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Sunday, December 21, 2014

Why we need a change: this is not your ordinary recession

Posted by steve on May 1, 2009

My recent visit to England shows a country nose-diving into a new kind of recession: one that has no end.

As the reams of newspaper articles laying out dismal prospects for 2009 appear before us, there is an underlying belief in that the recovery will come in a few or at most ten years, and 2008 will fade into memory as a year unremarkable. Not so from the perspective of Oil Peak. We are looking into the tangled guts of a system that has stopped working because the cheap and easy oil that feeds it has peaked.  We are looking over the precipice into the long decline, aptly called the long emergency by James Howard Kunstler.

The logic of this is almost too simple, but not anything you will find explained in the mainstream media.
The system we call business as usual is full of disconnects – think of it like a plumbing system with faulty joints and bends. Despite leakages, the system still delivers water to the end user. However, when pressure drops, the taps run dry and the installation is not only useless, it wastes valuable resources as well.
In this case, money is rather like water. You want to stuff money into the system and see more come out. At least you would want to know you can get basic services like food water, shelter etc. Any business needs a supply of capital and cash to start up and keep going. If you borrow money, you have to be able to pay it back at, say, 4% interest a year.

Standing in front of the bank manager or an investor you have to convince her that you will be able to expand your business to be able to pay the loan and the interest off in a reasonable time. Multiply this by the number of businesses around and you will see that in order for any money to come in to the system you must be convinced everybody will make more money than they are already doing, to at least pay off the debt from the interest.
When it works, this way of doing things creates jobs, provides an endless array of services and goods and generates tax income to run the civil sector.
When it does not work, you put money and your own time into the system and get very little out.

This is where the connection to oil comes in: look into any business plan of any business and you will find a massive reliance directly or indirectly on fossil fuel. Electricity, the life blood of any office, comes increasingly in the UK from gas fired power stations.
Energy price hikes make everything more expensive, reducing profits and undermining the logic of the business plan and indeed the whole set-up.

From this perspective you can see how we got into the situation we are in. Peak production of cheap oil in late 2005 started a process of price hikes and started to knock holes in the wealth generation machinery. First hit were airlines and transport sector, creating job losses and credit defaults. From there the spiral downward continues. In this context a much larger number of businesses cannot make the business plan work. Trying to kick-start the economy now that oil is cheap will only result in a new wave of price rises as economic activity grows, oil demand increases, the production ceiling hits and the bidding goes up to push oil back up.
The current wave of low prices is merely the receding of the wave of the economic tsunami that will inevitably come back to hit us again.
The current low price of oil means stalled investments in new wells or increased productivity. With 60 of 80 oil producing countries past their peak we cannot expect any increase in economic activity to be long lasting.

What does all this mean for the oil aware denizen in 2009?
Don’t be fooled by oil-unaware arguments. True, Woolworth’s demise is partly their own doing in trying to sell everything, but there is nothing to say that just because a business is working today, it will be able to continue as more and more job losses produce more and more unwilling or unable to buy their stuff. No, all business plans are energy reliant and I would say 99% are energy unaware.
You need to become familiar with other economic models. Interest-free banking and cooperatives are two I recommend.
Interest free banking at least shares rewards and risks and is more human.
Cooperatives, especially those involved with community supported agriculture, are designed to provide their owners with economic security and /or basic services at below market prices.

In fact, finding ways to ensure a supply of the basic necessities for all will be a major challenge in 2009. The leader in the Telegraph from Jan 2 expects there will be some people going hungry in the UK during 2009. Even the Swedish newspapers report how car factory workers, hit by unemployment, go hungry waiting for their unemployment check.
The system we live in already has major homelessness and poverty, in my opinion evidence of abject failure.
Oil aware people need to start to speak up outside the confines of discussion forums to send a clear message to politicians and civil servants: the fossil-fuel dependent way of life is on its last legs. Energy and food security for all need to become the top priority. And of course the good side of all this: this means there will be meaningful work for all, we expect to see a kinder, more generous UK, less stress and pollution, more local business and solidarity. The time to transition is now, 2009, while we still can.

Comments

3 Responses to “Why we need a change: this is not your ordinary recession”
  1. Paul says:

    “From this perspective you can see how we got into the situation we are in.”

    I partially disagree. You’re right that reaching the peak of oil production did put a squeeze on petroleum-dependent businesses, and it was especially obvious with airlines (and arguably with agriculture). However, I think other factors were equal or greater contributors to the current economic crisis. The economic house of cards rests on more than just fossil fuels.

    A huge asset bubble has been building in real estate. Property values have been bid higher and higher through government policies to keep mortgage costs low–and, in the not so “developed” nations, through money flowing into growing middle classes. Mortgage loans became easier for weaker borrowers to obtain, on the expectation of continually rising real estate values (which also encouraged weakening requirements for credit worthiness)–and, in the US at least, through fraudulent reporting by many mortgage sellers and brokers.

    Another huge asset bubble has been growing in the finance industry. Mortgage loans have been securitized for sale and resale among a growing range of investors, while associated risks have been covered up by ratings agencies (not nearly as objective and independent as advertised). Investors have bought and traded credit default swaps, making speculative bets on the changing values of mortgage-backed securities, corporate bonds, etc., amplifying price swings. Regulations and oversight have been removed to allow more leveraging of depositors’ and investors’ funds. Many of the transactions have been (lawfully) hidden from the government’s and public’s view, so investors have had limited information about some securities markets.

    From the top floor of the house of cards, investors looked down and saw that, with the world economy continuing to grow as everyone had hoped, petroleum and other energy prices would be driven up–especially with the growing demand from China and India. (As their speculative purchases moved the prices up so quickly, they started taking seriously some warnings that long term demand was overtaking supply.) Those higher energy prices would squeeze manufacturers and threatened to slow overall economic growth. Slower growth would mean fewer investment opportunities, less profits, decreasing ability of corporations to borrow based on future earnings. Hey, if you see that writing on the wall, it’s time to pull out of riskier investments–especially in “emerging economies”; expect to see a fall in stock markets.

    Other investors looked down from their heights and saw that the rate of mortgage loan defaults was rising due to the large number of home buyers who couldn’t really afford to pay off the loans. Maybe those investments in mortgage-backed securities weren’t worth as much as they had assumed. It was time to sell some of them off; prices started sliding as the securities were passed around like hot potatoes.

    Investors found themselves caught in a downward spiral. Since their mortgage-backed securities were worth less, they had to sell other securities as well to maintain their overall value–especially the banks were squeezed, with their mandated levels of capital. Sell some stocks too! Stock markets started plunging. Creditors holding collateral with falling value refused to turn over short term loans–sell more to pay off those loans! Banks, seeing the values of their investments fall, no longer had much capital left for mortgages or other loans.

    Without cheap mortgages, real estate values started to plummet and that bubble continues to steadily deflate. The finance industry bubble is deflating rapidly, even as governments pour money into the banks. Investors are sticking to the safest investments, the engine of the economy is slowing down, and energy price rises are a memory.

    Even if our overlords can start the economic engine accelerating again, the limits to growth won’t go away. Increasing demand for fossil fuels will force energy prices to rise drastically again. Climate change mitigation, if it’s attempted, will also force energy prices up (through taxes or rationing to reduce fossil fuel usage). Continually degrading soils, water supplies, fisheries, and habitats will make it more expensive to continue increasing production.

    Fossil fuel scarcity is certainly a factor, but let’s not elevate it to the primary explanation for our economic woes.

  2. steve says:

    Thanks for this comment, Paul. It made me think… the connection between finance and oil. Oil is up today around $60 dollars, bank stocks rose after the stress tests results. As economic activity rises, oil prices go up because production is at its maximum. To me, and I respect your point that financial woes are not entirely to do with oil, but without oil there can be no economic growth. And WITH economic growth there will be oil scarcity. That will in turn dampen economic growth. See my point? It’s game over already. They can keep moving the chess pieces but frankly, another game would be better!

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