Sunday, September 02, 2007

Busted: What the Economy and Peak Oil Have To Do With Each Other

My bills are all due and the baby needs shoes/But I'm busted
Cotton is down to a quarter a pound/And I'm busted
I've a cow that went dry and hens that won't lay
A big stack bills that gets bigger each day
The county will haul my belongings away
'Cause I'm busted."
-H. Howard, Sung by Johnny Cash

I strongly recommend that everyone here read Stuart Staniford's analysis of the relationship between the credit crunch and our peak preparations. Staniford is one of the most balanced and careful analysts out there - he's been a voice of moderation and reason among peak oil thinkers. But reading Staniford's analyses over the last year, I get the sense he's increasingly worried. Here he says,

"and just lay out what has spooked me over the last couple of weeks, which is the whiff of financial panic... Clearly, we have a situation in which financial system players have started to lose confidence in each other. The public has not lost confidence in financial institutions, but they are losing confidence in each other. They are probably better informed than we are, suggesting that as the chain of bad debt and overpriced assets continues to unwind, we could see more institutional failures, and more public loss of confidence in the financial system... The last financial panic of major significance in the US was was the Great Depression..."

Precisely because Staniford isn't prone to panic or overstatement, I think people should take this very seriously. The comments, including the criticisms of Staniford's analysis, also are worth a look - predicting the future is difficult, and Staniford is doing something rather difficult. Staniford's deepest concern is a dramatic reduction in our ability to invest in infrastructure changes, alternative energy, alternatives in transport. If we find ourselves dealing with an economic crisis, our ability to invest on a large scale in alternatives will fall dramatically. And if
oil prices fall in the short term due to conservation motivated by us being poorer, it will make alternative energy investment seem like a bad deal - and we don't have a lot of time left on that one.

Personally, in some ways I worry more about demand destruction *not* happening than about its occurrence. Because the reality is that most Americans I know are so deeply tied into the energy system that they will probably cut back in almost every area but their shopping and commute to work. Matthew Simmons, at ASPO this year, observed that demand destruction simply wasn't happening in places like Australia and Kenya, where rising gas prices resulted in people cutting back on other things. I'm sure we'll conserve to some extent. But human beings don't behave rationally, and we've become so dependent on cheap energy that I suspect most of us will give up our meds before we'll give up our cars, let the groceries run out at the end of the month before we turn off the lights. And with food prices set to rise 50% over the next five years and UN scientists warning that within the decade we're going see hunger on a scale we've never seen before, we're on the cusp of a sea change that is about to sweep the middle class of even the affluent nations into the well-charted, if sad, territory of poverty.

Stanford is still working the details out, and I personally don't claim to know whether the current market tremors are a large earthquake or something to be shortly forgotten. But I do think that the reality is that our economy and government are so overextended that all of us should work under the assumption that we are going to be left holding the bag, be left figuring out how to get along as systems fail. There will be some big and showy projects. But I suspect the simple truth is that instead of nicely organized rail systems coming in to fix the car problem, most of us will simply be deciding "if I've still got a job, can I afford to get there."

For a very long time, I've been making the very simple argument that we're about to encounter "ordinary human poverty." I take the term from Sigmund Freud, who once said that the goal of psychoanalysis was "replacing neurotic suffering with ordinary human misery." Freud's claim is that most suffering it ordinary, normal, human. And I think most of us in the rich world, who thus far have been comparatively isolated from ordinary human poverty, are in danger of encountering it. We're in danger of not being able to put enough food on the table, of finding that after we pay for gas and food and medicine, we're in the hole every single month. We're in danger of getting a little further behind and more desperate each month, of losing our houses and getting evicted from our apartments, and more and more entering the world of the poor.

Staniford quotes Paul Krugman of the NY Times several times supporting the point I made recently that the market is to a large degree a matter of confluent fantasies, known officially as "confidence" - that is, if we believe it works, it does. But the moment someone says "the emperor is naked" too loud, the whole thing can come crashing down. And even if you've got nothing in the stock market yourself, chances are your employer does, your Mom was planning on retiring on her investments and your own job depends on selling things to people who get their money from the stock market.

I'm no prophet, and I don't claim this is what will happen, or that any particular outcome is inevitable. But if I could suggest a single project for all of us, it would be to begin to strengthen poverty mitigation systems within your community and region. That means finding local food sources for your food pantry, or becoming a food pantry grower yourself. It means working with your neighbors to create local clinics, and local "meals on wheels" programs. It means "adopting" an elderly neighbor or a disabled community member, making sure that they have food and support and medical care. It means getting together with your neighbors and storing food and ensuring clean water supplies. It means getting your church or community group, synagogue or club together and looking into group discounts for big orders of things like food, bicycles, water purifying devices.

It means getting together and having "work weekends" where you reinsulate one another's homes. It means starting "goods pantries" and "community exchanges" for things like old clothes, tools and other extras. It means recognizing that your own security depends on the security of your neighbors - and all of them are equally vulnerable. It means remembering that the old "the life you save may be your own" is literally true here.

Staniford's analysis, if true, is just another reason why we simply can't expect this to be fixed from on high. And as frustrating as that can be, in a sense, it should be liberating. Because if the solution isn't going to come from government, and the stakes are this high, there's nothing to prevent you from plowing through the red tape and speaking up, taking the lead and stepping up to preserve you and yours and those around you. There is nothing to stop us now, from recreating those things we have relied on governments for within our own, new, shadow economies and governments. That is, there is no reason for us not to reclaim our power, because we have very little to lose.



Bedouina said...

Both you and No Impact Man model how to live on less energy. If enough of us start taking "eccentric" actions like hanging the laundry on a line, walking to shopping, maybe washing the clothes in the tub or installing a compost toilet, then such measures will become more acceptable.

I did a tub full of laundry yesterday and hung it on a newly installed line. It was a workout to stomp the laundry a la No Impact Man, and I laughed to imagine my children reporting on me to their teachers at school. But we are facing a severe water shortage, drought and severe power emergency here in California. They're putting the southern part of the state on extreme water rationing and they're asking us all to cut back on power drastically to avoid involuntary blackouts.

So how eccentric is it to try something that might mitigate the shortages?

Composting, recycling and carrying cloth bags have gone from eccentric hippie behavior ('only in Berkeley') to mandated by many cities and/or practiced by the hip and snobby as well as the tie-dyed and shaggy.

I love your ideas about reaching out to community, and I may start broaching some of this on our community email list. I think your many other great suggestions about how to face peak oil and economic catastrophe help people plan for and adapt to coming changes. And the more of us who try out "eccentric" behaviors, the faster these behaviors will become normal.

(Just last night I described the homemade compost toilet to my husband, who began by laughing but ended by admitting that it all made plenty of sense. If California goes to terrible drought long term, we may very well use a humanure system in our large back yard.)

Bedouina said...

In a previous thread I *think* I recall discussing how to get handicapped kids onto bikes/tandem bikes. We were trying to imagine how we could get our family around by bike when one large child doesn't have the judgment or physical coordination to ride on his own.

I just saw something on Craigslist in SF CA that looks ideal:

It's a two wheeled tandem (wheels side by side, like the back of a trike) with a back support on the seat that includes straps. It also has a luggage rack! The kid can peddle or not - one version seems to just have a platform instead of pedals.

There's no manufacturer name listed - I wonder if this is a custom adaptation. They call it an "adaptive" trailer - meaning for handicapped kids.

This goes on my serious wish list.

feonixrift said...

Reuters quoted an official in California as saying that "conservation is the only option we have".

I worry for the people who did not power down intentionally and slowly, and now find themselves forced to do so fast and hard. How many, strapped for cash for gas, may leave their air conditioner turned to 80 without realizing how much heat is pouring through the uninsulated windows, etc?

Leila said...

Awnings. Californians and others in hot climates need to re-install awnings. Awnings are the best way to protect your windows from collecting solar heat in the summer. If you don't have overhanging roof eaves then awnings are the next best thing.

If awnings are too expensive, then hang bamboo shades on the OUTSIDE of the windows. I saw this a lot on a recent trip to Portland, OR.

Anonymous said...

As an Australian couple with two young children, we're sensible enough to see the writing on the wall. Our leaders keep telling us our country is just in 'drought', but its climate change, pure and simple.

Major cities Sydney and Melbourne are set to run out of water in the next 10 years without major water recycling projects coming online and, as we don't fancy drinking other people's recycled viagra and birth control pills, we're leaving the city and will be buying land further south where water is not an issue. I'm hanging up my coat as atertiary industry worker, and returning to the land, to provide our own food, water, and energy, while my husband will continue to work in his job to provide us with modern, 'comfort' needs.

We're hoping to survive transition. But as for those in these massive Australian cities, I really don't think the outlook is good.

Rebekka said...

Also from Australia, and I have to disagree with this analysis from Matthew Simmons:
"Matthew Simmons, at ASPO this year, observed that demand destruction simply wasn't happening in places like Australia and Kenya, where rising gas prices resulted in people cutting back on other things."

Public transport use in Melbourne, where I live, has grown over 18% in two years, most of which is due to the increasing cost of petrol, or gas as you call it over there.

And I wish people would stop being put off recycled water by scare campaigns about "drinking other people's birth control pills" etc - the fact is that reverse osmosis filtration (which is what is used to 'recycle' water - which after all has been recycled millions of times before anyway, since it's a closed system!) is incredibly effective and removes particles larger than 1 angstrom which is much, much smaller than any left-over bits of birth control pills or viagra that might end up in the water.

And when you compare the overall environmental costs of recycling water with, say, the costs of a desalination plant, it's a far better option.

These sort of scare campaigns are usually instituted by someone who opposes water recycling for political reasons, and feeds on the fears of people who don't understand how water is recycled.

dooberheim said...

To Bedounia:

Worksman in New York makes a lot of human powered cargo haulers. Google 'em.

Poor people are generally not poor because they are frugal. They are poor because they want to spend like they are rich. I live near a housing project - these people are very poor at budgeting, and generally living within their income. They spend incredible amounts on luxuries and come ask me to "borrow" (that is, give them)money, because they know I live within my income (which isn't a lot more than theirs). I'm going to stop answering the door soon....


Amelia said...

bedouina, we're also dealing with drought conditions and a strained electrical system here in Salt Lake City. We have Coolaroo solar shades over the exteriors of the windows on the south and west sides of our house; in combination with solar film (on the storm windows over the original windows in the old part of the house) and low-e Energy Star windows in the new part, they make a tremendous difference: we kept a 1200 square-foot home 20 degrees cooler with one evaporative cooler.

When we have our roof replaced, we mean to add attic foil and a solar-powered whole-house fan, but that won't happen until next year at the earliest: the big expense for this year is the replacement of our fifty-year-old boiler.

Anonymous said...

I tried to explain some of this stuff to an economist friend, who is an optimist but believes that US wealth distributions are getting more skewed.

Is the end of August a liquidity crisis (Bob Diamond's position) or a solvency crisis, related to a credit crunch (Roubini, Staniford and Krugman's line)?

We can fight back and forth, but as Musashi argued way down in the comments, in a lot of ways the credit crisis is really an earnings crisis in disguise. No one should be getting into a house more than 4-6 times their yearing earnings, but that has priced out everyone in many sub- and ex-urban markets since the 70s, and especially since 1999, so we've gone to ever more exotic and unsound credit practices, so as not to dry up the all important housing sector.

In other words, this particular wrinkle can be explained in terms of increasing wealth inequality, as easily as it it can be explained in Peaknik terms. Normal Americans can no longer afford to own homes in many markets, but the US economy can't afford for normal Americans not to try to afford homes. Growing inequality can drive the process as easily as demand destruction can.

Worse - the housing market really took off in late 1999 and early 2000 as it tried to absorb money fleeing the impending and on going bubble. US housing assets doubled in value from 1999 to 2007, at a time when the rest of the economy, was, shall we say not doubling. The easiest way for teh economy to cope with a bubble bursting is to create a new bubble somewhere else, but that is terribly destructive to the new sector when the bubble pops a few years later. One real danger here, (according to the much brighter commentors on Oildrum) is that the hot capital fleeing the mortgage/derivitives meltdown, will flee to the alternative energy/infrastructure sector. See Eric Janzen at iTulip. That might look like a good thing in alternative energy (lots of capital pouring in finally), but it also distorts things way off true values, and leads to a bubble popping in a few years.

However this plays out it will have more complicated results that just furthing the gap between rich and poor in America which has been growing badly for a long time.

-Brian M.

jewishfarmer said...

Brian, I think your analysis of the earnings crisis elements of this is right on - very good stuff. Most people approach it from the perspective of overvaluation, including me - I'd honestly not, until this moment, thought to argue it as another issue of basic inequity. I'd been meaning to write a post suggesting that a part of the bubble was based on a un-conscious (under conscious) sense of the innate value of land - do you mind if I borrow some elements of your analysis (with proper credits of course?). Very nice stuff.

For those of you enduring serious drought, you'll probably lead the rest of us in some of the changes that need to be made. But I wish it was for a less miserable reason.

Rebekka, thanks for the information about public transport. Do you know if there has been an overall net drop in gas usage?


Anonymous said...

Sure borrow what you want. I usually approach it from over-valuation too. If an item is overvalued, or even just fairly, but highly-valued then people with insufficient earning just can't buy it. The problem is when something is highly valued AND the system relies on people buying it (like say transportation to work, or medical care, or lots of consumer goods). Then over- or high- valuation, becomes an earning crisis, because it hurts not just the individual families, but the system that relied on families being able to provide things for themselves and still consume adequately. But LOTS of current US problems fit this basic pattern (including the housing meltdown.)

In a sense, capitalism leaves the job of reproductive labor to the families (and to some extent the government) and focuses instead on productive labor. But if the families get screwed enough the means of reproduction can fall into disarray impinging on the means of production as well. Consider, societies with falling population, or where out-migration brain-drain hurt the replenishment of some category of workers, or simply where families are falling apart sociologically and this leads to all kinds of dysfunction. A homesteader is essentially someone who tries to opt out of productive labor as much as possible, typically because they think reproductive labor is hard enough. (Also notice that as the standards for what is considered normal in a society get more burdensome, the job of reproducing them from generation to generation becomes more burdensome). One strategy would be to stop doing wage work until wages increase enough to allow reproductive labor. But more recently the rich will simply take over and manage the means of reproduction as well as the means of production (often in the form of managed benefits). If our families are falling apart, rather than paying enough wages to allow families to function well, simply takeover the functions of families as the families fail at them.

On land and real-estate. I think there is all kinds of deep stuff going on here. The issue isn't just partially-conscious sense of the land. The medievals really valued land, the US hasn't for a while, it's valued location. Look at the mantra of real estate, "location, location, location." The vast majority of the "value" of a piece of real estate is not the land itself, or the structures on it, but the location of the land and structures. Just how valuable is a piece of land with a free standing house, within a long but doable commute of many desirable jobs and shopping venues? Well as the jobs move over seas, the price of the commute increases, and the stuff at those stores becomes less affordable, the "location" value of the land drops considerably. If you feel like cities are the only game in town, and apartments are not acceptible, you'll pay through the nose for an ex-urb house, and this is a high-valuation, but not necessarily an over-valuation. But the moment the relationship to the city is not so essential, paying the huge location premium starts looking foolish. My guess is the housing bubble is mostly a result of bubble-over-valuation, and not-enough decent entry level jobs, but its possible that part of the story is the beginnings of disenchantment with urbanization. But I'd love to see your take on it, your usually really good at that kind of stuff.
-Brian M.

Anonymous said...

Rebekka, don't believe the marketing hype. "particles bigger than 1 Angstrom" would include water molecules.

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