Monday, March 26, 2012

Coal: An underrated long term investment opportunity?


            This is not sexy, it is not glamorous, and it is not about the next Google, Apple or Facebook.  This is about dirty black stuff, which pollutes the air, more than any other source of energy we use.  I wish we would learn to do without, or do with less.  I in fact wrote a book entirely dedicated to promoting a global trading system, meant to help us move away from killing our environment in the name of jobs and consumer products.  I never really believed that my idea would ever enter mainstream culture, so I have to remain realistic and instead of convincing myself to see what I want to see, I have to remind myself to remember to always seek reality.

            So yes, I believe there is a huge opportunity for some to invest into a future trend that has real potential to yield significant returns in the next few decades.  To reap a profit from this, one has to be patient, and go about it in an intelligent manner.  I believe this potential investment is one of the last great chances to invest in a trend that will provide for great returns.  It should be something to look out for, precisely because everyone seems to have written it off, and few are talking about it.

The Facts on coal:

We currently have about 800-900 billion tons of coal resources underground that can be reached with current mining technology, and within a reasonable expectation of what prices will be for this commodity.

Currently the world produces and consumes about 8 billion tons per year, which would imply that at current rates, we have maybe 100 years worth of the stuff in reserve, so scarcity is hardly an urgent and imminent issue.

China produces and consumes about half the coal in the world currently and this is the key to realizing that we are looking at a great investment opportunity.

The facts on the alternatives to coal:

The case for renewables, or I should say the case to doubt the renewables can be made based on the fact that increasingly governments are strapped for cash, and these renewables have been dependent on subsidies in most cases.  Recently Germany, which up to now has been a champion of renewable energy, just announced that they are ending their subsidy for solar energy.  In the US, the Solyndra scandal has given the industry a bad name.  I still expect the world to increase its use of renewables, but it will only keep pace with the increase in the overall rate of global energy demand at best.

The recent story with natural gas has been that we are currently sitting on embarrassingly large deposits of it globally.  The story of the 100+ years worth of supplies in the US has been advertised by the industry for a few years now, and most have accepted to repeat this like the good parrots they are.  Fact is that in the past few years we went from the fantasy of as much as 4000 tcf of shale gas, to a recently downward revised figure released by the EIA of about 500 tcf that are technically recoverable.  Industry insiders, economists, investors and policymakers still talk about the 100 + years of gas however, and it seems that everyone is choosing to ignore the fact that taken into the larger perspective of the global hydrocarbon big picture, shale gas is in fact not such a great game changer for the long run.

John Pinckerton, of Range Resources just announced a few days ago in an interview with the Wall Street Journal that he believes, gas will be abundant, and in the US, the price range will remain in the $4 – 6 range, for the rest of his working career, thanks of course to the shale gas boom.  The world’s consumption of hydrocarbons, in gas equivalent is about the same for a year, as the entire technically recoverable reserves of shale gas identified in the US.  Even if it turns out that worldwide there will be four times more shale gas, than what we know to be there in the US, it is still not nearly as great of a game changer as we try to make it out to be for the long-run.  Fact is that we are just very hungry for energy, and even immense new resources being added to our potential supply, just do not make such a great long-term impact anymore.

An opportunity for profit:

            I mentioned already that China currently produces and consumes roughly half of all global coal output, or about four billion tons per year.  They claim that they have about 114 billion tons of reserves, but they have been claiming this number for more than a decade now, and they produced about 30 billion tons since then.  So in reality, even if the original claim of 114 billion tons was somewhat conservative, fact remains that it is unlikely that they have more than another 100 billion tons left.  From now, till about 2030, they will produce another 70 billion tons, if they maintain current rates of production.  Needless to say that somewhere between now and 2030, their production volume will start declining.  My guess is that it will happen around 2025 or so, and the decline rate will not be all that gentle.  A decline of 100 million tons per year should be a reasonable expectation.  So it is reasonable to assume that by 2030, China will produce about 3.5 billion tons per year at most.

On the consumption side, I assume there are three possible scenarios we can work with as points of reference.  The first one would be that the pace of increase in consumption will continue at current levels of about 10% per year, which has been the case in the last decade.  This is of course highly unreasonable, because it would mean that by 2030, they would consume about 23 billion tons per year, or almost 6 times more than in the present.  The global economy would not warrant such a rate of expansion in their consumption, even under the assumption of the most optimistic projections of growth.  Furthermore, China will most likely switch to ramping up its gas consumption regardless whether they will produce large volumes themselves or not.  Renewables and nuclear will also play a larger role, albeit not nearly enough to make a serious dent in a hypothetical continuation of their ramp up of coal consumption.

The second scenario is the one where we take the projections for global economic growth released recently by the likes of Goldman Sachs, the World Bank, and the IMF as given, and thus the world will expand at a rate of about 3.5% per year on average.  This would mean that China’s rate of GDP growth would be about 7% per year, which is far less than the 10% rate we saw in recent decades, but still robust enough to warrant the assumption that they will increase their rate of coal use at a very fast pace.  In past decades, they increased their rate of coal consumption at a similar rate as their overall GDP growth.  I assume as I stated already that they will most likely also ramp up the use of renewables, gas, and nuclear at a faster pace going forward, and we should expect them of course to advance in efficiency, so a rate of 5% increase in coal consumption until 2020, and then a decrease to 4% rate of increase from 2020 to 2030, is a reasonable expectation we should factor in.  This would mean that by 2030 they will use about 9 billion tons of coal per year.  Their imports will have to rise from about 500 million tons currently, to 5-6 billion tons per year.  So the only obvious conclusion we can draw from this, if we believe in the analysis of the mainstream, is that in places like the US, where large deposits of coal are known to be underground, production will ramp up at a fierce pace in the next few decades, and there are of course many ways that one can profit if properly positioned.

As I stated in previous posts, on my blog, I believe that global rate of GDP growth will be significantly less in the next two decades, than the mainstream projects.  My own conclusion left me to believe that between 2010 and 2030, average GDP growth rate will most likely hover at around 2% per year.  So does this mean that coal is not a great investment opportunity anymore?  China will be growing at a rate of about 5% per year in this scenario, and even with the above mentioned ramp up in consumption of other sources of energy, we should still expect a rate of growth in coal use of 2% per year until 2020, and a 1% increase per year from 2020 to 2030.  By 2030, they will still consume about 5.2 billion tons, and because they can only be expected to produce 3.5 billion at best, there will be a need for about 2 billion tons per year to be imported. 

If we can hold it all together and prevent the global economy from collapsing by 2040, they will likely have to increase their imports to about 3 billion tons per year at the very least, because by then, they will be almost completely out of their own supplies of coal.  So if someone were to play this by buying property near a currently well known coal deposit, where mining should be expected to commence in the next few decades to meet this demand for coal, it is possible that a good load of patience would be required to make this work, but the payoff could be as much as a three or fourfold return on original amount invested.  Comparing that, to other investments such as buying 30 year US government bonds, which currently yield about 3.5%, it is not so bad.  Similarly, if we are to look at the performance of the stock markets, in the last decade or so, not only is there less risk in buying property near potential new mines, because purchasing land carries only the risk of a loss of only a small portion of principal, but if the investment works out, it will most likely outperform the returns of the western stock markets by a very wide margin, allowing those who made this step a true chance at a decent retirement.


One final issue I want to address is the moral aspect of it.  Many people may feel that it is wrong to profit from the process of trashing our planet.  The irony of such a stance is that through the process of those who do have enough conscience to realize what they are doing to the planet, consciously foregoing opportunities to profit, they are aiding in the process of making those who do not have a conscience in this regard richer, and therefore more influential, while they continue to become poorer and less influential.  A trend such as the one I described in regards to the coal industry cannot be stopped by conscientious people foregoing personal benefit.  The only thing that can now stop it is a mechanism that changes the incentives that drive the global economy, like the one I proposed.  In the absence of such a mechanism being implemented globally, there is no point for anyone to go through the futile process of self-sacrifice.

Monday, March 19, 2012

The true dangers of Iran & our cultural inability to grasp them



            A decade ago, as the hawks were beating the drums of war, yours truly was an undergrad student, and took part in many conversations in regards to the impending invasion of Iraq.  I tried often (in vain) to explain the dangers associated with igniting a regional war, which we would not be able to handle.  It is hard however for North Americans to understand the complexities of the Old World. The regional war I feared did not materialize, but neither did the conflict turn out as many have hoped as we all now know.

            Now a decade later, while one US war just ended and another one is just in the first phases of winding down, without any significant lasting achievements having been secured in either one, we are already talking of another adventure.  I, or anyone else for that matter, who is outside the decision making circle, cannot know for sure whether the beating of the war drum is just a negotiating technique.  I personally hope very much that to be the case, because if it is not, we have a serious problem.

Threat of a regional war:

            Most American elites stress the danger that a potential armed conflict would pose to shipping in the Persian Gulf.  They also stress the importance of Iran’s own oil to the market.  These are all dangers that we can deal with, even if they were to pose a risk to our economic well-being in the short term.  Saudi spare production, even if it is far less than officially stated, coupled with periodic releases from the strategic stockpiles, can help us get past such emergencies, because we can solve them through military intervention.  I hope they are also thinking of the danger, which they do not talk about.

            During the Iraq war, regional powers like Turkey, Iran and Saudi Arabia did not shy away from pursuing their own interests, even if they were against the wishes of the mighty US of A.  Iran wanted Iraq to become exactly what it did become, which is a Shiite dominated state, and their most important strategic partner currently.  Saudi Arabia wanted to prevent this from happening, so they provided support to the Sunni insurgency, which was responsible for the bulk of US casualties during the war.  Turkey went in militarily to prevent the Kurdish north from becoming an independent state, which would pose a threat to their own territorial integrity, since their current boundaries include the bulk of the Kurdish population in the region, which despite being a large ethnic entity of about 25 million souls, was not endowed with a state, when the great powers divided the world, very unwisely in the aftermath of the first world war.  Even though Turkey is a NATO member, they were not eager to defer the pursuit of their own interests in favor of appeasing the US.

            I hope that our elites currently have the benefit of advisors knowledgeable enough of the situation to explain to them just how easy and desirable it would be for Iran to start a civil war in Iraq.  This time, the lines would be drawn slightly differently than the last one that the US just withdrew from.  Currently the central Shiite dominated government is trying to persecute a member of the Sunni minority’s political elites, and Iraq’s vice-president, Tariq al-Hashemi.  There was only one place out of the reach of the central government within Iraq, which is the autonomous Kurdish region, so that is where he took refuge.  The fact that the Kurds are willing to protect him is a clear olive branch that is being offered to the Sunni Arabs, which in my view signifies that the next internal conflict will have a Sunni-Kurdish coalition pitted against the Shiite majority.  Like I said, Turkey cannot afford a potentially oil rich Kurdish state to become reality.  The Saudis will support the Sunnis, which means that Turkey, which is likely the most powerful militarily in the region, will be aligned with Iran, against the Saudis, who will in turn have as allies the twin “great Satans”, in the form of Israel and the US.  Even their own population will be against them on this one.

            About 15% of Saudi Arabia’s population is Shiite, and they live in the general area where the oilfields also happen to be.  They were mistreated in the last few decades, which means, that it would not take much encouragement by outside forces to get them to rebel.  This effectively means that aside from the 5 mb/d of petroleum exports that we would loose as a result of exports from Iran and Iraq being disrupted, there is a good chance of an additional 7 mb/d being lost from Saudi Arabia.  There is also a danger of 1 mb/d being lost from Azerbaijan, if they feel adventurous enough to take advantage of the chaos, in order to take territory from Iran, which they consider to be rightfully theirs, because it is inhabited by Azeris.  In turn, Armenia could try to profit and with support from Russia, they might venture into Azerbaijan in order to take the region of Nagorno-Karabakh, which is inhabited by ethnic Armenians.  So the danger to us adds up to a loss of up to 13 mb/d indefinitely, because such a wide conflict could take decades to sort itself out.  There is of course a slight danger of another 5 mb/d being lost, due to potential disruptions to Kuwait’s and UAE exports, which also passes through the Persian Gulf.  The US the EU, Russia and China could make the situation worse by picking sides and aiding them.  In short, this is one Humpty Dumpty, which we will have a very hard time putting back together again, if ever.

            It should be important to also note, that a concerted effort to destabilize Iran, through covert operations and sanctions, can have the same effect of sparking a regional war as a military strike.

So why are we willing to risk so much?

            It is not easy to relate this information to people belonging to western culture.  Most were taught for generations now about the “evil doer” authoritarian leaders, who are always dangerous, because they have a predisposal to wanting to destroy freedom, and so on.  Looking back to my own childhood experience and reflecting on the situation, I have to say that, it is a much distorted image of these people.  The distortion is not accidental; it serves the purpose of lending legitimacy to our own leadership, by claiming that being democratically elected automatically makes them more ethical.  That of course may not necessarily be true.

            Their main preoccupation by far is survival and self preservation, not dreaming up evil plots against the world, as our elites want to make us believe.  The people who are most likely to be hurt by them are their own citizens.  Only on rare occasion does starting a conflict figure into achieving their above mentioned desired objective.  In fact, democracies are as likely to start conflicts as authoritarian regimes.

            So once again, why are we so freaked out at the prospect of Iran possibly building the capacity to put together a nuclear weapon?  We were told, that surely Iran would use the weapon to “wipe Israel off the map”, or provide it to a “terror group”.  This fits in with the usual narrative that they (dictators) are always up to “evil doing”.  This narrative does not fit reality however.  An Iranian regime, which did all it could to survive for decades now, would all the sudden abandon the will to survive, by launching a nuclear warhead at Israel?  Not likely!!!

            There is of course that other argument, which is that Iran’s regime is different than the brutal Ceausescu regime I experienced, because of the religious fanaticism aspect of their elites.  Here I think people have a point, because I indeed believe that religious fanatics are a danger to our global well-being.  I think we are overly obsessed with the fanatics from the other side however, while the main and immediate danger to our wellbeing comes from our own fanatics (Zionist Christians like John Hagee come to mind here).

            The above mentioned dangers of war with Iran have a very good chance of coming to fruition imminently, if they are attacked or pushed in a corner.  On the other hand, a nuclear armed Iran, able to launch a strike against anyone else, is probably about a decade away, while the probability that they would actually attempt such a strike against anyone is low as I said.

            Truth is that Israel has little reason to fear a nuclear strike against them.  Furthermore, there is a very good chance that such a strike if it was to happen, can be deflected through missile defense technology that is already being deployed in the region, and will be ready before Iran can realistically launch a nuclear strike.  Iran on the other hand will not have missile defense technology to defeat the 200 nuclear warheads that Israel has at its disposal, which is enough to turn the entire Middle East into a radioactive wasteland.  Yet Israel is acting as if their destruction is assured and imminent.

            Aside from loosing the ability to push around a region, which provides the world with the fuel that keeps us humming, the religious fanatics from our own society are bothered by the fact that their own vision of the region would be less likely to be achieved.  Israel may be a democracy, which is often invoked to justify its actions, but it is a state dominated by religious zealots, not driven by logic.  Their beliefs and drivers of policy, include the concept of the holy land, given to them by god.  They therefore want to re-establish that biblical state, making achieving peace with its neighbors impossible, since they claim and are currently colonizing land currently inhabited by non-Jews.  The Zionist Christians mainly in the US, who are now very influential in US politics, as well as some Jewish-American groups, are 100% in favor of Israel’s pursuits, with complete disregard for its victims.

            The voices of reason within US society are efficiently silenced through the now very potent strategy of labeling anyone who does not pledge unconditional allegiance to the state of Israel, as an anti-Semite.  Thus, resistance to the will of our own religious fanatics has now become socially impossible, so when it comes to Iran, they are firmly in charge of our policy.  Ironically it is in no way in the interest of Israel to do what the religious zealots want. 

In the end, the Middle East will recover so will Asia, and Latin America, regardless of the intensity of the economic pain the world will endure if my prediction of the worst case scenario will come true.  The heavily indebted, leveraged to the sky, demographically dying western society cannot rise again from the ashes of an economic meltdown that would likely be worse than anything the world has ever experienced.  With our death, Israel will never again have such committed supporters as we have been in the past decades.  They may continue to have a deterrent from attack in the form of their nuclear arsenal, but there will be nothing to protect them from a possible economic and political isolation from the rest of the world.

            As for our own wellbeing; we seem to be content with allowing a religious movement to highjack our foreign policy, and shape it as they please.  We could have gone down a different road.  We could have offered the potential of a carrot, not only the threat of a stick.  Every step of the way, we made sure that nothing less than humiliating capitulation on the part of Iran would prevent the eventual boiling over of the situation to what it is today.  That capitulation was never going to happen, since we do not hold all the cards, as I already said, because Iran has plenty of opportunities to push back.  Our very aggressive, belligerent and often hypocrite attitude is in fact an incentive for them to build the bomb, because as I mentioned these guys are in the business of survival.

            We live in a very complicated world, and the more complicated it becomes the more sophisticated our approach has to be to most problems we face.  Instead of doing so, we move towards allowing religious zealots, armed with ideas from thousands of years ago, from a far simpler age, to steer us.  It was not long ago that US society accepted to be dragged into the failed adventure of Iraq by a politician, who claimed that God himself advised him to invade.  Now we once again seem to be willing to allow a group of fanatics, no less dangerous than their Muslim counterparts to drag us into something that can potentially turn out to be far worse.  This is cultural failure we simply cannot afford, because the cost will be the "ultimate price" for western society.

Monday, March 12, 2012

Rio + 20, Part 2: Europe’s economic cost of past voluntary goodwill.



            As I promised in the February article on the same theme, I intend to write a monthly article about the upcoming June Rio Earth summit.  I am pleased with the level of interest February’s article has received from viewers, because this is a very important topic, even if it is currently not a mainstream media story.  As I stated in February, humanity’s fate will in fact be decided by the level of success that this summit will yield.  The problem of sustainability is now, twenty years after the initial 1992 summit, a real and increasingly dominant factor in global economic performance, despite the lack of acknowledgment it receives on political campaigns and in the media.

            The lack of any chance of success is the thing that worries me the most.  The summit will in fact be dominated by proposals for enhancing voluntary initiatives to protect basic human rights, the environment and promote efficiency.  The problem I have is with the voluntary and non collective part of the proposal.  Since there are currently no viable proposals that are being put forth, we automatically know that the summit will be a failure. 

            Sustainability is no different in the global economy, than parks and sidewalks in the local economy.  In the local economy, we achieve partial (non-unanimous) consensus on what needs to be done in terms of building public goods, and then, through coercive means, we extract the means to build these goods from those who agree as well as those who do not agree.  In the absence of this process, we simply cannot achieve the building and maintenance of the crucial and desired public infrastructure.  This is a simple basic economic principle, which has been proven to hold true through the ages.  Cities and states around the world operated on this basic principle for centuries or in some cases, thousands of years.

            It is hard for me to gauge, whether people are failing to understand the fact that global sustainability is a public good, and therefore only collective action, which in some cases has to include mechanisms of coercion, like I proposed in my book will work, or whether people are discouraged by recent failures to achieve collective consensus, and therefore have resigned themselves to pretending that this basic fact is not true.

In this article, I intend to show the reader that it is a true fact, by concentrating on the negative economic effect voluntary compliance had on the economy of Europe.  The cost so far has in fact been massive, despite claims to the contrary, while the benefit, if any, has been questionable in terms of its overall impact.

EU & China:  Two different directions.

Europe has been the backbone of the Kyoto agreement as well as most other global sustainability initiatives.  China on the other hand has focused on economic growth, with little regard for environmental, human rights and sustainability issues.  The result is that Europeans are on the brink of certain long term hardship, if not outright collapse.  Some may be quick to applaud the Europeans for their voluntary sacrifice, and point to it as a shinning example that should be followed.  Truth is that it is an example of idealistic foolishness.  Most realize it; few will follow it, and there are increasing indications that even the Europeans are now ready to abandon it.

Coal consumption since last Rio summit: EU versus China. (Yearly consumption according to EIA data)


Country
1992
2010
change
% change
EU
1.25 billion t
.96 billion t
-.29 billion t
-30%
Germany
.36 billion t
.26 billion t
-.1 billion t
-40%
China
1.2 billion t
3.7 billion t
2.5 billion t
+200%


As we can see from the table, the EU has done quite a bit in the name of helping prevent climate change.  Some may argue that they should have done even more, but the fact that they decreased consumption of the most polluting fossil fuel by 300 million tons per year is really something.  Petroleum consumption has also stayed flat, despite rising in every other region of the world during the same period.  They increased their dependence on natural gas somewhat, which pollutes only one third as much as coal.

As we can see, China’s increase has been over 200% during this same period.  They now use more coal per capita than Europeans do.  Their increase in consumption of 2.5 billion tons, makes Europe’s effort to cut consumption by .3 billion tons seem extremely pointless.  There is an argument to be made that it was in fact completely pointless, because on a global scale, consumption was in part shifted (outsourced) together with manufacturing jobs, rather than cut.

China also more than tripled its use of petroleum, so the herculean efforts made by Europe to prevent their own use of petroleum from rising by 1-2 mb/d, as it should have, if economic potential would have been met, is also made to look just as pointless, given the 7 mb/d rise in consumption, we saw in China during this period.

Aside from the evident loss of our fossil fuel sustainability, due to large increases in consumption, which brings us ever closer to a point of reckoning, given that fossil fuels are a non-renewable resource, CO2 emissions from China have tripled during this inter-Rio summit period, while the Europeans struggled to keep emissions levels flat (The collapse of communism in Eastern Europe helped a great deal towards this goal).  The increase in emissions from China during this period, is greater than the level of emissions of the entire continent of Europe, excluding Russia.  So to truly make a difference, the Europeans would have had to achieve close to 0 emissions in order to truly affect climate change prospects, by at least offsetting the rise in emissions from China.  It can once again be argued however that even that would have not helped, because in the long term the true effect would have been one of outsourcing.

The Europeans could have done nothing, allow for their own emissions to increase 10%, during this period, and nothing of consequence would have changed.  Total global emissions increased by over 40% during this period, according to EIA data.  A 10% increase coming from the Europeans would have only made a difference of roughly 1% more out of that total.  If they would have been wise enough to do so, we would not see today Angela Merkel going to China with cap in hand to beg for help in helping the EU stay afloat financially.

The effect on Europe’s economy:

            The defense of Europe’s policy of starving its economy, while the others continued to expand is that as a result, it is now a Europe that is far ahead of most of its competitors in terms of efficiency, and they are therefore set to be more competitive in a world of increasing scarcity.  Reality is a far different however, and as the evidence thus far shows, the countries that are most solid financially are the ones which are best prepared to deal with the problem of scarcity.

            China may be willing to use and abuse its land and resources, but as a result of this abuse, they have a $3 trillion dollar war chest, which they are already employing wisely to acquire the rights to resources around the world, which other countries abused and exploited to a lesser extent.  It may be said about many African countries for instance that they are better off in terms of food sustainability, because they employed less destructive farming methods, by not engaging in industrial farming.  It is the countries which did use and abuse their land among other resources, which have the financial power to purchase their land and use it to take care of their own however.  So while many in Africa are starving, there are plans underway to produce bio-fuels from portions of their farmland, which in many cases have been purchased by countries which need the bio-fuels.

            Europe’s story of sustainability is now turning into the same direction.  Their policies of promoting global sustainability have led to a competitiveness gap in attracting or retaining many industries.  Keeping a cap on emissions led to Europe being one of the most expensive places for business to purchase energy for their needs.


Country
Price kilowatt/hour
Gasoline per liter
China
$ .034
$ 1.20
US
$ .087
$ .96
Germany
$ .33
$2.20


As Europe’s economy is being systematically starved, the hope that the higher price would lead to incentives for innovations and eventually a more dynamic economy are fading, as increasingly we realize that firms are not interested.  In many cases, they prefer to seek out places that allow them to pollute at a lower price instead.  The realization that the economy is sinking is taking hold. Given the slow trajectory in Europe’s economic expansion, it is impossible to keep up with the growth in deficits and personal debt.  Now we have a policy of austerity taking shape which will slow the continent even further.

Eventually the political right will prevail over the greener oriented left.  Even If they will not, and the current policies will continue, it will eventually end in economic disaster, and the green agenda will further be discredited, making it even harder to offer a viable green option for the world in the future.  Germany’s recent announcement that it is ending subsidies for solar power is a signal that the game is over.  Europe will in the current decade probably turn its back on continuing to shoulder the burden of being the only stewards of sustainability.  Survival is more important.

Survival is in fact what is at stake for Europeans at this point.  The level of youth unemployment is so dramatic that young people are forgoing reproduction (In some places like Spain it has reached unbelievable levels, of close to 50%).  Not having a steady source of income means that people are no longer forming families.  Europeans are in essence starving themselves into extinction.

Conclusion:

It may upset those who are looking to build voluntary goodwill across the globe in order to promote sustainability that I am attacking the work they achieved in the last two decades.  Reality is that their efforts towards sustainability are not sustainable, and as I already said, they have no impact worth mentioning.  As long as we fail as a global society to treat sustainability as a public good, we will not have this public good available to us.  Sidewalks do not generally get built through voluntary donations of money and time.  We would have few sidewalks indeed if this was the approach we would decide to take.  Even if we would achieve a drive to get people to donate the means to build a sidewalk, we cannot go back to the same people over and over again as the need for more sidewalks and the need to preserve the old ones arises.  People will get tired and financially worn down from contributing, while the ones who did not contribute but benefited from the free sidewalks will have grown accustomed to doing so, and also became richer and more influential.  Does this sound like a sustainable path?

As things stand now, this is what will happen at the summit and in the immediate aftermath.  The summit itself will be low key, and will produce few, if any tangible agreements.  Many key global players will shun the summit, because no one wants to be associated with failure.  In the immediate aftermath of the summit, many individuals will in fact become energized in promoting individual responsibility, which at this point makes little difference on a global scale unfortunately.  Some companies will make grand announcements about how they will install solar panels or something at their headquarters, in order to cut their environmental footprint.  Most will fail to realize that it is the same companies that use suppliers from China for their products, which they sell in the west, making the supply chain for their merchandise much longer and much less environmentally friendly.  So many will applaud, and few will realize that such gimmicks only serve to give us a mirage that we are on the right path, making progress, and therefore collective action will not be necessary.

As for any attempts to push for local collective action on sustainability, it will rightly be attacked ferociously from the right, because they are after all correct in claiming that it harms the local economy by pushing many manufacturers away.  There will be some pledges to work with the international community on proposals for global implementation, but let us not forget that as long as the benefit of non compliance is out there, there will always be countries willing to undermine the whole process by insisting on their own non-collaboration.  So the much needed action on sustainability will never materialize.

I want to end by reproducing a comment I received by a person signed in as LBL to last month’s article on this same theme.

The truth is that we can't trust the government to do anything about this because they have their own interest that they prefer to protect. So it comes down to us, you and me and the government just going to have to follow. If teachers choose to include in their teachings ways kids can help and each of us that believe and see the problem teach others around us this could become the new Christianity. We under estimate the power of the WORD. We just need somebody to "write the book" I know comparing Christianity to what needs to happen in our society may not be the same but just think about it. The power the people had when Christianity spread around the world was stronger then any government.”

I actually hope that a good idea, such as the one I proposed for sustainability, or one that is even better, will spread as Christianity did.  We should not forget however that after the initial spread of Christianity in the first few centuries, the main tool of its spread became coercion, as is similarly the case with any idea, which might actually make a real difference to the world’s chance of achieving a sustainable path.

Note:  As I wrote this article, I found out that Poland Vetoed the latest EU climate initiative.  There are increasing signs that Europeans have had enough.

Monday, March 5, 2012

Maximum potential global GDP growth to 2030: An assessment, based on resource availability.


            There are many long-term global growth models out there, which intend to give us a guide to our economic future, including assessments made by prestigious organizations such as Goldman Sachs, the OECD, IMF and the World Bank.  Most current projections give us a picture of a global economy that has cooled somewhat from the pace we saw in the decade before 2008, but the mainstream consensus outlook is that the developing world will continue to converge with a growth rate averaging about 5%, while the developed world will expand at about 2.5% per year.  The global average is over 3% according to most mainstream institutions. 

            I want to add my own view to the conversation about this future of ours.  It is a view based on a slightly different calculation, and as such it provides for slightly different results.  The results unfortunately cannot be presented with the same comforting precision that the above mentioned mainstream institutions provide us with, partly because I believe it to be false manufactured comfort.  I decided to present my projections in terms of different trajectories, and the likelihood of occurrence for each scenario.  These scenarios I calculated based on resource scarcity probability and potential intensity of scarcity, as the main determining factors for the maximum potential growth that the world can achieve.

The commodities I think are crucial and in danger of not meeting demand, I grouped in three categories.  The first is oil and liquid fuels.  The second is food, and the third is comprised of a group of potentially scarce resources, which might let us down to some degree.

Oil & Liquid Fuels:

            Based on past economic data, it seems that global economic growth rates of 1.5% can be achieved without the need to expand liquid fuel supply.  I decided to increase this to 2% in my calculations, in order to deflect criticism on behalf of the worshipers of human ingenuity and the market.  In addition, a 1% increase in supply allows for an additional 2% Global GDP expansion, based on past history.

            There are about 6 trillion barrels of conventional oil in place, of which 1.1 trillion have been consumed.  Current field recovery rates are about 40% of the total oil in place.  Conventional petroleum production peaked in 2005.   According to the EIA, we should expect unconventional liquids to grow at an average rate of .5 mb/d.  I prepared three different scenarios for global liquid fuels supply, based on the assumption of a constant, which is the growth in unconventional, and the second variable on conventional supplies affected by field recovery rates, where I included the three different scenarios.  Current supply of all liquid fuels is at 87 mb/d, as measured by the EIA. 
One final note I want to make, is that I did not include an adjustment downwards, which is warranted due to a continuing trend of the decrease in energy return on energy invested, as well as a decline in average energy content per barrel unit of liquid fuels produced.  So in many ways, my projections might actually be somewhat optimistic.

Three scenarios for liquid fuels:

- 50% ultimate recovery from conventional fields, means that current peak and plateau is not permanent:

87 mb/d + 15 mb/d (10 mb/d unconventional & 5 mb/d conventional by 2030) = 2% + 1.5% = 3.5% annual average GDP growth.

- 45% ultimate recovery rate from conventional fields means that conventional crude will remain on the current supply plateau.

87 mb/d + 10 mbd (10 mb/d unconventional & 0 mbd conventional by 2030) = 2% + 1% = 3% annual average GDP growth.

- 40% ultimate recovery rate from conventional fields means that conventional crude supplies will decline from current plateau.

87 mb/d + 0 mb/d (10 mb/d unconventional & -10 mb/d conventional by 2030) = 2% + 0% = 2% annual average GDP growth.

Adding food to the equation:

For food price inflation, I assume current recent trends to continue, due to a continued increase in the world’s population, as a well as a growing appetite per capita.  The key is for productivity per unit of land to continue to increase to match these demands, as well as the continuing demand for liquid fuels derived from food if we are to prevent significant food price inflation.  It is somewhat harder to measure the effect on global GDP growth, but it is sensible to assume that a doubling in prices in real terms, means a decline in maximum global GDP growth rates of about 1%.

Nine scenarios for food and liquid fuels together:

No food inflation means, there is no effect on GDP growth, therefore 3.5%, 3%, and 2% will remain the most likely outcomes as indicated by the above seen petroleum availability scenarios.

50% increase in the real price of food:

3.5% - .5% = 3% maximum potential GDP growth
3% - .5% = 2.5% maximum potential GDP growth
2% - .5% = 1.5% maximum potential GDP growth

100% increase in the real price of food:

3.5% - 1% = 2.5% maximum potential GDP growth
3% - 1% = 2% maximum potential GDP growth
2% - 1% = 1% maximum potential GDP growth

Other Potential Shortages: (Coal, Water, Phosphate Rock, Copper, Silver, Rare Earths, just to name a few)

            At this point, it is hard to quantify precisely what effect; shortages of these above mentioned resources can have on GDP growth.  As is the case with oil and food, which we already looked at, some economists, will actually argue that none of these potential shortages can have a long term effect on GDP trajectory.  They tend to argue that the market is always able to substitute away from a commodity that might be in short supply, to more abundant commodities.  My own view is that there is a limit to how many opportunities there are to substitute from less abundant to more abundant commodities.  We have to keep in mind that we live on a finite planet.  I do believe that many potential commodity shortages can have a negative effect on long term economic growth.  Unlike with petroleum however, it is harder to comprehend the proportionality and the magnitude of it, because we cannot easily correlate potential GDP growth to supply growth, simply because few commodities are on their own as crucial as petroleum to the economy.  In the absence of a way to quantify the magnitude of the effect on global growth caused by potential shortages of many commodities, I decided to assign a 1% drop in maximum potential GDP growth to a scenario of a high degree of shortages, and a .5% drop in the case of some moderate shortages.

The 27 final scenarios when all three categories of shortages are added together

In the event of no shortages of key commodities at least until 2030, there would obviously be no effect on top of what we saw with the liquid fuels and food.  In this scenario, economic growth would be as indicated by the nine scenarios examined when food and liquid fuel probabilities were combined.
In the event of a .5% drag on global GDP yearly growth, caused by some moderate shortages added to previous scenarios of liquid fuels and food shortages:

                                                             

Liquids
Food
Other Shortages
Max Potential GDP Growth
3.5%
0%
.5%
3.0%
3%
0%
.5%
2.5%
2%
0%
.5%
1.5%
3.5%
.5%
.5%
2.5%
3%
.5%
.5%
2%
2%
.5%
.5%
1%
3.5%
1%
.5%
2%
3%
1%
.5%
1.5%
2%
1%
.5%
.5%

In the event of severe shortages causing a 1% drag on yearly global GDP growth rate, in addition to liquid fuels and food:


Liquid Fuels
Food
Other Shortages
Max Potential GDP Growth
3.5%
0%
2.5%
3%
0%
1%
2%
2%
0%
1%
1%
3.5%
.5%
1%
2%
3%
.5%
1%
1.5%
2%
.5%
1%
.5%
3.5%
1%
1%
1.5%
3%
1%
1%
1%
2%
1%
1%
0%


The result of the compilation of these glimpses within a range when adding together all scenarios after all three categories of potential shortages are put together, which actually contains countless possibilities, we get 27 possible scenarios, which can help us understand the likelihood of various potential economic futures, based on commodity availability.

Conclusions:

The following graph gives us the percentage probability of growth in the eight different ranges we got from the above calculations.




Remember that most mainstream institutions projected an average rate of global GDP expansion of over 3% for this same period as the most likely scenario, which runs counter to my own projections, which show that the likelihood of achieving growth of over 3% on average is less than 15%.  My projections also give us the maximum we can achieve given resource constraints, which means that other factors can only move the actual rate of growth down.

            It is by no means a coincidence that mainstream institutions all predict a rate of growth of over 3%.  It just so happens that this is the threshold that we need to pass if we are to ensure long term global financial stability.  If long term growth will trend under this threshold, the risk of systemic problems increases.  If the rate of maximum growth potential will average somewhere between 1% & 3%, we are looking at severe risk of financial implosion.  Having said that, there is nevertheless, a good chance to keep the system going, as long as cool heads will prevail among the global elites.  Keeping it together will still mean severe global misery, and the severity of it will be increasing, if we will find ourselves on the lower end of the above mentioned range of maximum potential growth.  I should also note here that the symptoms will not feel like commodity shortages.  Price spikes will be brief, and quickly forgotten.  The financial side-effects will be what everyone will be talking about and fixating on as the main problem.  Most of the two decade period will feel similar to what we experienced so far from 2007 to the present or perhaps even worse.  The graph I constructed shows that the bulk of the possible scenarios point to this being the most likely future we face for the next two decades

            As the graph shows, there is also a 10% possibility of us not even having the comfort of maximum potential global growth of 1% or higher.  If this will turn out to be the case, we will no longer be arguing about the cause of our economic hardships.  Most of us will be too busy trying to figure out a way to survive from day to day.  Complete financial collapse will occur sometime before 2030 in this scenario of resource scarcity, because the systemic risks will become uncontainable. 

Many might be tempted to point out that even if I happen to be right (which I cannot even be 100% certain of myself), the risk I presented here of a total collapse is only 10%, which means that we have a 90% chance of avoiding disaster by doing nothing.  I have to disagree with that view.  We are currently in the middle of deciding whether we should do something very drastic, in order to prevent Iran from acquiring a nuclear weapon.  Some are contemplating starting a war, which itself caries many risks to our economic wellbeing.  There is in my view far less than a 10% chance of Iran using the bomb, if they in fact end up getting it, because they know exactly what the retaliatory measures will be if they do.  So if we are so eager to contemplate starting a potentially disastrous war, in order to prevent a much smaller than a 10% probability of disaster, should we not also contemplate ways to prevent a 10% chance of a potentially much greater global disaster?  After all, what if I am right?