Tuesday, January 1, 2013

2012-2013: The year that was & the year that will be.



            With our greeting of the New Year, comes the first anniversary of my book release, as well as the start of my blog.  Looking through my work as I occasionally do, there is one regret I have, which is that my book contains far too many grammatical mistakes.  I sincerely hope that it did not inconvenience too much those who read it, for the content itself, I feel has much to offer.  I may have made some beginner’s mistakes in terms of the book’s style, which shall serve as a great lesson, if I will ever do another project, but looking back at what I wrote, it is becoming ever more clear that my view of our world and its most likely political and economic evolutionary path, seems to be proven quite accurate so far (which is very unfortunate for humanity and the planet we inhabit).

On the Economy:

            Looking back, I have to remind myself that while the publish date of the book was December, 2011; I started researching and writing in 2010.  Some of the material and data I used was last updated in 2009.  Yet, when it comes to the evolution of the world’s economy, I seem to be more accurate than large prestigious organizations such as the IMF, World Bank, Goldman Sachs and other big boys and girls involved in forecasting economic trajectories.  On page 255 for instance, I stated that the US will only see growth rates during the good years, in other words during the years of recovery out of a recession; of between 2-3%.  Most establishments have been predicting growth to pick up  in just a few years to 3-4%.  That level of growth is proving ever more elusive, since it is always bumped further down the road by forecasters.  In 2011, growth was 1.8%, for 2012, it will be about 2% and the latest forecasts now predict about 2% for 2013.  I also published an article in March, 2012, which went into analyzing in greater detail the world’s potential for growth for the next few decades.  So far, I have to say that my approach has produced a far more accurate prediction than what the big boys had on offer.  There is little out there on the horizon to suggest that I will be proven wrong in the future.  Global growth since 2008 averaged less than 3%, which is significantly slower than what we became accustomed to in the 1995-2008 periods, since average growth averaged over 4% in those years.

            As far as government finances go, there is further deterioration of the situation in the western world, on which I spent the whole of chapter nine, entitled ‘Western governments; the ultimate sub-prime borrowers”, explaining why we should expect our governments to face increasing difficulties in meeting the needs of society, which need to be addressed if we are to keep social stability.  The EU is finding out the hard way that in the current global growth environment we are in, trying to fix the debt issues by simply cutting spending or raising taxes, can actually lead to a faster rate of deterioration of the debt/GDP ratio, due to falling revenues as a result of the cuts.  In the US, they did not start addressing the $trillion + deficits yet, but the only alternative to ignoring the problem is the same failing approach that is currently being tried in Europe.  That is why I pointed out throughout the book the fact that in the absence of a push to restructure fundamentally the entire global economy, by changing the way we approach global trade, we will not be able to exit the current trap we are in.  In fact, we will sink deeper and deeper, and the fiscal problems of the western world will eventually lead to all out economic and social collapse.  It may take a few decades for this to happen, but it will happen if we fail to act soon.  2013 will not bring much improvement on this front.

On our structural Institutions:

            I think the failings of our basic local, national and global institutions are quite obvious.  Americans should know all about failing institutions by now.  Their government is failing to make basic decisions such as raising the debt ceiling, or agree on taxation and spending policies.  The so called “Fiscal Cliff” is just the latest example.

            The three main credit rating agencies: S&P, Moody’s and Fitch, continue to be failing institutions in my view, which I specifically pointed out in chapter seven, called “Risk assessment and risk management”.  The role they played in causing the 2008 crisis was instrumental.  They rated mortgage backed securities as AAA, as well as Greece’s sovereign debt at investment grade level, which we all saw how off the mark they were in both cases.  On the other hand, S&P just downgraded Hungary’s rating another notch, taking it deeper into non-investment grade territory, while just a few days later, it was revealed that Hungary’s debt/GDP ratio improved from a high level of over 80% reached last year, to about 75% this year, due to smaller deficits as well as its currency strength.  Hungary was one of just a handful of nations out of the 27 members of the EU, which had an improving debt/GDP ratio over the last year.  It is hard to see how these ratings agencies, which investors depend on to navigate through all the data out there can still be considered to be anything but failed institutions, either due to competing interests, or simply due to incompetence.  Yet we are also failing by not serving them with a serious downgrade by simply no longer using their guidance as part of our charters, which commit many investors to relying on these ratings.

On our cultural institutions:

            Chapters ten to twelve of my book were dedicated to culture, because it is important to realize that it is the base of everything.  Therefore, achieving cultural change could solve many problems which we otherwise have a hard time dealing with.  On my blog, I wrote an article entitled “Mitt Romney & Fareed Zakaria on economics and culture ”, which was a rebuff to Fareed’s statement that culture is not a very important factor in economic development and adaptation.  I pointed out that in chapter ten of my book, I identified a clear link between economic evolution and culture by looking at all non-former Soviet communist countries in Eastern Europe and their economic development since the collapse of communism.  The mainly Orthodox Christian countries of the Balkans are all under-performing their mainly Catholic peers of Central Europe when measured by GDP per capita, or by using the HDI index.  There is no overlap between the two groups, despite the fact that there was no clear starting point advantage, which we can identify, whether we are looking at the physical or human capital they inherited, or by looking at structural institutions they had during the communist era, which might have served as an advantage or disadvantage.  So culture in my view is definitely one of those issues that have been greatly neglected in the last few decades, due to our inability to effect cultural change.

            Our cultural values in the Western World are definitely failing us.  I pointed out the inability of politicians in the US to deal with issues such as the fiscal cliff, and such, but we should not forget that they are the product of the collective culture of the American electorate.  Ideological partisanship seems to be more accentuated than ever.  Whether one sits down to talk with someone leaning left or right, the one thing they have in common is that they no longer have the ability to differentiate between good idea and bad idea.  Ideas coming from their own ideological corner automatically qualify as good ideas, and they come up with arguments to support them, even if they do not necessarily wholeheartedly believe in their own arguments, often based on conscious selection of facts and data.  Exchange of ideas has become impossible between the two sides and this spells our doom, because we are faced with intellectual stagnation, just at the time when we need fresh ideas to deal with our economic stagnation and malfunction.  As the year 2012 passed, we see this failure happening in the Western World, whether one looks at Europe, Canada or the US.  Ironically, there seems to be a very strong belief in the values we hold, even though they are clearly failing us.  I pointed out in the book that we need a cultural revolution no less intense than the European Enlightenment, which helped us transition from a world dominated by feudal forces and the clergy, to the world we have today, now more than ever, because the only alternative is collapse.  One year after I started my blog and published my book, it saddens me to admit that we are actually farther away from realizing the need for this Cultural Revolution in the West.  It is the classic story of failure, which history recorded over and over again, yet despite our modern society’s ability to piece together the facts related to humanity’s past, we are unable to learn and realize our own failure to continue to adapt our culture to the needs that arise.

Some short-term good news:

            The one constant story which gave us hope of continuing on with our way of life, despite the crisis that started in 2008, has been the development of unconventional sources of hydrocarbons.  In the aftermath of the plateau in global conventional crude oil production in 2006 as confirmed by the IEA in 2010, things looked rather grim.  The maximum potential global economic growth, without any growth in liquid fuel supplies is about 1.5% per year, which compared to 4%+ we saw on average in past years and decades, would effectively mean the end of today’s economic system as we know it.  Remember that the 1.5% is only the maximum potential, but in reality, it would be much worse.  A complete meltdown of the global financial system would be imminent within just a few years after the event of stagnation or decline in liquid fuel supplies.  Since 2006, the global economy did manage to grow at around 3% on average, and it is largely due to the growth in unconventional supplies of liquid fuels.  For every 1% growth in liquid fuel supplies, we can expect a 2% growth in addition to the 1.5% potential growth rate which we can expect to have even in the absence of any growth in liquid fuel supplies.  According to the EIA and IEA data, total liquid fuel supplies have grown by almost 1% per year since 2006, and we should expect this trend to continue in the following years if not decades, which gives us a maximum potential rate of average yearly global GDP growth of about 3.5%.

            2012 saw a flurry of great news, especially for the US in regards to the development of unconventional liquids as well as gas.  Headlines, such as “US to be top oil producer”, or “net energy exporter” dominated the public sphere.  There were even more optimistic headlines, such as “world facing oil glut” and other such misguided statements.  There is also the good news of continued well-paying job gains in the oil and gas industry, as the frantic race to drill more and more to not only replace the fast depleting fracked wells, but to also grow production is giving more and more people the opportunity to make a good living.  The United States is once again at the forefront of this, but the practice of hydraulic fracturing is spreading all over the world, and it will mean jobs for people.  For 2013, and for many years after, this will be a continued source of good news in an otherwise grim world.  It is however important to remember that while the news may be good, for the long-run it is way overhyped, as I will explain in the next article in two weeks time, by examining one field in the US, and its real prospects, versus the industry’s claims.

            Even though hydraulic fracturing will continue to be a good news story for 2013, and years after, it is important to also understand the true nature of this story for its longer term implications.  First of all, it did not happen as a result of innovations but as a result of price.  In other words, the thing that kept hydraulic fracturing of shale oil and gas from becoming a viable technique in the past was the cost involved in production, which was above the market price of the product.  Since the plateau of conventionally produced oil in 2006, the price floor for oil has moved high enough to allow this technique to be profitable.  The new price range oil is trading in is not only beneficial to hydraulic fracturing, but also to the oil sands projects in Canada, the deep water projects all over the world, Venezuela’s heavy oil projects as well as the development of many techniques meant to squeeze out more petroleum out of the increasingly old and worn out conventional fields around the world.  It is hard to estimate by how much the new expected price range for oil has increased recoverable reserves around the world, but it is quite clear that even though many people who were convinced that following the expected plateau in conventional oil may not like to admit to it, we are looking at hundreds of billions of barrels of extra recoverable oil.  It comes at a price, including more environmentally damaging recovery techniques, a declining rate of energy return on energy invested, and the higher price needed to access these resources in the first place, but it is nevertheless a short-term lifeline given to the global economy.

            I cannot stress enough however that it is important to remember that the explosion in unconventional liquid fuels supply, which we saw happen in the past decade or so, is not so much a technological leap event, but a supply/demand market event, driven by price.  In other words, for us to move to the next big revolution in liquid fuels supply, we will likely need another market event to drive prices to the next level, which is likely to be somewhere in the $150-200 a barrel range (in today’s dollars), in order to unlock additional recoverable sources of oil, such as squeezing more out of old fields, or moving on to getting it out of Kerogen deposits, which sometimes are mistakenly refered to as oil shale.  It is not even clear that we will ever be able to produce this resource because we may never be able to  get a net gain in energy out of it.  It is also unclear whether the global economy can support such a leap in prices.  In the absence of another such price event, it is possible that the extra billions of barrels of oil we gained by the current price leap we experienced in the past decade will be all we will get.  This means that in a decade or two, we will be back to a 2006 like scenario, and we will be just as unprepared to live in a world with stagnated or even declining liquid fuels supplies, and we will not have the benefit of another price increase to rely on either, because the economy cannot support it.  A year after I wrote “Sustainable Trade”, I can say with certainty that my view on where we are headed in this regard remains intact.  The ones continuing to preach imminent doom due to peak oil will see another year of disappointment, for they will be proven wrong again.  With every such year however, we are getting closer to the year when they will be proven right, which like I said, will not likely happen for another decade at least.

On climate change & the environment:

            2012 was a big year for environmentalists, in terms of winning the scientific debate in regards to issues such as climate change.  The Koch brothers funded study that blew up in their face, the extreme weather, ranging from the severe droughts that hit the US and parts of Europe, to the strange occurrence of hurricane Sandy, all went in their favor.  I am certain that they will continue to work towards total victory.  As I stressed in my book, and also warned on my blog, the expectations of total victory will never materialize because they are losing the policy debate, by ignoring basic economic theory.  They are doing much damage to the cause by not acknowledging the destructive effect that policies meant to make only some parts of the world shoulder the costs involved in dealing with climate change are extracting on the societies willing to help.  These policy ideas are ignoring the free rider dilemma.  As I often pointed out, it amounts to asking people in a town to voluntarily pay for the paving of public infrastructure such as sidewalks.  No mayor in his/her right mind would ask for such a thing, yet the environmental movements in the west are asking for this exact aproach.  It was this sort of misguided idealism which torpedoed last summer’s crucial Rio Earth summit.  Many western countries, which are expected to jump to volunteer to tackle this problem at the expense of losing even more competitive edge to fast growing economically and in terms of their environmental footprint countries such as China and India did not even bother to send their main people. 

After spending a year warning about the counterproductive and ineffective nature of this environmental stance, I can say with confidence that they will not abandon such self-defeating views, so 2013 will be yet another year, which will likely see more evidence of climate change surface, without action meant to accompany the problem to counteract it.  People who instinctively feel that it is in their own self-interest not to encourage their governments to engage in self destructive unilateral schemes to tackle this problem will continue to believe that climate change and other environmental problems are not real, no matter how compelling the scientific evidence will be.  People should not under-estimate humanity’s ability to engage in self-delusion, especially when it is needed to prevent being the sucker stuck with voluntarily paving the town’s sidewalks, for the greater good, but to the detriment of the volunteer.

In the absence of solid, and smart action, environmental and sustainability problems will continue to plague us.  Some years will be better, others will be worse, but the long-term trend will prevail, and it will be bad.  Some people may be tempted to claim that it may not be so bad, because after all climate change could potentially unlock virgin farmland in the Northern Hemisphere, so places like the US Midwest may be experiencing a drop in average yearly yields due to drought conditions, but will be offset by the crop growing line being extended further north.  Having lived most of my life on the frontier of agricultural land's Northern edge, I have to say, some people need to get in touch with reality.  It may indeed be the case that due to weather patern changes in the past few decades, farmland can potentially be claimed further North than one currently finds them.  Problem is that farmers are not nomadic by nature.  Farmers who give it up in the US Midwest are not likely to show up North of Winnipeg, Canada any time soon to claim virgin Northern land.  One will most likely find them taking up new activities in Omaha, Des Moines, or other urban centers.  Those who are older will fill the ranks of the retired.

The long-term trend towards disaster intact:

            In 2012, the Euro did not collapse, petroleum and other liquid supplies continued to increase, The US housing market showed signs of life, more people were hired in the US, and more fired in Europe.  China, India and other emerging powers continued to emerge, albeit at a slower pace.  We kept relative peace on earth.  No global-scale natural disasters with immediate consequences happened.  It was overall not such a bad year.

            2013, will probably be one where we will be able to say the same a year from now.  It will not be a great year for most citizens of the “global village”, many will be the victims of the new slower pace rate of global growth.  3% potential growth for the world simply cannot deliver for the middle class and the less fortunate, because we are living in a system geared towards funneling a disproportionate proportion of the gains to the global 1%.

            Sometime between 2020 & 2030, liquid fuels growth rates will slow to somewhere between 0 & .5%, while the rate of energy return on energy invested will continue its gentle declining path, making it worse for the end consumer and for our prospects of continued growth.  At that point, maximum potential global growth will likely slow to between 1.5% & 2.5%.  2013 will be just another step towards that rough reality.  It will be another year in which we will do nothing to prepare, because most still do not believe it will happen, simply because they are grossly misinformed, or under-informed by their own choice.  The fact that we are already dealing with many negative consequences due to the downshift we experienced in the aftermath of the 2006 event of conventional crude plateau, is making it much harder to concentrate on longer term problems, since we need to deal with the immediate challenges we face.

 Many thanks to those who read my book and the articles on my blog.  I hope to be able to continue to produce work that people can find interesting and informative.


Happy New Year!!!


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