Friday, February 1, 2013

Growing Global Unemployment: A sign of the beginning of end of the current world order.

            In my book published more than a year ago, I pointed out that the world will never be the same again economically speaking, as of the end of the last decade.  In the introduction I explained that the way market forces allocate resources for the very long run may be flawed, even though our basic supply/demand economic models may show that the market is doing it in an efficient manner.  The models are designed to affirm that given the resources available to people in the 1950’s for instance, letting the market allocate the resources available was the most beneficial to the average person living in those times.  It can be said also about people living in the following decades, taken by each individual decade. 

Given what is available to us this decade, the market will be the best mechanism to allocate what we have, and same will be the case for people in the 2020’s, and 2030’s.  I however pointed out that just because that is all the models we apply can tell us, it does not mean that this is the right picture.  A study that just came out proves my point.  The International Labor Organization (ILO) reported a rise in the rank of the globally unemployed by another 4 million people in 2012.  Furthermore, they expect another rise by 5 million in 2013, and 3 million in 2014.  In other words, growth in job availability is not keeping up with the growth of the workforce in our “global village”.  This trend will continue according to them, at least until 2017, and it started with the 2008 economic crisis.  This study confirms my hypothesis that if we take a much longer view of the global economy, and take our evolution from the end of the Second World War, which gave rise to the current world order, and look out until 2045, to make it an even century, the century is shaping out to be one of two somewhat un-equal halves.  One that lasted until 2008, as it turns out, and then there is the current half we are living through right now.

            In the first half, people were certainly happier with driving their own automobiles, rather than take public transit.  They were happy to take airplane rides to exotic places, or visit other countries, full of historical architecture, and most importantly, full of little differences that provided those who went, with something to talk about for a while upon their return.  The one indispensable ingredient that made all this possible was liquid hydrocarbon fuel, produced at what we now regard as an unbelievably cheap price.

            In the past, I observed that maximum potential global GDP growth is dictated by the growth rate in liquid fuel availability.  Based on historical trends, the global economy can potentially grow by 1.5% per year when average yearly increase in liquid fuel availability is 0%.  This 1.5% rate is mainly courtesy of productivity growth, and changes in infrastructure and technology.  On top of this rate of growth, we have 2% potential rate of growth, for every 1% increase in liquid fuels availability.  So given a yearly growth rate of almost .8% in liquid fuels availability since 2008, we have a maximum potential rate of global GDP growth of 3.1%.

(.8% growth in liquid fuels x 2)+ 1.5% efficiency growth per year = 3.1% 

Past, Present and Future data and forecasts of this liquid fuel, to GDP growth relationship:

1990-2008
Average yearly % increase in liquid fuels supply (EIA data)
1.2%
Resulting potential economic rate of growth
3.9%
Actual rate of average yearly growth
3.6%


2008-2020
Average yearly % increase in liquid fuels supply (EIA data)
.8% (2008-2012)
Resulting potential economic rate of growth
3.1%
*Actual rate of average yearly growth (realized & expected)
2.5-3%

* Actual rate of yearly average global growth between 2008 & 2012 was 2%, while for the rest of this decade; forecasts vary between 2.5-3.5%.

Actual rate of achieved average growth will always be less than the maximum potential.  This rate is not enough to absorb the growth in the world’s labor force, so we get this continued growth in the number of unemployed year after year, which is hitting young people especially hard.

            It turns out that the fact that our grandparents and parents used up the cheap stuff by the hundreds of billions of barrels, without thinking of future generations, is affecting us.  I am confident that by the time my son will be my age, he will be worse off due to our refusal to make changes, instead of continuing our desperate fight to retain the status quo.  Our grandparents and parents could have been perhaps almost if not as happy using maybe 20-30% less than they did, simply by driving smaller cars, using a bit more public transit, and perhaps taking one or two fewer airplane trips during their lifetimes.  I think we would have all been better served also if they would have made perhaps a bit more effort spending time with their children, rather than working overtime so they could buy us more and more plastic toys (made of petroleum), in order to compensate for their absence.  Some may even venture to claim that net collective happiness would have been higher in the event of the above mentioned consumption patterns, but that is certainly not what the market dictated, so we get what we have now.  Eventually, perhaps a lot sooner than the period of observation I picked, starting from 1945, till 2045 will end, things will get a lot worse as slow growth in liquid fuels will give way to no growth, and then even negative growth eventually, and we will lack the institutional, and infrastructural qualities needed to deal with it.

            There are of course plenty of people, especially since the fracking revolution, who will counter that we will not see the event of declining liquid fuel production, because technology will always come to the rescue.  Of the currently known oil and oil like resources in place, which may be as much as 15 trillion barrels, we only consumed about 1.2 trillion barrels so far.  Based on this first glance, the oil age is far from over from the point of view of those who either know very little about oil extraction, or pretend not to know many of the details, so they can make outrageous claims meant for public consumption.  Fact is that within the 15 Trillion barrel estimate of total oil in place, we have some conventional fields, which may yield as much as 80% of the total oil in place, or as little as 10%.  The conventional oil fields hold about 6 trillion barrels of oil in place, of which current technology can extract about 40%.  Some optimistic estimates put the eventual rate of final recovery at 60%, which means that in addition to the 1.2 trillion barrels already consumed, we may still have about 2.4 trillion barrels left to develop.  This all sounds good, except the IEA already reported in 2010 that conventional fields plateaued, perhaps permanently in 2006.  So, all the growth from now on will come from unconventional sources of oil, and in the event that the 60% recovery rate will prove to be highly overoptimistic, it will also have to make up for declines in conventional oil production in perhaps as little as a few years.

            Many people who predicted a peak in oil production to be imminent were quick to dismiss unconventional oil resources, which was a mistake, because depending on what we count as unconventional oil, there may be as much as 8-10 trillion barrels of it in the ground.  That said however, the current euphoria about unconventional sources of oil, is just as misplaced as the effort of peak oil supporters to dismiss these resources.  Shale oil, oil sands, Venezuela’s heavy oil, or even the 3 trillion barrels of Kerogen found in the US, which to date no one has been able to prove that it can be extracted in a way that will return more energy than what needs to be invested for its extraction are not a solution.  These are just scraps left at the bottom of the pot, which may still maintain significant nutrients, and we will eat if hungry, but will not last for long, and we have to work hard to get to these last resources.

            There is no doubt that production from these fields will grow at a dramatic pace in the next decades.  It is impossible to predict what the rate of growth will be in any given year or decade, because a lot depends on the amount of money going into the development of these resources.  The long term average rate of yearly growth seems to have already entered an established trend, and it seems it will most likely average out at a pace that will give us about 1% growth in total liquid fuel supplies in the next few decades, as long as conventional fields will not enter into production decline.  Of course, many will see my current assessment of this growth in unconventional oil production as overly pessimistic.  They simply look at the large resource of oil in place, which is larger than the conventional resource base we were endowed with, and conclude that we essentially were given a chance at writing a second chapter for the oil era, which should be as substantial as the first one.  Reality is however that as I pointed out, of that large base of potential resources, we find the Kerogen deposits, which may never yield any oil, simply because we are unlikely to find a way to get a net return on energy invested.  We also have the shale oil deposits, which will yield perhaps 5%, maybe even 10% of the original oil in place eventually, but for now, it is still uncertain whether we can get more than 2-3% out of them.  There are some more producer friendly resources, such as Canada’s oil sands, or Venezuela’s heavy oil, which may in the end yield at a double-digit rate.  All these resources collectively will most likely have an ultimate recovery rate in the 10% range (we are not there yet), which compares poorly to the current 40% we got out of the conventional fields so far, and my own expected 50% ultimate recovery rate, yet to be achieved.

            Not to be neglected is also the issue of net energy return on energy invested.  Some of the best oilfields gave us a rate of return of 100/1.  Conventional fields now only give us about 20/1 because of their aging process.  Oil sands and shale oil projects currently give us a rate of energy return of about 4/1.  Therefore, the average net energy return on energy invested into oilfields is on a continuing declining path, and that is partly responsible for the lack of robust global economic growth we are witnessing presently, which is leaving millions of people disappointed.  This trend will continue decade after decade, and it will contribute to the gradual grinding down of our current world order.

            The process is already starting, and it is happening in the form of a growing ideological polarization found within the developed world.  The centrist elites are being abandoned by the masses, in favor of extreme views held by those who should in normal times be confined to the fringes.  It is one of the developments, which leads me to believe that the current status quo will not even survive to witness the point where maximum liquid fuel production will reach its high point and then decline for geological, economic and technological reasons, because we will descend into chaos long before then.  The changes in the Muslim world are clear evidence that the current world order, dominated by the latest global superpower, the USA is already disintegrating.  Countries across North Africa and the Middle East seem poised to become either increasingly leaning towards Islamist ideas, or tear themselves apart and join the growing list of failed states across the world. 

The danger of such failed states developing across the world is plain to see in the case of Somalia.  Privateers with no other way of earning a living were disrupting shipping in a strategic part of the world, disrupting our orderly activities.  Now imagine dozens of failed states.  To contain Somalia the US and others had to resort to the deployment of significant naval forces, as well as getting client states in Africa to send their troops in there to do the dirty work of fighting the local militias.  I doubt we would be able to do the same in dozens of places, especially since with every year that passes our own fiscal situation is worsening.

            The potential for failed states arising across the world is higher than most realize.  We have the headline-grabbing suspects in the form of the mainly Muslim countries such as Syria, Egypt, Lybia, Pakistan, Afghanistan, Iraq, Yemen and others.  Most people however are failing to realize that there are also a number of states in Eastern Europe, which will become candidates for collapse due to unsustainable demographic trends.  Take Romania for instance, a current member of the EU, which lost almost 20% of its population since 1990, mainly to migration, but also due to collapsing birth rates.  Ukraine, Bulgaria, and many other countries in the region are in the process of fast becoming colonies for the elderly, with a fast disappearing youth population.  As I pointed out in my book, looking at the situation of Romania, it is hard to see how they will be able to cope with their demographic trends for much more than maybe three more decades, before it will become impossible to continue having a functioning economy and government in place.  Countries like Hungary, Slovakia, Greece and Poland are not doing much better, but there is still a chance of avoiding disaster for some of them if they act now, and do so with a clear view of the problem they face, which is not always something we can count on.

            With a debt to GDP ratio of about 240% and growing, coupled with a stagnated economy and shrinking population to shoulder already accumulated debts, Japan might also be a candidate of implosion as a state.  At this point, all it would take is a moderate rise in the rate of interest asked for their bonds to make their state unviable.  This is something that could happen tomorrow, in a decade, or in five, but no matter how long the bond vigilantes will give them, at this point they have no way of reversing course.

            Aside from the threat of failing states, there is also the very real threat of the tens of millions of disenfranchised young people.  Across the world, we have young people growing up who believe that as long as they do everything right, work hard, get educated; their efforts will be rewarded with a decent standard of living.  Then they grow up, and reality hits.  Millions of young people cannot find steady jobs; they end up struggling, often under-employed given their level of education.  They do not even dare to entertain the thought of starting a family anymore, because they know that there is a real danger that they cannot provide with the necessary stability needed to take on such responsibilities.  If only a small fraction of these disappointed people decide to take it out on the rest of society, we are in for a lot of trouble.  Take for instance the thousands of young people who finished a Master’s or PhD in science, but are currently struggling to find a job in a research lab paying perhaps as little as $20,000-30,000 a year in North America.  If only a fraction of them decide to put their knowledge in chemistry, biology, engineering or who knows what else, to use in a destructive manner, because of their disappointment, watch out!  There are millions more, who may be somewhat less educated, but still find it hard to find a job matching their educational skills.  The potentially destabilizing effect that this trend can have on society should not be ignored and under-estimated.

            As I pointed out in my book and in my articles in the past year, we would most certainly be better off if we were to stop pretending that we are headed in a good direction, and change direction instead.  The market needs new global guiding parameters within which to operate, in order to deal with problems such as commodity and environmental scarcity.  That is why I recommended we look at abolishing current bi-lateral, and multi-lateral trade agreements, and move towards standardized global trade tariffs, designed to encourage sustainability.  The alternative is to continue to look on as we see more and more signs, ranging from environmental degradation, to the increasing trend of disenfranchisement of the global youth, or the ballooning debt levels across the world, and continue to pretend that nothing is wrong, until we can pretend no more, because it will be too late.  Then again, who knows, maybe we should ignore the long term, big picture, and focus instead on the fact that the Dow Jones index just crossed 14,000 today, so obviously we must be off to the races again towards new record highs.

1 comment:

  1. Zoltan,

    The fuel situation is limiting our current "growth" prospects. The rate at which we can produce economic fuels is declining, limiting demand through price rises every time demand exceeds a certain level. Check out my posting on 'energy and economics' at www.econpoint.com. It includes some critique of economic policies as well as some good graphs. Check out the rise in "lifting" cost.

    Rob

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