Sunday, February 26, 2012

Freedom: ACTA, PIPA, ITU, and Julian Assange, a reflection of our unsustainable path?

            I was ten years old when Romania’s brutal totalitarian regime collapsed.  Many people asked me recently whether I still remember what it was like.  Most who grew up in the west, have no way of understanding that there are certain things that one just does not forget.  How am I to forget when my mom was crying a whole day over the fact that Mr. Antal, one of her co-workers was arrested, beaten to death, and then declared to have died of lung problems?  My parents used to often remind me not to say anything about the regime, or the president, before I would go to school in the morning, or when talking on the phone.  I remember the sadness I felt, when a woman was being dragged away by two police officers.  Out of a sense of desperation, she yelled at a saleswoman nearby to help her, to which the sales woman replied to leave her alone, because she does not know her, despite the fact that the arrested woman called her out by name.  I have no idea why the woman was dragged away, but I do remember that she was frightened, and so was the saleswoman at the prospect of being associated to her in any way, for the obvious reason that there was a chance that the woman was being taken away for political reasons.  I also remember the increasing level of misery.  The economic situation was getting worse, and as such there was an increase in shortages.  There were rolling power outages.  Hot water was rationed, and so were most food items.  The most ridiculous shortage we experienced was a constant absence of toilet paper from the market.  I am reminded of that even two decades later, whenever there is a commercial on TV about the quality and softness of brand X or Y.

It goes without saying that I did not understand then why it was all happening, but I do remember the effects, and now, two decades later, I have a chance to make better sense of it all.  The economic situation was the key to shaping that particular social environment.  It became worse gradually, as a result of misguided economic policies.  As the economic situation became worse, the natural reaction of the government was to take measures to discourage dissent.  This was done through intimidation, as well as through an intensification of control over the modes of communication, which went as far as trying to control personal face to face communication, through a robust network of informants.

After experiencing such a brutal, controlling regime, it is understandable, why I value freedom.  In fact I value it so much, that I even found it necessary on a few occasions to express my views, in the face of pressure, in the form of cultural values that if questioned, one becomes labeled unfavorably as a consequence.  I believe in the importance of speaking out for what one believes to be right, even in the face of social intimidation, because it can be just as harmful to society in some respects as legal intimidation.

It is with sadness that I have to acknowledge that we are as a society witnessing the beginning of the end of human freedom as we know it. Do not get me wrong, our freedom was never ideal.  Our democracy is tainted by money, as is our mainstream media.  Even our culture and values are a reflection of social conditioning, meant to serve certain interests and needs.  Nevertheless, the level of individual freedom we experienced thus far is something I believe to have been a rare breath of fresh air, which few people experienced through human history.  I can write this blog, I can choose to go, or not to go to church, and even criticize it if I wish to do so.  We get to vote, as well as express our opinions about our elites.  We have artistic freedom, and some social mobility, although far less than what many would want us to believe.  The taste of freedom is sweet indeed, even if it is not perfect. 

It is increasingly obvious that this era is close to coming to an end now.  It may not revert back to the brutal totalitarian rule for the foreseeable future, but control through intimidation is especially evident, as is the increasing effort to gain control of the internet as we have seen, and continue to see.  Intimidation comes in the form of situations such as the one which Julian Assange finds himself in.  There is little doubt in my mind that he was set up in Sweden.  Former economist at CIBC, Jeff Rubin was let go shortly after his book was released, and we are increasingly told that private enterprise is in the habit of screening potential employment candidates, through searching for their activities on the internet.  In other words, we no longer have to fear only our governments, but also our prospective private sector employers, and in this case, there seems to be very little that we can do about it.  Intimidation through the threat of marginalization can be quite effective.  Persecuting people for their political views, when hiring, or trying to wrongly prosecute someone, all the while maintaining the belief that we are still the same free society is an effective tool of control, especially due to its complexity and sophistication, which unlike the brutal and blunt forceful approach employed during my childhood experience, few can actually understand it, or even acknowledge its existence.  And unlike the brutal approach, this one is far more successful at turning dissenters into losers, rather than martyrs.

I do not want to focus entirely on arguing whether this curbing of personal freedoms is happening, or in what shape or form.  I want to also concentrate on the reasons it is happening, and why it is happening precisely now. It is important to acknowledge the causes and not just the symptoms, if one is to truly understand what is happening in our increasingly complex world. Freedom can be correlated to many factors.  In the US recently, support for freedom became correlated in the minds of many, to the willingness to invade other countries.  Many like to correlate freedom to the bravery with which many were willing to fight for it.  Some correlate the presence of freedom to the level of education within a society.  I think however that freedom, and its advance or retreat, can most easily be correlated to the level of content experienced by the population living within a regime.  Level of collective social content can easily be destroyed by a decline in economic prospects, and that in turn can trigger a response on the part of the authorities and elites, trying to prevent change which is increasingly demanded, whether it is constructive or not.  The ramp up in attempts to limit internet freedom, as well as a few other recent curbs on people’s abilities to voice dissent are simply the response to expectations of increased dissatisfaction on the part of the public for the short, medium and long-run.  The world is gearing up to respond to the 2011 Time’s person of the year (the protester), in order to make sure that it will not lead to eventual social breakdown.

The threat of social breakdown is expected, because we have problems, with few solutions proposed or implemented by our elites.  Since we are incapable of responding to the problem, the world is gearing up to respond to the symptoms.  The problems include resource scarcity issues that we are very busy as a society debating whether they are real or not, but there is very little debate on what to do about it, aside from a few unrealistic proposals, which can never make a real difference, aside from the difference it makes to a few elites who can point and say that they are actively doing something to try to solve the problem.  I stated already in previous articles, my belief that the peak in conventional oil production, which happened in 2006, according to the IEA, has shaved a full 1% from our yearly potential global GDP growth.  Resource constraints ranging from water, food, rare earths, and many other key resources, including our environment, which are in danger of not being able to keep up with demand, will have a similar global growth dampening effect.  Market economics does provide some flexibility for the economy to adapt to these scarcities, but it is nowhere near enough to neutralize the effects.  That is why I suggested giving the market a helping hand in this matter, through my proposal for implementing a standardized global sustainability trade tariff, which is designed to encourage efficiency.  I am not one of the elites however, so there is little chance that the idea will ever be noticed and gain traction.  Ironically, if I were one of the elites, I would have never been able to come up with such a suggestion, because I would have been too concerned with protecting my status and position in society.  So we continue our paralysis, and settle for dealing with the symptoms rather than the problems.

Our current elites were also unable to protect the global economy from the imbalances we are currently witnessing in trade, which threatens to derail the economy.  The solutions to this problem as well as the above mentioned sustainability issue, are not to be found in solutions suggested within the increasingly heated arguments between left and right.  Both sides are heavily invested in their respective ideologies, and it is precisely the constraints of these ideologies, which prevent us from finding appropriate answers to the world’s problems.  So regardless whether the left or right prevails within our current political environment, the result will inevitably be less freedom.

Note:  Feb/27, the ITU meeting in Geneva is the next event to watch in the current tug of war over how much control should be exercised over the internet.  The ITU, which is a branch of the UN, can pass binding legislation through a simple majority vote.  It may not happen at this meeting, but it will probably happen eventually, because following the social media revolts of 2011, there are many parties interested in curbing the freedom of people to organize protests online.

Monday, February 20, 2012

Rio + 20 & the UN’s 56 recommendations: Collective failure of humanity.

           Twenty years after the initial Rio summit, which rightly proclaimed the need for global sustainability, the world will be meeting again to assess the progress made in the past 20 years, as well as to recommend a way forward from our current position.

            For this occasion, the UN has prepared a report, which details the successes and failures of the past 20 years.  It also contains a set of 56 recommendations, meant to achieve sustainability.

            After reading through the report, I have to say that I could not help but shake my head in disbelief.  I will deal with some of the details of the report in a moment, but first I want to sum up what the UN is recommending as a formula for success.  It is the same approach we already used to achieve 20 years of failure.  I should also add that some of the approaches are even less likely to have an effect today, given the economic realities we face, namely the increased pressure faced by governments to give in to increasingly obscene demands made by private enterprise in order to hold on to their investments, and that includes concessions on environmental and human rights protection.

            Of the 56 recommendations made, not one of them contains a mechanism meant to deal with the economic advantage that is automatically to be gained by non-collaboration with these recommended policy changes.  All of the recommendations rely on goodwill and self sacrifice for success.  It is no surprise therefore that one of the 56 recommendations is a call to promote education about sustainability awareness (recommendation 13).  There is also a recommendation to enhance the ability of the consumer to choose between products that we made in a more or less sustainable fashion (recommendation 11).  There are recommendations for governments to do a wide range of things, including promoting technological innovation, advance human rights, and promote carbon trading.  All of it is stuff that has already been recommended.  The one thing that seems to escape the panel’s considerations is that it is precisely the nations which made some effort to adopt these recommendations in the aftermath of the initial Rio summit, which are currently on the brink of economic collapse, while the nations which shunned these ideas, like China, are set to become the new masters of the world.  Keeping this in mind, do they really expect these ideas to take hold, or should we recognize that they are in retreat, and come up with a more realistic approach?

            There is of course also the renewed recommendation of reaching voluntary global consensus on action on most of our sustainability related issues.  There is no reason to believe that this can be done, because the same things that prevented consensus in the past 20 years are the things that stand in the way currently.  The main stumbling block is the fact that sustainability is a public good, and like any public goods, they can only be built through a form of coercive enforcement of participation, no different than government taxation to build sidewalks, or other public infrastructure.  This all leads me to question whether any of the members of the panel responsible for preparing these recommendations, even have a basic understanding of basic economic theory.

            Then again, perhaps it is not the knowledge that is lacking, but the inability to go beyond individual ideological conviction, which prevents people from reaching appropriate conclusions, and therefore offer viable solutions.  The fact that after 20 years of failure, following the original Rio summit, we are presented with the same recommendations is a testament to the power of ideology to cause collective intellectual stagnation.  We most certainly cannot be any more stagnated than we are currently, and the consequences are already being felt.  The intensity of the pain experienced due to our failure to promote a sustainable economic path, will intensify in time

            Many will remember 2012 for many different reasons.  For myself, I have to say that in the absence of a great apocalyptic disaster, which so many prophesized to be upon us this year, I will remember a different kind of calamity.  I will remember this year as the one in which collective human failure has condemned us and many generations hereafter, to a bleak future. That precise moment of failure will happen when the Rio+20 conference will be completed, with many pledges of goodwill declared from across the planet, while the consequences will take a while to become clear.  Few realize this, but the main aspects of our future will not be determined by our endless, left & right arguments over national policies of taxation, spending, and regulations.  It will be decided when this summit fails to implement a global mechanism for sustainability.  The effects of the above mentioned left & right squabble, that everyone seems to be so heavily invested in emotionally, will be secondary in comparison regardless of the political outcome.

It is a future that we already see unfolding before us.  Failure to promote true sustainability has led to the economic difficulties we experience today, and have been experiencing since 2007 already, and yet few people talk about it in the event’s appropriate context.  Record high energy prices, as well as spikes in food prices, caused by shortages, have been a part of our global reality for about five years now, but listening to our elites, one would think that it is all part of just some temporary technical glitches in the global financial market’s performance.  Facts which are publically available, such as the IEA’s admission in 2010, that conventional crude production has reached a plateau since 2006 already, and it will remain on a plateau at best in the near to midterm future, are never contemplated in the mainstream media.

We needed to have a mechanism in place to promote global resource efficiency within the economy, at least a decade before this event.  Five years after conventional crude plateaued, we still lack such a mechanism, which is reflected in the fact that even as the economic recovery or better said non recovery is taking hold; we have near record petroleum prices.  I explained the effect of the event of the peak in conventional oil production that happened half a decade ago, in a previous article.
 It seems to have shaved more than 1% out of the world’s potential capacity to expand GDP.   In the years and decades to come, the oil situation will get worse, as conventional petroleum will move from the current plateau in production, to an eventual permanent decline.  The much hyped unconventional sources will not be enough to fill the void.  Other resources, will reach their maximum yields, and some even start declining, ranging from minerals, to ocean based protein harvests.  Each one of these resource constraints will negatively impact our ability to expand the global economy, which in turn will intensify the ferocity with which systemic risks will hit us, until we reach a global breaking point.  In the absence of an agreement to implement a global mechanism to promote sustainability this year at the Rio summit, similar to the one I proposed in my book, this will be our future, because with every year that passes, it becomes harder to change course, because most of us will be too busy dealing with the immediate symptoms of our unsustainable path.    

As the conference will close, no one will notice any immediate significant changes, so few will remember the significance of failure at this summit.  We will move on to the next stories and issues, which will seem more important, because they will appear to be more immediate.  The effects of failure to promote true sustainability will take the shape of symptoms, which we will in most cases fail to identify correctly to the source, and thus we will deal with these symptoms, which will progressively become more severe, in the years and decades ahead, without realizing the importance of having in place a mechanism to promote global sustainability, and thus prevent the intensification of the symptoms.  Even when our global economic system will be on its death bed, we will fail to recognize the disease, so unfortunately, we will become witnesses to the beginning of the worst human disaster on record, because unlike other failed societies from our past, this one, for the very first time, is a global society.

            The summit will take place in June, and I intend to write an article related to this subject every month leading up to the event, in order to do my small part in trying to raise awareness of the need for success, as well as explain what should be considered real success.  I hold no illusions of making a great deal of difference on my own. The best I can hope for is to reach a few people, and thus help reshape the argument into a direction that is more relevant to our needs.  The last article centered on this particular summit, I will write in July as a follow-up and sum-up of the results.  I hope those of you, who decide to read them, as well as my other weekly articles and perhaps even my book; will find the material to be informative and perhaps even persuasive enough to change your view, not only about the need for sustainability, but also on how this can be achieved.

Monday, February 13, 2012

Occupy movement’s missing message

            One of the most potent criticisms of the occupy movement, which is now looking like it is set to fade, is the charge that it is a movement that does not propose any viable alternatives to the way we do things now.  Furthermore, there was precious little in terms of providing a convincing argument to counter the stance of the right that redistribution, which it seems was the main argument of the ones protesting in the name of the 99%, will in fact hurt the 99%, because it will stunt economic growth due to decreased private investment.

            A few months back, my sister asked me to look at this short video about 300 economists who stand with the occupy movement, which she and others described as a powerful message.
Well, they may have done so, but out of the 300 economists, one would think that at least a few would have bothered to do more than just agree with the occupy movement on ideological grounds, and put forward some detailed proposals instead, just like right leaning economists do, in the form of their argument to lower taxes on the rich to provide incentives for them to invest in our own countries (the very fact that we are talking of right or left leaning economists is sad, because we need objective economists to provide fresh ideas).  No such proposal was put forward by them however.  I think they may be inclined to suggest higher taxes on the rich in order to increase spending on the poor.  I believe there are more important things we have to look at than tax policy, if we are to truly get to the bottom of things.  Tax policy seems to be the only thing that our increasingly polarized elites always seem to want to argue about.  It has become an obsession that they are simply unable to move past, in order to explore other avenues.

The missing message:

            There are two key ingredients missing from the occupy movement’s argument.  These two ingredients come in the form of explaining why, and then the all important how we are to pursue more equality. 

            The why, as explained by the wall street protesters and their supporters, centered mainly on the argument that the poor and middle class have become stagnant or even poorer, while the top earners reaped all the profits from the economic expansion we experienced in the past decades.  A recent study made by the CBO in the US, has found that the top 1% have indeed reaped most of the benefit.  Their income has risen by 275%, from 1979 to 2007, while the income of the bottom 20% of earners has remained stagnant.
The occupy movement assumed that this piece of data alone should be enough to win enough support in demanding more equality.  They were wrong.

            The upper middle class may not have fared as well as the top 1%, but their incomes have risen enough to make them content.  The middle class overall is struggling, and recently more and more people are struggling to remain in the middle class, but life is not unbearable by any means, for the majority of the population just yet.  Furthermore, the political right makes a pretty good argument against any attempts for more equality.  Essentially they argue that we have to continue to make it worth it for the rich to keep their money invested here, because through their entrepreneurial activities they create jobs, which allow many to remain in the middle class.  It is a flawed argument, because it neglects to address the fact that the main job creators are the consumers, because as long as demand is there, entrepreneurs will always invest in meeting that demand, as long as there is a profit to be made.  That profit need not be obscene either in order to convince people to pursue that profit.  While their argument may be flawed, at least the right provides a technical argument, while the left only provides an argument that pleads for fairness. 

            I am personally not in the habit of adhering to one side or the other in political partisan arguments, but in this case, the left and the occupy movement are right, and there is a valid economic argument to be made for their stance, even if it is not precisely the argument they made so far.  The one variable that I feel makes their argument for the pursuit of more equity in the share of income is the fact that as of 2006 we are in a new era for global economic expansion, mainly due to the peaking and plateau of conventional crude oil production as confirmed by the IEA in its 2010 report.  As I already explained in a previous article on my blog, this event has meant that there is a constraint to global economic growth, which was able to expand at 4% or more per year on average in past decades.  Since 2006, average global economic growth rate has slowed to less than 3%, which means that mature economies will only reach average growth rates of 1-1.5% at most.  Growth rates experienced in the western world so far confirm this trend.  Since 2007, average US growth rate has only been .63% per year, which compares rather poorly with average growth rates since the end of the Second World War of over 3%.  With conventional crude production stagnated, and only growth coming from unconventional sources of liquid fuels, this trend cannot improve much in the upcoming years or decades.  There is actually more chance of a further deterioration, because conventional crude production will not stay on a plateau forever.  At some point it will decline, and unconventional sources will only be able to keep total liquid fuels production stagnant at best.  At that point, if we do not make drastic changes to the global economy before the above mentioned event, we will be faced with a global economy stagnated at a 2% rate, which means that the developed world will be shrinking.

            Going back to the current reality of 1% growth prospects for the developed world, we have to realize that in the absence of a mechanism to create an environment that allows all social strata to share in that flimsy 1% yearly increase more or less evenly, there is a serious danger of systemic risks plaguing the economy, which may prevent us from even reaching average growth of 1% in the long-run.

            The reason there is a danger of systemic risks developing is simple.  If the top 1% which currently takes 17% of total income in the US, continues to rake in yearly income growth in the 4% range as they do currently, they will take fully one third of all real income growth from the US economy.

$1.3 trillion x .04 = $52 billion yearly increase in income for top 1% of earners
$15 trillion (size of US economy) x .01 (1% GDP average) = $150 billion GDP growth
$52 billion/$150 billion = 1/3 of income growth rate going to top 1%

            That means that two thirds will be left to be distributed among the 99%.  This means that only .7% growth in income will be available to the rest of the population.  That is not even enough to keep pace with population growth of .9%, so in effect real income per family is set to shrink by .2% per year.  This slow grinding down of an increasing number of households (the trend will not be uniform as some, especially in the upper middle class will still fare well, while the income of many others will shrink by a greater margin), can only mean that we will continue to experience explosions in loan defaults.  At some point consumption will grind to a halt, and the entire 100% will end up suffering a permanent decline.

Note:  This chart takes into account the assumption that US GDP growth will decline to around 1% per year, as should be expected assuming I am correct to factor in continued stagnation of global conventional crude supply growth, as indicated by IEA report from 2010.  Continued population growth of roughly 1% per year was also factored in, as well as a continuation of income growth patterns established in the last few decades, of the above mentioned economic demographic as indicated by the CBO.
It is not visible on the graph, but the net income of households from the bottom 90%, in 2012 dollars, will most likely drop to $25,800, from about $31,000 currently.

            So this is the answer to the why question.  Given that so far, the stats show that the global economy has indeed entered into a lower growth rhythm, which reflects the drag on growth due to resource constraints, it is a perfectly valid argument to make for greater equality.  If the 1% yearly increase in national income in the US will be shared more or less uniformly, at least it will help the average family keep a stagnated level of real income.

            Now to get to the more important question of how this greater level of equality in sharing in economic growth should be achieved?

            The main suggestion so far coming from most, who already support the need for greater equality is to do it through taxation.  The answer from the right, which is actually a valid counterargument in current circumstances, is to point out that higher taxation of capital, or an increase in the cost of labor will drive investment away, making the situation of the working class even worse.

            The first step as a solution is to remember that we live in the global economy, so the solution has to be on a global scale (just like the solution to most other problems we have).  As such, I am proud to say that I already proposed a viable solution in the form of the sustainability trade tariff, which is the central subject of my book "Sustainable Trade".  Reality is that at the moment, the owners of capital are in the driving seat when it comes to dictating the terms of investment.  They have us engaged globally in a race to the bottom in wages, worker and environmental protection, and we are undermining the state’s ability to provide the necessary infrastructure, both human and physical for long term social health and stability, through their increasingly aggressive demands for tax breaks.  My suggested standardized global trade tariff is designed to penalize the practice of engaging in undercutting each other to attract investment, breaking the current source of high returns on investment for the top 1%, at the expense of the producers and consumers of the world.

            This is the missing message of the occupy movement and their supporters.  The 300 economists, who declared their support, did not provide for a similar approach as a justification for the demands of the movement.  It may seem to some that the issue of social justice may be enough as an argument, but it is clearly not.  After all, how many of us were told when we grew up that life would be fair?  The important thing is to make sure that it is sustainable; otherwise the result will be unfair to all.

Monday, February 6, 2012

Left versus Right: The game used to play the masses.

            In my book “Sustainable Trade” I am advocating for a dramatic shift in the way we have thus far organized global trade, in order to promote resource and environmental sustainability.  Promoting standardized global trade tariffs that encourage a smaller environmental footprint per unit of GDP produced at a national level, which would be applied to all countries, even if some may be against being subjected to such a tariff, is change that I believe to be imperative if we are to have any hope whatsoever of meeting humanity’s most basic needs for the long term.  It is a message I believe to be important enough to try to make people aware of this concept.  The main stumbling block I find aside from my own relative lack of fame, is the already generations’ old political game of left and right, which many of our citizens are currently fiercely invested in emotionally, as well as intellectually.  I try to appeal to logic instead, starting from the most logical of assumptions that neither side holds all the right answers, nor is the other side always automatically wrong, and I have to say that it is not easy to convince those who are already heavily invested ideologically to listen. 

Environmental and resource sustainability advocates are currently mostly focused on convincing people at a national, local and individual level to have the goodwill to sacrifice in the name of sustainability globally.  Basic economic theory tells us that this approach is flawed, because environmental and commodity sustainability are what economists call public goods.  In other words they are just like a sidewalk, which is used by everyone, regardless whether they contributed to paving it or not.

If people were to be asked to contribute voluntarily, in effect it would mean that they would be asked to give up a portion of the advantage they desire to have as a result of spending what they earned on their own needs and desires, in favor of contributing to something that they may find useful, but so will those who chose not to contribute.  So those who chose not to contribute, gain an advantage in consumer satisfaction.  Same can be said about those who choose not to contribute to the effort of preserving our natural resources and the environment.  So, for those hoping for the grand global agreement to solve these sorts of global issues, they will most definitely be left disappointed.

Those who think that “people power” can be mobilized for goodwill that will change the world through promoting responsible individual choices of lifestyle and patterns of consumption, will likewise discover that they are only preaching to the convertible, while the vast majority of the world’s population is not.  For those who do not believe me, they should try to go a middle class neighborhood in China, and try to gauge the reaction of people there to the proposal to give up their newfound desire to eat meat, in order to help provide more nourishment to the global poor, a large proportion of which are to be found in their own country.

            The deniers are supported in their view by the mainstream elite, which by its very nature has an automatic incentive to present the masses that prefer to be oblivious to many of our problems with reinforcement for their views.

 The non-technical, cultural denier explanation is that the ones, who raise alarm bells, are nothing new, have always been part of society and are always wrong.  No mention is made ever of course of many societies in the past, which experienced collapse due to unwise decisions in the way they adapted themselves to the environment (Easter Island, Rwanda, Haiti, and Greenland’s Viking Settlers).  Given that we are now a more or less global society, we may set ourselves up for the ultimate collapse of humanity, because all previous collapses were regional in nature, because economies were also mainly regional.

We cannot know for sure, but my guess is that at some point, there may have been a few individuals out of a population of 20,000 inhabitants on that island who may have raised concern about the wisdom of chopping down the island’s forest cover in order to build large stone heads.  It is possible that those “Chicken Littles” had their little heads cut off, in order to prevent the rest of the population from panicking and demand change in policy.  Our own “Chicken Littles” do not have their heads chopped off, but judging by the case of Jeff Rubin, who was let go from his job at the CIBC soon after he had his book published “why our world is about to get a whole lot smaller”, I’d have to say that not much has changed, because being marginalized in today’s society may not seem as dramatic, but I’m sure that those who do become marginalized may feel that they would prefer to be dead.

            On the technical front, the deniers like to argue that previous analysis missed the mark as was the case more recently with geologists like Kenteth Deffeyes, Kjell Alekett and others who argued that peak oil was upon us by 2005.  While conventional crude production did indeed peak in 2005, just as many have predicted, it is now being argued by the deniers that peak oil was pushed back indefinitely, as higher prices provided an incentive to try to raise the recovery rate from conventional fields, as well as push for more and more production from unconventional fields.

            A recent analysis done by Exxon Mobil is an example of this reinforcement for denial.  It argues that we can continue adding new production at least until 2060 thanks to improving methods and higher prices, we therefore have nothing to worry about.

            In this report they want to present a reassuring forecast that we will increase fuel liquids production globally, from about 88 mb/d today to over 120 mb/d fifty years from now. 

Unfortunately, the natural reaction of many who argue that peak oil is imminent was to deny the geological probability of such an increase happening as a possible reality.  I on the other hand will do no such thing.  I do actually believe that given the right price, right political environment and some good old human ingenuity, we can make this increase a reality.  So why do I still believe then that there is a serious problem?

            If we take a closer look at how this increase in total liquid fuel supply is to be achieved, we should actually be very much concerned about our future.

Conventional petroleum reserves currently produce about 80% of all liquid fuels, and these fields have now reached stagnation, as I mentioned and as many have predicted in 2005.  To achieve the projection presented by Exxon, we would have to maintain the current production plateau until 2060.  Problem is that currently proven conventional reserves add up to 800 billion barrels (excluding OPEC’s political reserves), while we produce 25 billion barrels per year.  New finds have been adding about 7 billion barrels per year in the past two decades, so if we continue this rate of discovery, which is actually a very optimistic assumption given the steady decline in discoveries since the 1960’s, we can add about 350 billion barrels through discovery alone.  We will however produce 1250 billion barrels of conventional petroleum by then, so without great improvements in field recovery rates, it will be impossible to maintain the current plateau.  Currently we have about 5,000 billion barrels of conventional original oil in place, while current methods allow us to recover 40% of that, and we produced already about 1,100 billion barrels (20% of total oil in place).  So we need to raise recovery rates to about 60% at least by 2060.  I believe that if the price of petroleum is right, we can do that.  We have after all managed to increase recovery rates from just 15% a century ago to 40% currently.  In the process however we went from a rate of energy return on energy invested of about 100/1, to about 20/1 currently, and technology did not help reverse that trend, nor can we expect it to in the future, for geological reasons.  If we increase recovery rates to 60% by 2060, we should expect these fields to yield an energy return on energy invested rate of about 5/1.  So the end consumer will go from having 66.5 mb/d available to them currently, to having just 56 mb/d out of the total 70 mb/d produced, if we manage to maintain the plateau.

Unconventional sources will in the Exxon scenario to 2060, yield 50 mb/d at least.  The energy return on energy invested from these sources is about 4-5/1 currently, and as we will go for harder and harder to get to resources, it might even drop to 3/1, which means that out of the 50 mb/d of total production; only about 35 mb/d will be available to the end consumer.

Putting conventional and unconventional together, we get about 91 mb/d that will be available to the end consumer, which is only an increase of about 9 mb/d over current energy availability, which is about 82 mb/d out of the total 88 mb/d being produced.  It is a very different picture than the one Exxon offered us, which would suggest that we have an increase of about 32 mb/d coming our way by 2060.  The environment however will feel the effect of us burning through 120 mb/d per day, even if it will not feel like it to the economy.

Given this reality, global economic growth will be constrained by energy availability, and with this realization, the theory of trickle down economics that most deniers adhere to goes out the window, because there will be very little wealth created by favoring the rich, therefore not much will trickle down (This will be my topic for next week’s article). Maintaining the current status quo in global finance and trade is not feasible with such a small increase in net energy available to the consumer, because global growth rates for this period would slow down dramatically, and that in turn would cause systemic risks.  In other words, we will likely fail to reach production of 120 mb/d by 2060, not because it is geologically and technologically impossible, but because the economy will fail to remain stable, due to the painfully low rates of growth of net energy available to the consumer.  I covered the effect on the economy of lower liquid fuel supply growth in a past article “Peak oil and environmental degradation deniers own the podium” in more detail on my blog.

Given these considerations, there is little to counter argue my assessment that given what the right and the left have to offer us, my proposal for the sustainability trade tariff is the superior choice for the long-run, and it should be something that I hope at least the political center can embrace, even if it is in its traditionally passive fashion.  I just hope that the few, who currently agree, will not continue to be outnumbered by a million to one by the ones who still buy into the current political game, which increasingly offers very little.

I want to end, by thanking those who did show interest in my book and my articles on the blog.  I hope you enjoyed my writing so far, and I will do my best to continue to keep you interested in the future.