rates much below zero, a limitation that seems to have become increasingly relevant during this century. As Blanchard et al. (2010) point out, today’s environment of low and stable inflation rates has drastically pushed down the general level of interest rates. The low overall level, combined with the zero bound, means that central banks cannot cut interest rates nearly as much as they might like in response to large deflationary shocks.

If all central bank liabilities were electronic, paying a negative interest on reserves (basically charging a fee) would be trivial. But as long as central banks stand ready to convert electronic deposits to zero-interest paper currency in unlimited amounts, it suddenly becomes very hard to push interest rates below levels of, say, -0.25 to -0.50 percent, certainly not on a sustained basis. Hoarding cash may be inconvenient and risky, but if rates become too negative, it becomes worth it.

However, he too notes associated risks:

Another argument for maintaining paper currency is that it pays to have a diversity of technologies and not to become overly dependent on an electronic grid that may one day turn out to be very vulnerable. Paper currency diversifies the transactions system and hardens it against cyber attack, EMP blasts, etc. This argument, however, seems increasingly less relevant because economies are so totally exposed to these problems anyway. With paper currency being so marginalized already in the legal economy in many countries, it is hard to see how it could be brought back quickly, particularly if ATM machines were compromised at the same time as other electronic systems.

A different type of argument against eliminating currency relates to civil liberties. In a world where society’s mores and customs evolve, it is important to tolerate experimentation at the fringes. This is potentially a very important argument, though the problem might be mitigated if controls are placed on the government’s use of information (as is done say with tax information), and the problem might also be ameliorated if small bills continue to circulate. Last but not least, if any country attempts to unilaterally reduce the use of its currency, there is a risk that another country’s currency would be used within domestic borders.

Miles Kimball’s proposals are very much in tune with Buiter and Rogoff:

There are two key parts to Miles Kimball’s solution. The first part is to make electronic money or deposits the sole unit of account. Everything else would be priced in terms of electronic dollars, including paper dollars. The second part is that the fixed exchange rate that now exists between deposits and paper dollars would become variable. This crawling peg between deposits and paper currency would be based on the state of the economy. When the economy was in a slump and the central bank needed to set negative interest rates to restore full employment, the peg would adjust so that paper currency would lose value relative to electronic money. This would prevent folks from rushing to paper currency as interest rates turned negative. Once the economy started improving, the crawling peg would start adjusting toward parity.

This approach views the economy in very mechanistic terms, as if it were a machine where pulling a lever would have a predictable linear effect — make holding savings less attractive and automatically consumption will increase. This is actually a highly simplistic view, resting on the notions of stabilising negative feedback and bringing an economy ‘back into equilibrium’. If it were so simple to control an economy centrally, there would never have been deflationary spirals or economic depressions in the past.

Assuming away the more complex aspects of human behaviour — a flight to safety, the compulsion to save for a rainy day when conditions are unstable, or the natural response to a negative ‘wealth effect’ — leads to a model divorced from reality. Taxing savings does not necessarily lead to increased consumption, in fact it is far more likely to have the opposite effect.:

But under Miles Kimball’s proposal, the Fed would lower interest rates to below zero by taxing away balances of e-currency. This is a reduction in monetary base, just like the case of IOR, and by itself would be contractionary, not expansionary. The expansionary effects of Kimball’s policy depend on the assumption that households will increase consumption in response to the taxing of their cash savings, rather than letting their savings depreciate.

That needn’t be the case — it depends on the relative magnitudes of income and substitution effects for real money balances. The substitution effect is what Kimball has in mind — raising the price of real money balances will induce substitution out of money and into consumption. But there’s also an income effect, whereby the loss of wealth induces less consumption and more savings. Thus, negative interest rate policy can be contractionary even though positive interest rate policy is expansionary.

Indeed, what Kimball has proposed amounts to a reverse Bernanke Helicopter — imagine a giant vacuum flying around the country sucking money out of people’s pockets. Why would we assume that this would be inflationary?

 

Given that the effect on the money supply would be contractionary, the supposed stimulus effect on the velocity of money (as, in theory, savings turn into consumption in order to avoid the negative interest rate penalty) would have to be large enough to outweigh a contracting money supply. In some ways, modern proponents of electronic money bearing negative interest rates are attempting to copy Silvio Gesell’s early 20th century work. Gesell proposed the use of stamp scrip — money that had to be regularly stamped, at a small cost, in order to remain current. The effect would be for money to lose value over time, so that hoarding currency it would make little sense. Consumption would, in theory, be favoured, so money would be kept in circulation.

This idea was implemented to great effect in the Austrian town of Wörgl during the Great Depression, where the velocity of money increased sufficiently to allow a hive of economic activity to develop (temporarily) in the previously depressed town. Despite the similarities between current proposals and Gesell’s model applied in Wörgl, there are fundamental differences:

There is a critical difference, however, between the Wörgl currency and the modern-day central bankers’ negative interest scheme. The Wörgl government first issued its new “free money,” getting it into the local economy and increasing purchasing power, before taxing a portion of it back. And the proceeds of the stamp tax went to the city, to be used for the benefit of the taxpayers….Today’s central bankers are proposing to tax existing money, diminishing spending power without first building it up. And the interest will go to private bankers, not to the local government.

The Wörgl experiment was a profoundly local initiative, instigated at the local government level by the mayor. In contrast, modern proposals for negative interest rates would operate at a much larger scale and would be imposed on the population in accordance with the interests of those at the top of the financial foodchain. Instead of being introduced for the direct benefit of those who pay, as stamp scrip was in Wörgl, it would tax the people in the economic periphery for the continued benefit of the financial centre. As such it would amount to just another attempt to perpetuate the current system, and to do so at a scale far beyond the trust horizon.

As the trust horizon contracts in times of economic crisis, effective organizational scale will also contract, leaving large organizations (both public and private) as stranded assets from a trust perspective, and therefore lacking in political legitimacy. Large scale, top down solutions will be very difficult to implement. It is not unusual for the actions of central authorities to have the opposite of the desired effect under such circumstances:

Consumers today already have very little discretionary money. Imposing negative interest without first adding new money into the economy means they will have even less money to spend. This would be more likely to prompt them to save their scarce funds than to go on a shopping spree. People are not keeping their money in the bank today for the interest (which is already nearly non-existent). It is for the convenience of writing checks, issuing bank cards, and storing their money in a “safe” place. They would no doubt be willing to pay a modest negative interest for that convenience; but if the fee got too high, they might pull their money out and save it elsewhere. The fee itself, however, would not drive them to buy things they did not otherwise need.

People would be very likely to respond to negative interest rates by self-organising alternative means of exchange, rather than bowing to the imposition of negative rates. Bitcoin and other crypto-currencies would be one possibility, as would using foreign currency, using trading goods as units of value, or developing local alternative currencies along the lines of the Wörgl model:

The use of sheep, bottled water, and cigarettes as media of exchange in Iraqi rural villages after the US invasion and collapse of the dinar is one recent example. Another example was Argentina after the collapse of the peso, when grain contracts priced in dollars were regularly exchanged for big-ticket items like automobiles, trucks, and farm equipment. In fact, Argentine farmers began hoarding grain in silos to substitute for holding cash balances in the form of depreciating pesos.

 

For the electronic money model grounded in negative interest rates to work, all these alternatives would have to be made illegal, or at least hampered to the point of uselessness, so people would have no other legal choice but to participate in the electronic system. Rogoff seems very keen to see this happen:

Won’t the private sector continually find new ways to make anonymous transfers that sidestep government restrictions? Certainly. But as long as the government keeps playing Whac-A-Mole and prevents these alternative vehicles from being easily used at retail stores or banks, they won’t be able fill the role that cash plays today. Forcing criminals and tax evaders to turn to riskier and more costly alternatives to cash will make their lives harder and their enterprises less profitable.

It is very likely that in times of crisis, people would do what they have to do regardless of legal niceties. While it may be possible to close off some alternative options with legal sanctions, it is unlikely that all could be prevented, or even enough to avoid the electronic system being fatally undermined.

The other major obstacle would be overcoming the preference for cash over goods in times of crisis:

Understanding how negative rates may or may not help economic growth is much more complex than most central bankers and investors probably appreciate. Ultimately the confusion resides around differences in view on the theory of money. In a classical world, money supply multiplied by a constant velocity of circulation equates to nominal growth.

In a Keynesian world, velocity is not necessarily constant — specifically for Keynes, there is a money demand function (liquidity preference) and therefore a theory of interest that allows for a liquidity trap whereby increasing money supply does not lead to higher nominal growth as the increase in money is hoarded. The interest rate (or inverse of the price of bonds) becomes sticky because at low rates, for infinitesimal expectations of any further rise in bond prices and a further fall in interest rates, demand for money tends to infinity.

In Gesell’s world money supply itself becomes inversely correlated with velocity of circulation due to money characteristics being superior to goods (or commodities). There are costs to storage that money does not have and so interest on money capital sets a bar to interest on real capital that produces goods. This is similar to Keynes’ concept of the marginal efficiency of capital schedule being separate from the interest rate. For Gesell the product of money and velocity is effective demand (nominal growth) but because of money capital’s superiority to real capital, if money supply expands it comes at the expense of velocity.

The new money supply is hoarded because as interest rates fall, expected returns on capital also fall through oversupply — for economic agents goods remain unattractive to money. The demand for money thus rises as velocity slows. This is simply a deflation spiral, consumers delaying purchases of goods, hoarding money, expecting further falls in goods prices before they are willing to part with their money….In a Keynesian world of deficient demand, the burden is on fiscal policy to restore demand. Monetary policy simply won’t work if there is a liquidity trap and demand for cash is infinite.

During the era of globalisation (since the financial liberalisation of the early 1980s), extractive capitalism in debt-driven over-drive has created perverse incentives to continually increase supply. Financial bubbles, grounded in the rediscovery of excess leverage, always act to create an artificial demand stimulus, which is met by artificially inflated supply during the boom phase. The value of the debt created collapses as boom turns into bust, crashing the money supply, and with it asset price support. Not only does the artificial stimulus disappear, but a demand undershoot develops, leaving all that supply without a market. Over the full cycle of a bubble and its aftermath, credit is demand neutral, but within the bubble it is anything but neutral. Forward shifting the demand curve provides for an orgy of present consumption and asset price increases, which is inevitably followed by the opposite.

Kimball stresses bringing demand forward as a positive aspect of his model:

In an economic situation like the one we are now in, we would like to encourage a company thinking about building a factory in a couple of years to build that factory now instead. If someone would lend to them at an interest rate of -3.33% per year, the company could borrow $1 million to build the factory now, and pay back something like $900,000 on the loan three years later. (Despite the negative interest rate, compounding makes the amount to be paid back a bit bigger, but not by much.)

That would be a good enough deal that the company might move up its schedule for building the factory. But everything runs aground on the fact that any potential lender, just by putting $1 million worth of green pieces of paper in a vault could get back $1 million three years later, which is a lot better than getting back a little over $900,000 three years later.

This is, however, a short-sighted assessment. Stimulating demand today means a demand undershoot tomorrow. Kimball names long term price stability as a primary goal, but this seems unlikely. Large scale central planning has a poor track record for success, to put it mildly. It requires the central authority in question to have access to all necessary information in realtime, and to have the ability to respond to that information both wisely and rapidly, or even proactively. It also assumes the ability to accurately filter out misinformation and disinformation. This is unlikely even in good times, thanks to the difficulties of ‘organizational stupidity’ at large scale, and even more improbable in the times of crisis.

Part 4 is here





It’s the nett energy George…..

7 02 2016

George-Monbiot-L

George Monbiot

George Monbiot has written another piece on the current oil situation, but whilst I agree mostly with what he says, he still doesn’t ‘get it’………

Oil, the industry that threatens us with destruction, is being bailed out with public money

By George Monbiot, published in the Guardian 3rd February 2016

Those of us who predicted, during the first years of this century, an imminent peak in global oil supplies could not have been more wrong. People like the energy consultant Daniel Yergin, with whom I disputed the topic, appear to have been right: growth, he said, would continue for many years, unless governments intervened.

Oil appeared to peak in the United States in 1970, after which production fell for 40 years. That, we assumed, was the end of the story. But through fracking and horizontal drilling, production last year returned to the level it reached in 1969. Twelve years ago, the Texas oil tycoon T. Boone Pickens announced that “never again will we pump more than 82 million barrels”. By the end of 2015, daily world production reached 97 million.

Following one of those links, I have to admit, surprised me…..  I had no idea the US’ oil production had almost reached its 1970 peak….. I may have confused how much they were extracting with what they were consuming. And, that chart is already out of date, the extraction rate is now in freefall…

usoilprod

What everyone who comments on this fails to say is that whilst the numbers of barrels tabled in their spreadsheets might well be there, and they may be following the money, absolutely nobody is following the nett number of Megajoules.  A barrel of oil from the last dot on the above chart may well contain less than a quarter of the nett energy content of one from a dot at the toe of the curve.

George then adds….:

Saudi Arabia has opened its taps, to try to destroy the competition and sustain its market share: a strategy that some peak oil advocates once argued was impossible.

Methinks he should visit Gail Tverberg’s site for proper analysis….

saudiexport

Saudi Arabia has been pumping flat out for years, with no discernible market flooding power.  It may in fact be trying very hard to meet its own fast growing domestic demand which is having an obvious impact on how much it is exporting, which is discernably less than it was way back in 1980……. so how can you blame them for flooding the market?

George continues with…..:

Instead of a collapse in the supply of oil, we confront the opposite crisis: we’re drowning in the stuff. The reasons for the price crash – an astonishing slide from $115 a barrel to $30 over the past 20 months – are complex: among them are weaker demand in China and a strong dollar. But an analysis by the World Bank finds that changes in supply have been a much greater factor than changes in demand.

Whilst Gail Tverberg says…..:

Some people talk about peak energy (or oil) supply. They expect high prices and more demand than supply. Other people talk about energy demand hitting a peak many years from now, perhaps when most of us have electric cars.

Neither of these views is correct. The real situation is that we right now seem to be reaching peak energy demand through low commodity prices. I see evidence of this in the historical energy data recently updated by BP (BP Statistical Review of World Energy 2015).

Growth in world energy consumption is clearly slowing. In fact, growth in energy consumption was only 0.9% in 2014. This is far below the 2.3% growth we would expect, based on recent past patterns. In fact, energy consumption in 2012 and 2013 also grew at lower than the expected 2.3% growth rate (2012 – 1.4%; 2013 – 1.8%).

Figure 1- Resource consumption by part of the world. Canada etc. grouping also includes Norway, Australia, and South Africa. Based on BP Statistical Review of World Energy 2015 data.

Recently, I wrote that economic growth eventually runs into limits. The symptoms we should expect are similar to the patterns we have been seeing recently (Why We Have an Oversupply of Almost Everything (Oil, labor, capital, etc.)). It seems to me that the patterns in BP’s new data are also of the kind that we would expect to be seeing, if we are hitting limits that are causing low commodity prices.

Of course, people like George who want to keep growth going, only using wind and nuclear power, don’t understand we are hitting limits.

When oil hit $147 at the time of the GFC, it literally bankrupted the economy. Having hit peak conventional oil, trillions of dollars had to be invested (read, borrowed…) to capitalise on the much higher hanging and less energetic fruit. Which made us get less with more, when we should be doing the exact opposite, doing more with less…..

George then has a big whinge about fossil subsidies at the expense of renewables.  The way I see it however, is that as all renewables are manufactured with fossil fuels, as they get cheaper, the costs of making the renewables also goes down, so that to some extent, any fossil subsidy is a hidden renewables subsidy…..  Furthermore, without further subsidies, oil and coal companies will go bust to which George says….:

A falling oil price drags down the price of gas, exposing coal mining companies to the risk of bankruptcy: good riddance to them.

Which, George, unfortunately also means good riddance to renewables….  He then ends with…….:

So they lock us into the 20th Century, into industrial decline and air pollution, stranded assets and – through climate change – systemic collapse. Governments of this country cannot resist the future forever. Eventually they will succumb to the inexorable logic, and recognise that most of the vast accretions of fossil plant life in the Earth’s crust must be left where they are. And those massive expenditures of public money will prove to be worthless.

Crises expose corruption: that is one of the basic lessons of politics. The oil price crisis finds politicians with their free-market trousers round their ankles. When your friends are in trouble, the rigours imposed religiously upon the poor and public services suddenly turn out to be negotiable. Throw money at them, trash their competitors, rig the outcome: those who deserve the least receive the most.

At last……  George recognises systemic collapse, for all the wrong reasons unfortunately. It may look like corruption to him, but it sure as hell looks like limits to growth to me.





Ugo Bardi on Food Systems Complexity

19 07 2015

Ugo Bardi

Ugo Bardi

Can you think of something worse than a wicked problem? Yes, it is perfectly possible: it is a wicked solution. That is, a solution that not only does nothing to solve the problem, but, actually, worsens it. Unfortunately, if you work in system dynamics, you soon learn that most complex systems are not only wicked, but suffer from wicked solutions (see, e.g.here).

This said, let’s get to one of the most wicked problems I can think of: that of the world’s food supply. I’ll try to report here at least a little of what I learned at the recent conference on this subject, jointly held by FAO and the Italian Chapter of the System Dynamics Society. Two days of discussions held in Rome during a monster heat wave that put under heavy strain the air conditioning system of the conference room and made walking from there to one’s hotel a task comparable to walking on an alien planet: it brought the distinct feeling that you needed a refrigerated space suit. But it was worth being there.

First of all, should we say that the world’s food supply is a “problem”? Yes, if you note that about half of the world’s human population is undernourished; if not really starving. And of the remaining half, a large fraction is not nourished right, because obesity and type II diabetes are rampant diseases – they said at the conference that if the trend continues, half of the world’s population is going to suffer from diabetes.

So, if we have a problem, is it really “wicked”? Yes, it is, in the sense that finding a good solution is extremely difficult and the results are often the opposite than those intended at the beginning. The food supply system is a devilishly complex system and it involves a series of cross linked subsystems interacting with each other. Food production is one thing, but food supply is a completely different story, involving transportation, distribution, storage, refrigeration, financial factors, cultural factors and is affected by climate change, soil conservation, population, cultural factors…… and more, including the fact that people don’t just eat “calories”, they need to eat food; that is a balanced mix of nutrients. In such a system, everything you touch reverberates on everything else. It is a classic case of the concept known in biology as “you can’t do just one thing.”

globalfoodsystemOnce you obtain even a vague glimpse of the complexity of the food supply system – as you can do in two days of full immersion in a conference – then you can also understand how poor and disingenuous often are the efforts to “solve the problem”. The basic mistake that almost everyone does here (and not just in the case of the food supply system) is trying to linearize the system.

Linearizing a complex system means that you act on a single element of it, hoping that all the rest won’t change as a consequence. It is the “look, it is simple” approach: favored by politicians (*). It goes like this, “look, it is simple: we just do this and the problem will be solved”. What is meant with “this” varies with the situation; with the food system, it often involves some technological trick to raise the agricultural yields. In some quarters that involves the loud cry “let’s go GMOs!” (genetically modified organisms).

Unfortunately, even assuming that agricultural yields can be increased in terms of calories produced using GMOs (possible, but only in industrialized agricultural systems), then the result is a cascade of effects which reverberate in the whole system; typically transforming a resilient rural production system into a fragile, partly industrialized, production system – to say nothing about the fact that these technologies often worsen the food’s nutritional quality. And, assuming that it is possible to increase yields, how do you find the financial resources to build up the infrastructure needed to manage the increased agricultural yield? You need trucks, refrigerators, storage facilities, and more. Even if you can manage to upgrade all that, very often, the result is simply to make the system more vulnerable to external shocks such as increases in the cost of supplies such as fuels and fertilizers.

There are other egregious examples of how deeply flawed is the “‘look, it is simple” strategy. One is the idea that we can solve the problem by getting rid of food waste. Great, but how exactly can you do that and how much would that cost? (**) And who would pay for the necessary upgrade of the whole distribution infrastructure? Another “look, it is simple” approach is ‘if we all went vegetarian, there would be plenty of food for everyone’. In part, it is true, but it is not so simple, either. Again, there is a question of distribution and transportation, and the fact that rich westerners buy “green food” in their supermarkets has little impact on the situation of the poor in the rest of the world. And then, some kinds of “green” food are bulky and hence difficult to transport; also they spoil easily, and so you need refrigeration, and so on. Something similar holds for the “let’s go local” strategy. How do you deal with the unavoidable fluctuations in local production? Once upon a time, these fluctuations were the cause of periodic famines which were accepted as a fact of life. Going back to that is not exactly a way to “solve the food supply problem.”

A different way to tackle the problem is focussed on reducing the human population. But, also here, we often make the “look, it is simple” mistake. What do we know exactly on the mechanisms that generate overpopulation, and how do we intervene on them? Sometimes, proposers of this approach seem to think that all what we need to do is to drop condoms on poor countries (at least it is better than dropping bombs on them). But suppose that you can reduce population in non traumatic ways, then you intervene into a system where “population” means a complex mix of different social and economic niches: you have urban, peri-urban, and rural population; a population reduction may mean shifting people from one sector to the other, it may involve losing producing capabilities in the rural areas, or, on the contrary, reduced capabilities of financing production if you could lower population in urban areas. Again, population reduction, alone, is a linear approach that won’t work as it is supposed to do, even if it could be implemented.

Facing the complexity of the system, listening to the experts discussing it, you get a chilling sensation that it is a system truly too difficult for human beings to grasp. You would have to be at the same time an expert in agriculture, in logistics, in nutrition, in finance, in population dynamics, and much more. One thing I noticed, as a modest expert in energy and fossil fuels, is how food experts normally don’t realize that the availability of fossil fuels must necessarily go down in the near future. That will have enormous effects on agriculture: think of fertilizers, mechanization, transportation, refrigeration, and more. But I didn’t see these effects taken into account in most models presented. Several researchers showed diagrams extrapolating current trends into the future as if oil production were to keep increasing for the rest of the century and more.

The same is true for climate change: I didn’t see at the conference much being said about the extreme effects that rapid climate change could have on agriculture. It is understandable: we have good models telling us how temperatures will rise, and how that will affect some of the planet’s subsystems (e.g. sea levels), but no models that could tell us how the agricultural system will react to shifting weather patterns, different temperatures, droughts or floods. Just think of how deeply agricultural yields in India are linked to the yearly monsoon pattern and you can only shiver at the thought of what might happen if climate change would affect that.

So, the impression I got from the conference is that nobody is really grasping the complexity of the problem; neither at the overshootlevel of single persons, nor at the level of organizations. For instance, I never heard a crucial term used in world dynamics, which is “overshoot”. That is, it is true that right now we can produce roughly enough food – measured in calories – for the current population. But for how long will we be able to do that? In several cases I could describe the approaches I have seen as trying to fix a mechanical watch using a hammer. Or to steer a transatlantic liner using a toothpick stuck into the propeller.

But there are also positive elements coming from the Rome conference. One is that the FAO, although a large, and sometimes clumsy, organization understands how system dynamics is a tool that could help a lot policy makers to do better in managing the food supply system. And, possibly, helping them device better ideas to “solve the food problem”. That’s more difficult than it seems: system dynamics is not for everyone and teaching it to bureaucrats is like teaching dogs to solve equations: it takes a lot of work and it doesn’t work so well. Then, system dynamics practitioners are often victim of the “spaghetti diagram” syndrome, which consists in drawing complex models full of little arrows going from somewhere to somewhere else, and then watching the mess they created and nodding in a show of internal satisfaction. But it is also true that, at the conference, I saw a lot of good will among the various actors in the field to find a common language. This is a good thing, difficult, but promising.

In the end, what is the solution to the “food supply problem”? If you ask me, I would try to propose a concept: “in a complex system, there are neither problems, nor solutions. There is only change and adaptation.” As a corollary, I could say that you can solve a problem (or try to) but you can’t solve a change (not even try to). You can only adapt to change, hopefully in a non traumatic manner.

Seen in this sense, the best way to tackle the present food supply situation, is not to seek for impossible (wicked) solutions (e.g. GMOs) but to increase the resilience of the system. That involves working at the local level and interacting with all the actors working in the food supply system. It is a sensible approach. FAO is already following it and it can insure a reasonable supply even in the presence of the unavoidable shocks that are going to arrive as the result of climate change and energy supply problems. Can system dynamics help? Probably yes. Of course, there is a lot of work to do, but the Rome conference was a good start.

H/t: Stefano Armenia, Vanessa Armendariz, Olivio Argenti and all the organizers of the joint Sydic/FAO conference in Rome

Notes.

* Once you tackle the food problem, you can’t ignore the “third world” situation. As a consequence, the conference was not just among Westerners and the debate took a wider aspect that also involved different ways of seeing the world. One particularly interesting discussion I had was with a Mexican researcher. According to her opinion, “linearizing” complex problems is a typical (and rather wicked) characteristic of the Western way of thinking. She countered this linear vision with the “circular” approach that, according to her, is typical of ancient Meso-American cultures, such as the Maya and others. That approach, she said, could help a lot the world to tackle wicked problems without worsening them. I just report this opinion; personally I don’t have sufficient knowledge to judge it. However, it seems true to me that there is something wicked in the way Western thought tends to mold everything and everyone on its own image.

** In the food system, the idea that “look, it is simple: just let’s get rid of waste” is exactly parallel to the “zero waste” approach for urban and industrial waste. I have some experience in this field, and I can tell you that, the way it is often proposed, the “zero waste” idea simply can’t work. It involves high costs and it just makes the system more and more fragile and vulnerable to shocks. That doesn’t mean that waste is unavoidable; not at all. If you can’t build up a “zero waste” industrial system, you can build up subsystems that will process and eliminate that waste. These subsystems, however, cannot work using the same logic of the standard industrial system; they have to be tailored to operate on low yield resources. In practice, it is the “participatory management” approach, (see, e.g.,the work of Prof. Gutberlet). It can be done with urban waste, but also with food waste and it is another way to increase the resilience of the system.





Peak fossil fuel won’t stop climate change – but it could help

26 02 2015

The Conversation

Peak fossil fuel means it’s unlikely the worst climate scenario will come to pass. Gary Ellem explains.

What happens to coal in China will play a big role in deciding which climate road we’re all on. Han Jun Zeng/Flickr, CC BY-SA

Fossil fuels are ultimately a finite resource – the definition of non-renewable energy. Burning of these fuels – coal, oil and gas – is the main driver of climate change. So could the peak of fossil fuels help mitigate warming?

The short answer is maybe … but perhaps not how you might think.

In a paper published this month in the journal Fuel, my colleagues and I suggest that limits to fossil fuel availability might take climate Armageddon off the table, although we will still need to keep some fossil fuels in the ground for the best chance of keeping warming below 2C.

But more importantly, the peak of Chinese coal use is changing the face of global alternative energy industry development, and is soon likely to impact on international positioning for a low-emissions future.

Now for the long answer.

Predicting climate change

Predicting future climate change is dogged by two fundamental uncertainties: the dosage of greenhouse gas that human civilisation will add to the atmosphere, and how Earth’s climate and feedback systems will respond to it.

In the absence of a crystal ball for the future of emissions, the Intergovernmental Panel on Climate Change (IPCC) has adopted a scenario-based approach which highlights four representative concentration pathways (or RCPs). These are named after how much extra heating they add to the earth (in watts per square metre).

The relationship between emissions, and temperature projections. IPCC
Click to enlarge

From these scenarios the IPCC has developed temperature scenarios. So the RCP2.6 scenario is expected to restrict climate change to below 2C, whereas RCP8.5 represents catastrophic climate change of around 4C by the end of this century, rising to perhaps 8C in the ensuing centuries.

Fossil fuels forecast

The key thing to note here is that the emissions scenarios are demand-focused scenarios that have been developed to reflect possibilities for potential fossil fuel consumption. They explore a range of scenarios that include increasing global population and living standards, as well as the possible impact of new alternative energy technologies and global emissions-reduction agreements.

Instead of examining demand scenarios for fossil fuels, our work has focused on supply constraints to future fossil fuel production. Our work is not a forecast of future fossil fuel production and consumption, but rather seeks to determine the upper bounds of the geological resource and how it might be brought to market using normal supply and demand interactions.

We developed three projections based on different estimates of these Ultimately Recoverable Resources (URR). URR is the proportion of total fossil fuel resources that can be viably extracted now, and in the future (this accounts for some resources that are technologically inaccessible now becoming extractable in the future). The low case used the most pessimistic literature resource availability estimates, whereas the high case used the most optimistic estimates.

We also included a “best guess” estimate by choosing country-level resource values that we considered most likely. We then compared the resulting emissions profiles for the three upper bounds to the published IPCC emissions scenarios, as shown in the figure below.

Our projections for fossil fuel supply (black) matched with emissions scenarios (colours). RCP8.5 is the worst, RCP2.6 the best. Gary Ellem
Click to enlarge

In comparison to the published emissions scenarios, we found that it was very unlikely that enough fossil fuels could be brought to market to deliver the RCP8.5 scenario and we would recommend that this be removed from the IPCC scenarios in future assessment reports.

Mining out the optimistic fossil fuel supply base could perhaps deliver the RCP6 scenario, however, our best guess limit to fossil fuel availability caps the upper limit of emissions exposure to the RCP4.5 scenario (roughly equivalent to a median estimate of 2C warming).

But even under the low resource availability scenario, it will be necessary to leave some fossil fuels untapped if we are to meet the conditions for the RCP2.6 scenario or lower (to have more than a 90% chance of avoiding 2C temperature rise).

To sum up, our supply side assessment suggests that even if the climate Armageddon of the RPC8.5 scenario were desirable, it is unlikely that enough new fossil fuel resources could be discovered in time and brought to market to deliver it. To be clear, there is still much to worry about with the RPC4.5 and RPC6 scenarios which are still possible at the limits of likely fossil fuel resources.

So a simple reflection on global fossil fuel limitation won’t save us … but nations don’t face peak fuels at the same time. A country-level analysis of peak fuels suggests the possibility of a very different future.

How China could shake the world

As part of our assessment we looked closely at the fossil fuel production projections for four countries including China, Canada, the United States and Australia. Of these, China is by far the most intriguing.

China has little in the way of oil and gas resources and so has established its remarkable industrial growth on exploiting its substantial coal resources. Our projections indicate that the rapid expansion in Chinese coal mining is rapidly depleting this resource, with Chinese peak coal imminent in the mid-2020s under even the high fossil fuel scenario, as seen in the projections below.

Various scenarios for China’s fossil fuel supply. Gary Ellem
Click to enlarge

China is well aware of this and is currently scrambling to cap coal consumption and develop alternative energy projects and industries. Its leaders understand that the alternative energy sector is really an advanced manufacturing sector, and have moved to position themselves strategically as the world leader in solar, wind, hydro, battery and nuclear technology construction and manufacturing.

As fossil fuels start to fail China as a path to economic and energy security, China will join other regions in a similar position, such as the European Union nations, which have largely depleted their fossil fuel reserves.

For these nations focused on alternative energy investment for energy and economic security, global action on climate change is strategically aligned with their industrial strength. We can therefore expect them to pressure for increasing global action as a method of improving their strategic global trading position. We may see the beginnings of this transition at this year’s international climate talks in Paris this year, but it will take a few more years for the Chinese shift to play out as they exploit the remainder of their coal resource and gain confidence in the ability of their alternative energy sector to scale.

The question then becomes “can the USA manufacturing sector afford to be out of these global alternative energy markets?”. Our guess is “no” and a global tipping point will have been reached in the alternative energy switch.

This is perhaps the most profound way that peak fuels may contribute to a low-emissions future.