An argument against a near term collapse

ALL those arguments are MONEY arguments...... you've left out THE most important element of the collapse, ENERGY.

I know this site is mostly about "economics", but let's not forget why we all met here......  the CRASH COURSE, and the CC is more about exponential everything, and Peak Oil.....

There is also one more aspect of modern life that at least I recognise as a problem, that doesn't get a mention in the CC.......  and that is complexity. The more complex a system is, the fore fragile it becomes. I like the analogy of a modern car......  cut one wire and the whole thing is stationary. It doesn't matter one iota that a modern car is a wonder of mankind's technological prowess, it takes very little to  make one stop.

Today, with everything pretty well governed by computers, a mere blackout  can throw a spanner in the works......  and more complex backup systems are needed to protect them. A terrorist attack totally immobilised the air traffic in the US for days.... Fuel shortages, coming in a town near you in the not too distant future will start causing chaos, and ultimately collapse. Fuel shortages = food shortages = social unrest.

Mike

This argument doesn't hold up. 

One cell in the human body is far more complex than any machine ever constructed.  And human beings are pretty tough.  They've survived and adapted to almost every situation imaginable and will continue to do so.

LIkewise, a modern car, although far more complex than cars half a century ago, are far more reliable and trouble free.  And a much less complex car can be stopped just as easily by cutting one wire.

I'm not saying we're not vulnerable.  To assume that vulnerability will not be compensated for, however, is unjustified. 

That argument doesn't hold up. ALL cells die, along with, eventually, the body made of them.....

Before we decide that we must slash our wrists over the energy predicament, consider that oil at $80 - $90 / Bbl is likely to lock the world economy in a recession for a good while. If the economy weren't in such a precarious state already this would actually be a good thing. We would be forced out of our "must grow" mode and onto some other, perhaps more sustainable, path. That might be inconvenient or even painful, but not necessarily catastrophic. To be sure, there is rich potential for catastrophe; perhaps aided by dumb economic policy decisions, but it is not chiseled in stone. It may disappoint some if doom is postponed, but I won't be among them.

Stan

Either of two things can happen:

either the price of oil stay at ~$80 and supply drops off very fast,

OR

the price of oil keeps fgoing up, and production drops off less fast.....

You seem concerned about the price way more than the real problem, collapsing production/flow rates. Low production = shortages. Shortages = people not being able to go to work (because what will be available will be confiscated by the army and prioritised for farming).

Aussie:

Thanks for taking the time to read the post and respond. I appreciate your input.

That said, i do take peak conventional oil into consideration when making longer term forecasts, such as 5-10 years from now. The above post was geared toward the next 1-3 years as many CM users are of the belief that things could fall apart within a few months. At this point it is safe to say that Lehman's collapse was a defining moment of the current economic shift. Back then, there was still some semblance of regulation, capital requirements, margin requirements, and liquidity based on the capital markets alone. Now, we have central banks watching the credit markets very closely and carefully, making sure that a default doesnt set off counterparty exposure. In addition, we have the federal reserve which has purchased 1.5 trillion in MBS junk which is now off of bank balance sheets. Systemic risk is much lower today than it was before Lehman blew up.

That said, peak oil is a problem that we will be facing within the next few years. However, the phenomenon itself must be viewed from a rational perspective. Things arent just going to stop moving because of oil supply concerns. Remember what happened in 2008 when oil peaked at 145 a barrel. Demand got crushed and supplies filled up all over the world. In the event of another supply crunch oil prices will fly and then crash as world economies will buckle under the inflationary pressure. The "right side" of the supply curve will not be as sharp as the most pessimistic peak oilers believe. Take for example what happened to oil demand after the 70's oil crisis: prices spiked and then demand plunged. Similarly, after the 2008 spike oil demand fell to a 17 million barrel a day in the US for several months. China, which is being cheerleaded as the new world engine will cool thereby curtailing demand more in the years ahead. A chart on the oildrum.com shows how chinese oil demand has grown to 9.5 million BPD whereas in 2008 it was 6.5m BPD. This is a temporary buying frenzy on the part of the chinese. That said, demand for crude will be under pressure for several years as the great debt deflation continues to unfold.

bearmarkettrader,

You make a persuasive case that those factors alone that you cited won't cause near term collapse, but what about the other major destabilizing factors such as the government debt/spending. Wont' the factors that you cited at least provide further distress to an economy already buckling under the weight of irresponsible fiscal (mis)management. 

DamtheMatrix knows his stuff:

ALL those arguments are MONEY arguments...... you've left out THE most important element of the collapse, ENERGY.

I know this site is mostly about "economics", but let's not forget why we all met here......  the CRASH COURSE, and the CC is more about exponential everything, and Peak Oil.....

There is also one more aspect of modern life that at least I recognise as a problem, that doesn't get a mention in the CC.......  and that is complexity. The more complex a system is, the fore fragile it becomes. I like the analogy of a modern car......  cut one wire and the whole thing is stationary. It doesn't matter one iota that a modern car is a wonder of mankind's technological prowess, it takes very little to  make one stop.

Today, with everything pretty well governed by computers, a mere blackout  can throw a spanner in the works......  and more complex backup systems are needed to protect them. A terrorist attack totally immobilised the air traffic in the US for days.... Fuel shortages, coming in a town near you in the not too distant future will start causing chaos, and ultimately collapse. Fuel shortages = food shortages = social unrest.

Mike

Oil is now a yoke on all future economic activity.

Your comments on complexity are also true:

Catton has taught us that any species that experiences frenzied growth on an accumulated supply of resources will overshoot the long term carrying capacity of it's environment and eventually experience collapse.

Tainter has shown us that the most directly quantifiable mechanism for that collapse in complex human societies is the diminishing marginal returns of attempts to mitigate the problems faced by that society. Ironically, problems that are made increasingly worse by those very attempts to solve them using a world view that is not appropriate to the actual situation.

Meadows, et al. have demonstrated that our current industrial society, if it remains committed to exploiting our abundant accumulation of non-renewable resources, will experience greatly diminished marginal returns on the amount of capital that must be expended to continue extracting those resources, as well as to mitigating the problems created by the frenzied growth enabled by those resources. Further, because the short term carrying capacity of our environment was so dramatically increased by the abundant accumulation of non-renewable resources the resulting overshoot will severely degrade the long term carrying capacity and the eventual collapse will reduce the population to a much lower level than might otherwise have been sustainable

.
Odum further elucidates that such cycles of frenzied growth on accumulated resources followed by collapse are found at all scales of complex systems, both living and non-living, and are repeated at regular intervals at various time scales in "pulses". In fact, complex systems emerge quite naturally around flows and accumulations of resources and self organize to fully maximize those resources, eventually dying-off when the resources are exhausted, only to begin anew after another accumulation or flow has built up. Such pulses, while they might be viewed as a disaster from a limited perspective, actually seem to increase the eMergy of the whole system as seen from a larger perspective and longer time scales.

Therefore, anyone who thinks our current drama of overshoot and collapse, with the global economy evaporating into a black hole, billions of human lives being rendered redundant, and entire ecosystems wiped off the face of the Earth, is some sort of freakish calamity that must be avoided AT ALL COSTS..., well, they are quite simply dead wrong.

Earthwise:

Wont' the factors that you cited at least provide further distress to an economy already buckling under the weight of irresponsible fiscal (mis)management.

 

The above factors will add further distress to an economy buckling under the stress of too much excess debt. However, the weight of fiscal mismanagement is not as heavy as some believe it to be. In 2009 for example, US interest payments will be less than 400b due to the lowering of yields on bonds. This will allow the scam to continue for quite some time. Also, debt to gdp hasnt crossed 100% and even when it hits 120% of gdp it will still not be enough to dismantle the existing system.

One more thing. I hear lots of talk about the US trade deficit being a huge source of our ills. True, the deficit in trade causes jobs to be lost but for borrowing purposes the US imports roughly 2 trillion dollars worth a year and exports 1.3 trillion a year. Excluding energy imports the trade imbalance is not that bad at all. US imports 12 million barrels a day, price of 70 a barrel (X 365 days a year) and energy constitutes 300 billion of the trade deficit. 2 trillion - 300b for oil= 1.7- 1.3 imports = 400b trade deficit.  Lets not forget that the rest of the economy is supported by domestic factors so US dependence on cheap imports is not as perilous as some argue that it is.

Sporadic market dislocations can occur and likely will but at the end of the day Best Buy, Staples, Target, Raiload co's, AT&T, Verizon, and the majority of the S&P companies are still going to be around.

Dont forget that the US has some of the best and largest amount of food producing land in the world that China and India must covet.

Great comments by Sadad al Husseini, former VP of oil exploration and production
for Saudi Aramco. He denies being a peakist or anything similar but then
everything he says supports serious declines ahead! Regards, Michael.

http://www.energybulletin.net/node/50584

Sadad al Husseini, former VP of oil exploration and production for Saudi Aramco
and now an industry consultant, started by saying "I am not a peak oil or flat
oil or plateau oil [person]; I think we just need to be good engineers and try
to see what's going on…It's the short term and the long term—you've got tolook
at both the recent volatility and the longer term direction…

"In the long term, and that's kind of where we probably miss the boat, we are
depleting reserves. The clock is ticking. The replacement rate has not been very
good…If you want to push production beyond say 70 or so million barrels a day,
you have to move into higher cost alternatives.

"Other sources of energy we've talked about this morning…is coal going to
displace oil? The cost of clean coal is going to almost double the cost of
electricity….Is [natural] gas going to displace oil? The top 10 gas reserves
holders have about 77% of the reported gas reserves…How realistic is it to count
on them as a future alternative to oil?...We get a little bit too facile with
our talk about alternatives and switching and so on—there's a problem with every
source of energy.

"…as you go up to say $90 a barrel, you're consuming 4.5% of the global economy
[for oil]. That in itself is a ceiling—you cannot go indefinitely into more
expensive alternatives without destroying [the] economy and therefore destroying
demand. So we do have a ceiling on prices and how much expensive alternative
fuel we can put into the market.

"…in spite of the fact that oil prices were going up, North American production
was going down…We've had a very exciting development in Brazil with the
subsalts, but on the other hand there's Venezuela coming down and the rest of
South America hardly moving. Another example: West African production is
climbing very steadily, but Nigeria is declining; in North Africa, Libya has
increased but flattened out and the others are generally flat. So the
relationship between real high prices and increased production does not hold
when you don't have the resources.

"One of the projects I do with my friends in Morgan Stanley is to track global
projects…Here are 273 non-OPEC projects, country by country, [and assuming] a
6.5% decline rate; at an 8% decline rate you need even more [projects]. Here are
the OPEC projects including Iraq, Iran, Saudi Arabia, at a 3.5% decline rate; at
a 5% decline rate means more intense production [is needed]. Combining OPEC and
non-OPEC and looking at the global replacement rate, which should be around 4.5
million barrels/day per year, assuming conservative decline numbers, you just
don't have enough projects…Even if you have a very moderate increase in demand
of about ½% per year, that shortfall becomes very substantial. I'm not saying
this is the forecast—of course a lot has to be done to avoid this—but this is
the reality as it stands today."