Oct 222016
 
 October 22, 2016  Posted by at 11:03 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle October 22 2016


NPC Fire at S. Kanns warehouse, Washington, DC 1908

Why Corporate America’s Debt Is a ‘Major Risk’ (BBG)
Ignoring the Debt Problem (Volcker/Peterson)
Bank of England Says Authorities Mustn’t Fine Banks Because Groaf (Bill Black)
Think Canada is a Progressive Paradise? That’s Mooseshit (G.)
No, Hillary, 17 US Intel Agencies Did Not Say Russia Hacked Dem E-mails (NR)
Rigged Elections Are An American Tradition (Paul Craig Roberts)
EU Parliament Chief, Canada Minister In Bid To Save CETA Trade Deal (AFP)
Greek Union Files EU Human Rights Case Against Austerity (COE)
Gove Says Criticizing Carney or BoE Policy ‘Equivalent Of A Thought Crime’ (DM)
Up To 25 Feared Dead In Attack On Migrant Boat Off Libya (AFP)

 

 

You guessed it: interest rates.

Why Corporate America’s Debt Is a ‘Major Risk’ (BBG)

Are investors in denial about how dim the outlook is for American businesses? That’s the question Société Générale’s Andrew Lapthorne, global head of quantitative strategy, posed to his bank’s clients. “Asset valuations are extreme; returns are poor, the probability of losses is high and the ability to recover any losses quickly is low,” he writes. In particular, the strategist sounded an alarm over the state of corporate America’s balance sheet. Company spending exceeds cash flow by a near-record amount—a fundamentally unsustainable situation—as net debt continues to increase at a rapid pace.

In many cases, companies have used debt to repurchase their own stock, flattering their bottom-line financial performance. While not all buybacks are financed by debt, Lapthorne did note a correlation between net repurchases and the change in corporate indebtedness. “U.S. corporate balance sheets are a major risk going forward,” he says. “U.S. corporates are massively overspending.” To be fair, servicing this debt load isn’t as onerous as it might appear, because of low interest rates. And despite the recent steepening of corporations’ yield curve, companies have continued to extend duration, which offers them more certainty about what their interest payments will be over the long term. “For corporate credit, there’s very little concern about short-term coverage from the market,” write analysts at Bespoke Investment Group. “We note that maturities continue to creep up slowly; despite higher spread costs, corporates are generally borrowing further out the curve and ‘locking’ low rates.”

Read more …

As Steve Keen observes, ironically, it’s Volcker and Peterson themselves who ignore the biggest debt problem: private debt. Which is much higher:

Ignoring the Debt Problem (Volcker/Peterson)

Together, the two of us have 179 years of life experience and 13 grandchildren. We have served presidents of both parties. We have seen more campaign seasons than we care to count — but none as strange as this one. Insults, invective and pandering have been poor substitutes for serious debate about the direction in which this country is going — or should be going. And a sound and sustainable fiscal structure is a key ingredient of any viable economic policy. Yes, this country can handle the nearly $600 billion federal deficit estimated for 2016. But the deficit has grown sharply this year, and will keep the national debt at about 75% of GDP, a ratio not seen since 1950, after the budget ballooned during World War II.

Long-term, that continued growth, driven by our tax and spending policies, will create the most significant fiscal challenge facing our country. The widely respected Congressional Budget Office has estimated that by midcentury our debt will rise to 140% of GDP, far above that in any previous era, even in times of war. Unfortunately, despite a brief discussion during the final presidential debate, neither candidate has put forward a convincing plan to restrain the growth of the national debt in the decades to come. Throughout the campaign, Donald J. Trump has called for a combination of deep tax cuts that appear to far exceed proposed spending reductions, at the clear risk of substantially increasing the ratio of debt to GDP. Hillary Clinton has set out more balanced and detailed proposals, but they would still fail to stabilize and reduce our debt burden.

Whoever wins, the new president will eventually face fiscal realities that force him or her to develop strategies for decreasing the national debt as a share of the economy over the long term. Our current debt may be manageable at a time of unprecedentedly low interest rates. But if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending. There would be no room for the infrastructure programs and the defense rebuilding that today have wide support. [..] we’d be dependent on foreign investors’ acquiring most of our debt — making the government dependent on the “kindness of strangers” who may not be so kind as the I.O.U.s mount up.

Read more …

Always good to read Bill.

Bank of England Says Authorities Mustn’t Fine Banks Because Groaf (Bill Black)

Elite bankers and the pathetic economists who serve as apologists for their frauds specialize in proving our family saying that it is impossible to compete with unintentional self-parody. The subtitle of the WSJ article providing the latest proof is “Fines on banks translate into $5 trillion of ‘reduced lending capacity,’ bank says.” The “bank” referred to is the Bank of England, which is supposed to be the UK’s primary bank regulator. To be kind, the “study” by BOE is so embarrassing that a better descriptor of the BOE would be “fraud enabler.” “The roughly $275 billion in legal costs for global banks since 2008 translates into more than $5 trillion of reduced lending capacity to the real economy,” Minouche Shafik, a deputy governor of the BoE, told a New York conference of regulators and bankers Thursday.

BOE’s methodology and “logic” (which it did not make public) are easy to guess. It is not sufficient that elite banksters are able to become wealthy from leading the worlds’ most destructive financial frauds with impunity from prosecution, civil suits, and enforcement actions. It is vital that the banks no longer be fined for conducting these massive frauds. When banks are fined they lose some of their profits from these epidemics of frauds, bid-rigging cartels, predatory lending, aiding and abetting elite tax fraud, and money laundering for terrorists and violent drug cartels. For the sake of brevity, I will call these collectively “fraud proceeds.” Banks remain highly leveraged despite modest increases in capital requirements, so the BOE’s staff is assuming that each dollar of fraud proceeds that the banks lose to fines reduces total bank size by $18.18. They are assuming that the typical bank has a miserably inadequate capital requirement of slightly over five percent.

There are a number of fatal problems with BOE’s “logic” and (unstated) methodology. First, under the BOE’s “logic” the more profitable banks become by defrauding their customers the faster the economy will grow. The bank CEOs who led the three most destructive epidemics of financial fraud in history were apparently Soviet-style (pun intended) “Heroes of Capitalism.” Except, of course, what they actually drove was a massive financial bubble that produced the Great Recession. The projected loss of GDP in the U.S. due to the Great Recession is $24.3 trillion – and the loss of eurozone GDP is far larger because their economic losses have occurred over a far longer time and have been far deeper than in the United States. Only central bank economists would be so dogmatically divorced from reality and so moral challenged that they would think that allowing banksters to keep their fraud proceeds and avoid all accountability for their crimes would be good for the economy.

Read more …

“When your next-door neighbour is a billionaire celebrity genius with automatic weapons and an undying need for attention, you can get away with all sorts of stuff.”

Think Canada is a Progressive Paradise? That’s Mooseshit (G.)

Quick – picture Canada. What comes to mind? A progressive wonderland of polite manners and majestic moose? What America might be if it evolved a little? That place you’ll move to if Trump wins? If that’s what you think, that’s fine by us. In fact, it’s our brand: not America. The nice guys. Dull, kind and harmless. That’s how we like to be thought of. But it’s mooseshit. We are not the country you think we are. We never have been. The first prime minister and founding father of Canada, John A Macdonald, was a raging alcoholic. He spent entire campaigns fabulously drunk and once vomited on stage during a stump speech. When his rival pointed it out, Macdonald shot back that he hadn’t puked because of booze, but because he had been “forced to listen to the ranting of my honourable opponent”.

It was a deflection worthy of Trump. Macdonald handily won the election. The reason the Royal Canadian Mounted Police (our “Mounties”) ride horses is because during the labour movement of the 30s, horseback was the best way to trample protesting immigrants and miners. By the 60s, the horses were mostly just for show and the Mounties’ regular activities included subjecting suspected homosexuals to the “Fruit Machine”, a device designed to measure erotic responses to gay porn. These days, Canada is the third-largest arms dealer in the world. Our Alberta oil sands produce more carbon emissions each year than the entire state of California. Our intelligence agency is allowed to act on information obtained through torture. And a lot of French Canadians are into blackface comedy.

Little of this is widely known, because we happen to share a border with America. When your next-door neighbour is a billionaire celebrity genius with automatic weapons and an undying need for attention, you can get away with all sorts of stuff. It’s nice to be thought of as the world’s nice guys. And it’s useful – it obscures a lot of dirt.

Read more …

When I first hears her make that claim, I was thinking Russia must have been real eager to get caught. Why Trump didn’t jump on it, I can’t tell. Take a look for yourself which agencies are included:

No, Hillary, 17 US Intel Agencies Did Not Say Russia Hacked Dem E-mails (NR)

Hillary Clinton in last night’s presidential debate tried to avoid talking about the substance of the damaging WikiLeaks disclosures of DNC and Clinton campaign officials by claiming 17 U.S. intelligence agencies determined that Russia was responsible for this. After Clinton made this claim, she scolded Trump for challenging U.S. intelligence professionals who have taken an oath to help defend this country. What Clinton said was false and misleading. First of all, only two intelligence entities – the Office of the Director of National Intelligence (DNI) and the Department of Homeland Security (DHS) – have weighed in on this issue, not 17 intelligence agencies. And what they said was ambiguous about Russian involvement. An unclassified October 7, 2016 joint DNI-DHS statement on this issue said the hacks

. . . are consistent with the methods and motivations of Russian-directed efforts. These thefts and disclosures are intended to interfere with the US election process. Such activity is not new to Moscow — the Russians have used similar tactics and techniques across Europa and Eurasia, for example, to influence public opinion there. We believe, based on the scope and sensitivity of these efforts, that only Russia’s senior-most officials could have authorized these activities.

Saying we think the hacks “are consistent with the methods and motivations of Russian-directed efforts” is far short of saying we have evidence that Russia has been responsible for the hacks. Maybe high-level officials would have authorized them if Russian hackers were responsible, but the DNI and DHS statement did NOT say there was evidence Russia was responsible. My problem with the DNI/DHS unclassified statement is that it appeared to be another effort by the Obama administration to politicize U.S. intelligence. Make no mistake, U.S. intelligence agencies issued this unprecedented unclassified statement a month before a presidential election that was so useful to one party because the Clinton campaign asked for it.

The Obama administration was happy to comply. Clinton tried to defend the DNI/DHS statement by repeating the myth that U.S. intelligence officers are completely insulated from politics. She must think Americans will forget how the CIA crafted the politicized Benghazi talking points in 2011 and how SOUTHCOM intelligence analysts were pressured to distort their analysis of ISIS and Syria to support Obama foreign policy. And that’s just under the Obama administration.

Read more …

PCR could have done a tad more research, I’m thinking.

Rigged Elections Are An American Tradition (Paul Craig Roberts)

Do Americans have a memory? I sometimes wonder. It is an obvious fact that the oligarchic One Percent have anointed Hillary, despite her myriad problems to be President of the US. There are reports that her staff are already moving into their White House offices. This much confidence before the vote does suggest that the skids have been greased. The current cause celebre against Trump is his conditional statement that he might not accept the election results if they appear to have been rigged. The presstitutes immediately jumped on him for “discrediting American democracy” and for “breaking American tradition of accepting the people’s will.” What nonsense! Stolen elections are the American tradition. Elections are stolen at every level—state, local, and federal.

Chicago Mayor Richard J. Daley’s theft of the Chicago and, thereby, Illinois vote for John F. Kennedy is legendary. The Republican US Supreme Court’s theft of the 2000 presidential election from Al Gore by preventing the Florida vote recount is another legendary example. The discrepancies between exit polls and the vote count of the secretly programmed electronic voting machines that have no paper trails are also legendary. So what’s the big deal about Trump’s suspicion of election rigging? The black civil rights movement has fought vote rigging for decades. The rigging takes place in a number of ways. Blacks simply can’t get registered to vote. If they do get registered, there are few polling places in their districts. And so on. After decades of struggle it is impossible that there any blacks who are not aware of how hard it can be for them to vote.

Yet, I heard on the presstitute radio network, NPR, Hillary’s Uncle Toms saying how awful it was that Trump had cast aspersion on the credibility of American election results. I also heard a NPR announcer suggest that Russia had not only hacked Hillary’s emails, but also had altered them in order to make incriminating documents out of harmless emails. The presstitutes have gone all out to demonize both Trump and any mention of election rigging, because they know for a fact that the election will be stolen and that they will have the job of covering up the theft. [..] Don’t vote early. The purpose of early voting is to show the One Percent how the vote is shaping up. From this information, the oligarchs learn how to program the electronic machines in order to elect the candidate that they want.

Read more …

Well, it certainly dies hard. How many hours has Obama spent on the phone for this malt minute turn?

EU Parliament Chief, Canada Minister In Bid To Save CETA Trade Deal (AFP)

EU parliament head Martin Schulz and Canada’s trade minister Chrystia Freeland were meeting Saturday, saying they hoped to revive a trade deal threatened by the refusal of a Belgian region to sign on. Schulz wrote on Twitter he would also meet with Wallonia’s socialist government head Paul Magnette, who has moved to stop the bloc’s 28 nations from signing the accord. The meetings in Brussels are aimed at “reviving CETA talks. We can’t stop at the last mile,” Schulz wrote, referring to the agreement’s name. On arriving at the parliament building, Freeland said: “The ball is in Europe’s court. We hope that it is possible to find a solution,” according to the Belga news agency.

Canada blasted the European Union on Friday as incapable of signing international agreements, as the talks to persuade Wallonia to sign up to the huge trade deal broke down. Freeland appeared on the verge of tears after walking out of negotiations with the head of the French-speaking Belgian region on the deal that has been seven years in the making. Canadian Prime Minister Justin Trudeau had planned to travel to Brussels next week to sign the deal but that visit looks almost certain to be called off.

Read more …

May I suggest they get good lawyers.

Greek Union Files EU Human Rights Case Against Austerity (COE)

A public hearing of the European Committee of Social Rights today focused on how austerity in Greece has affected social rights under the guidelines of the European Social Charter. The committee granted the hearing request, which was made by the complainant organisation, the Greek General Confederation of Labour (GSEE) v. Greece.

The complaint alleges that some laws enacted in Greece as part of the austerity programme affect workers’ rights in a manner that is contrary to Article 1 (the right to work); Article 2 (the right to just conditions of work); Article 4 (the right to a fair remuneration); and Article 7 (the right of children and young persons to protection) of the 1961 Social Charter; as well as of Article 3 of the 1988 Additional Protocol (the right to take part in the determination and improvement of working conditions and working environment). Greece’s Minister for Labour, Social Security and Social Solidarity George Katrougalos and GSEE president Yannis Panagopoulos attended the hearing. The Committee, which monitors commitments to the European Social Charter, is expected to issue its decision to the public by mid-2017.

Read more …

Brits are funny even if they don’t mean to. Ming dynasty was 14th-17th century.

Gove Says Criticizing Carney or BoE Policy ‘Equivalent Of A Thought Crime’ (DM)

Michael Gove has launched a scathing attack on the Governor of the Bank of England, comparing his arrogance to that of the cruel Ming emperors. The former justice secretary said that like the rulers of medieval China, the pro-EU Mark Carney believed his judgments had ‘near-divine’ status and that he was infallible in his actions. But in reality, many of his policies – such as printing money and cutting interest rates – had been shown to have created significant economic problems, he said. Mr Gove said the Canadian banker should show more humility – as it was technocrats like him who had brought the ‘disaster’ of the euro and failed to predict the 2008 crash. He said Mr Carney should ‘ponder the fate of the Chinese emperors’ who were finally overthrown because they could not bear any criticism.

The attack by Mr Gove, a senior figure in the Leave campaign, echoes his criticism before the referendum of ‘experts’ who predicted a slump if we left the EU. In an article for The Times, he wrote: ‘At different eras in world history there have been sacred figures who, while apparently of flesh and blood, have been elevated to inhabit a special realm of near-divinity above the rest of fallible mankind. In medieval China, they had the Ming Emperor, Lord of Ten Thousand Years, who employed the Mandate of Heaven to decide the fate of millions. ‘His person was held to be inviolable and without imperfections. ‘Those who dared to question his rule were flayed alive, their skin left hanging from a hook to emphasise the emperor would brook no challenge to his authority.

In contemporary Britain we have Mark Carney, the Governor of the Bank of England, who employs control over interest rates to decide the fate of millions. ‘His position is held to be independent and without any error. ‘And so any criticism of his actions is regarded as a thought crime – and those who dare to question his rule are flayed in the press with dire warnings left hanging in the air to emphasise the Governor will brook no challenge to his authority.’

Read more …

Yeah, it wasn’t crazy enough yet.

Up To 25 Feared Dead In Attack On Migrant Boat Off Libya (AFP)

Up to 25 people were missing, feared drowned, Friday after men on a Libyan coastguard speedboat attacked a packed migrant dinghy during a rescue operation off the north African state. German NGO Sea-Watch, which is taking part in the multinational search and rescue operation in the Mediterranean, said the tragedy happened after its boat Sea-Watch 2 and a passing oil tanker were sent to help the distressed dinghy in the early hours. As the rescue operation proceeded just beyond Libyan territorial waters north of the port of Sabrata, a speedboat bearing the Libyan coastguard insignia arrived and tried to steal the dinghy’s outboard engine, spokesman Ruben Neugebauer told AFP.

The men, who spoke Arabic, beat some of the migrants with sticks and some clambered onto the dinghy, causing panic which resulted in one side of the boat deflating and most of the passengers ending up in the sea. After the assailants left, Sea-Watch said it rescued 120 people and recovered four corpses from the water. Other bodies were seen floating but could not be recovered and it was estimated that between 15 and 25 of the people who had been on the board were unaccounted for. Sea-Watch said in a statement that its two speedboats had been “hassled in an aggressive way” during the attack, “preventing our crew from providing life vests and medical aid to the people in need.” “All of these deaths could have been avoided but for this intervention,” Neugebauer added.

Read more …

Oct 222016
 
 October 22, 2016  Posted by at 7:29 am Finance Tagged with: , , , , , , ,  Comments Off on Why The Global Economy Will Disintegrate Rapidly


Pamir, Last Commercial Sailing Ship To Round Cape Horn 1949

 

We have written little on the topic of energy lately, other than related to oil prices going up and down, empty OPEC ‘promises’ to cut oil production, and the incredible debt load threatening to crush US -and Canadian- unconventional oil and gas. It’s a logical outcome of focusing more on finance than energy, because we feel the former has a shorter timeline than the latter. Something that harks back to our Oil Drum days.

But that doesn’t mean that the idea and/or principle of peak oil has disappeared, or that we have completely forgotten it. It has just been snowed under by the financial crisis (and by unconventinal oil and gas). And while we continue to find that the financial world will dump us into a bigger crisis sooner than energy will, it’s useful to look at oil et al from time to time.

Please note: we don’t wish to deny that oil depletion has its own dynamics, but in our view those dynamics will be hugely affected by the financial crisis that is looming big and will strike first. A crisis that, by the way, will affect not just oil and gas, but solar and wind just as much. You can get only as much ‘alternative’ energy as you can pay for, and that is before we even mention solar and wind’s EROEI (Energy Return On Energy Investment).

What the world needs to do, but we very much doubt it will voluntarily, is not to look for other forms of energy to replace oil and gas, but to look for ways to use much less energy (90% or so) while still maintaining societies that function as best they can. We doubt this because man is no more made to volunteer for downsizing than any other species.

The interview below with Louis Arnoux by the SRSrocco Report, combined with an article Louis wrote in July on the site of our old friend Ugo Bardi (is Florence really 6 years ago already?), is an excellent opportunity to catch up on energy issues.

The discussion of energy relative to finance will no doubt continue, and Louis doesn’t seem to have the exact same view as us, but that’s fine, or at least it shouldn’t deter us from listening. This graph from his work, for instance, contains a great depiction of what EROEI really means, and how it works out, and that is important to know.

And yes, we are aware of the contradiction between the provocative title of this post (borrowed from SRSrocco Report) and our own view that it’s not energy that will bring the economy down; the internal dynamics of finance don’t need any help on their way towards crashing the system. But it’s a great title nonetheless.

 

 

First, here’s the SRSrocco Report interview, below it you’ll find the article. Note: this is part 1, links to parts 2 and 3 are provided.

 

 

 

Louis Arnoux: Some reflections on the Twilight of the Oil Age – part I:
Alice looking down the end of the barrel

 

 

This three-part post was inspired by Ugo’s recent post concerning Will Renewables Ever ReplaceFossils? and recent discussions within Ugo’s discussion group on how is it that “Economists still don’t get it”?  It integrates also numerous discussion and exchanges I have had with colleagues and business partners over the last three years.

Introduction


Since at least the end of 2014 there has been increasing confusions about oil prices, whether so-called “Peak Oil” has already happened, or will happen in the future and when, matters of EROI (or EROEI) values for current energy sources and for alternatives, climate change and the phantasmatic 2oC warming limit, and concerning the feasibility of shifting rapidly to renewables or sustainable sources of energy supply.  Overall, it matters a great deal whether a reasonable time horizon to act is say 50 years, i.e. in the main the troubles that we are contemplating are taking place way past 2050, or if we are already in deep trouble and the timeframe to try and extricate ourselves is some 10 years. Answering this kind of question requires paying close attention to system boundary definitions and scrutinising all matters taken for granted.

It took over 50 years for climatologists to be heard and for politicians to reach the Paris Agreement re climate change (CC) at the close of the COP21, late last year.  As you no doubt can gather from the title, I am of the view that we do not have 50 years to agonise about oil.  In the three sections of this post I will first briefly take stock of where we are oil wise; I will then consider how this situation calls upon us to do our utter best to extricate ourselves from the current prevailing confusion and think straight about our predicament; and in the third part I will offer a few considerations concerning the near term, the next ten years – how to approach it, what cannot work and what may work, and the urgency to act, without delay.

Part 1 – Alice looking down the end of the barrel


In his recent post, Ugo contrasted the views of the Doomstead Diner‘s readers  with that of energy experts regarding the feasibility of replacing fossil fuels within a reasonable timeframe.  In my view, the Doomstead’s guests had a much better sense of the situation than the “experts” in Ugo’s survey.  To be blunt, along current prevailing lines we are not going to make it.  I am not just referring here to “business-as-usual” (BAU) parties holding for dear life onto fossil fuels and nukes.  I also include all current efforts at implementing alternatives and combating CC.  Here is why.   

The energy cost of system replacement


What a great number of energy technology specialists miss are the challenges of whole system replacement – moving from fossil-based to 100% sustainable over a given period of time.  Of course, the prior question concerns the necessity or otherwise of whole system replacement.  For those of us who have already concluded that this is an urgent necessity, if only due to CC, no need to discuss this matter here.  For those who maybe are not yet clear on this point, hopefully, the matter will become a lot clearer a few paragraphs down.

So coming back for now to whole system replacement, the first challenge most remain blind to is the huge energy cost of whole system replacement in terms of both the 1st principle of thermodynamics (i.e. how much net energy is required to develop and deploy a whole alternative system, while the old one has to be kept going and be progressively replaced) and also concerning the 2nd principle (i.e. the waste heat involved in the whole system substitution process).  The implied issues are to figure out first how much total fossil primary energy is required by such a shift, in addition to what is required for ongoing BAU business and until such a time when any sustainable alternative has managed to become self-sustaining, and second to ascertain where this additional fossil energy may come from. 

The end of the Oil Age is now


If we had a whole century ahead of us to transition, it would be comparatively easy.  Unfortunately, we no longer have that leisure since the second key challenge is the remaining timeframe for whole system replacement.  What most people miss is that the rapid end of the Oil Age began in 2012 and will be over within some 10 years.  To the best of my knowledge, the most advanced material in this matter is the thermodynamic analysis of the oil industry taken as a whole system (OI) produced by The Hill’s Group (THG) over the last two years or so (https://www.thehillsgroup.org). 

THG are seasoned US oil industry engineers led by B.W. Hill.  I find its analysis elegant and rock hard.  For example, one of its outputs concerns oil prices.  Over a 56 year time period, its correlation factor with historical data is 0.995.  In consequence, they began to warn in 2013 about the oil price crash that began late 2014 (see: https://www.thehillsgroup.org/depletion2_022.htm).  In what follows I rely on THG’s report and my own work.
Three figures summarise the situation we are in rather well, in my view.
Figure 1 – End Game
For purely thermodynamic reasons net energy delivered to the globalised industrial world (GIW) per barrel by the oil industry (OI) is rapidly trending to zero.  By net energy we mean here what the OI delivers to the GIW, essentially in the form of transport fuels, after the energy used by the OI for exploration, production, transport, refining and end products delivery have been deducted. 
However, things break down well before reaching “ground zero”; i.e. within 10 years the OI as we know it will have disintegrated. Actually, a number of analysts from entities like Deloitte or Chatham House, reading financial tealeaves, are progressively reaching the same kind of conclusions.[1]

The Oil Age is finishing now, not in a slow, smooth, long slide down from “Peak Oil”, but in a rapid fizzling out of net energy.  This is now combining with things like climate change and the global debt issues to generate what I call a “Perfect Storm” big enough to bring the GIW to its knees.

In an Alice world


At present, under the prevailing paradigm, there is no known way to exit from the Perfect Storm within the emerging time constraint (available time has shrunk by one order of magnitude, from 100 to 10 years).  This is where I think that Doomstead Diner’s readers are guessing right.  Many readers are no doubt familiar with the so-called “Red Queen” effect illustrated in Figure 2 – to have to run fast to stay put, and even faster to be able to move forward.  The OI is fully caught in it.

Figure 2 – Stuck on a one track to nowhere

The top part of Figure 2 highlights that, due to declining net energy per barrel, the OI has to keep running faster and faster (i.e. pumping oil) to keep supplying the GIW with the net energy it requires.  What most people miss is that due to that same rapid decline of net energy/barrel towards nil, the OI can’t keep “running” for much more than a few years – e.g. B.W. Hill considers that within 10 years the number of petrol stations in the US will have shrunk by 75%…  

What people also neglect, depicted in the bottom part of Figure 2, is what I call the inverse Red Queen effect (1/RQ).  Building an alternative whole system takes energy that to a large extent initially has to come from the present fossil-fuelled system.  If the shift takes place too rapidly, the net energy drain literally kills the existing BAU system.[2] The shorter the transition time the harder is the 1/RQ.  

I estimate the limit growth rate for the alternative whole system at 7% growth per year.  

In other words, current growth rates for solar and wind, well above 20% and in some cases over 60%, are not viable globally.  However, the kind of growth rates, in the order of 35%, that are required for a very short transition under the Perfect Storm time frame are even less viable – if “we” stick to the prevailing paradigm, that is.  As the last part of Figure 2 suggests, there is a way out by focusing on current huge energy waste, but presently this is the road not taken.

On the way to Olduvai


In my view, given that nearly everything within the GIW requires transport and that said transport is still about 94% dependent on oil-derived fuels, the rapid fizzling out of net energy from oil must be considered as the defining event of the 21st century – it governs the operation of all other energy sources, as well as that of the entire GIW.  In this respect, the critical parameter to consider is not that absolute amount of oil mined (as even “peakoilers” do), such as Million barrels produced per year, but net energy from oil per head of global population, since when this gets too close to nil we must expect complete social breakdown, globally. 

The overall picture, as depicted ion Figure 3, is that of the “Mother of all Senecas” (to use Ugo’s expression).   It presents net energy from oil per head of global population.[3]  The Olduvai Gorge as a backdrop is a wink to Dr. Richard Duncan’s scenario (he used barrels of oil equivalent which was a mistake) and to stress the dire consequences if we do reach the “bottom of the Gorge” – a kind of “postmodern hunter-gatherer” fate.

Oil has been in use for thousands of year, in limited fashion at locations where it seeped naturally or where small well could be dug out by hand.  Oil sands began to be mined industrially in 1745 at Merkwiller-Pechelbronn in north east France (the birthplace of Schlumberger).  From such very modest beginnings to a peak in the early 1970s, the climb took over 220 years.  The fall back to nil will have taken about 50 years.

The amazing economic growth in the three post WWII decades was actually fuelled by a 321% growth in net energy/head.  The peak of 18GJ/head in around 1973, was actually in the order of some 40GJ/head for those who actually has access to oil at the time, i.e. the industrialised fraction of the global population.

Figure 3 – The “Mother of all Senecas”

In 2012 the OI began to use more energy per barrel in its own processes (from oil exploration to transport fuel deliveries at the petrol stations) than what it delivers net to the GIW.  We are now down below 4GJ/head and dropping fast.

This is what is now actually driving the oil prices: since 2014, through millions of trade transactions (functioning as the “invisible hand” of the markets), the reality is progressively filtering that the GIW can only afford oil prices in proportion to the amount of GDP growth that can be generated by a rapidly shrinking net energy delivered per barrel, which is no longer much.  Soon it will be nil. So oil prices are actually on a downtrend towards nil. 

To cope, the OI has been cannibalising itself since 2012.  This trend is accelerating but cannot continue for very long.  Even mainstream analysts have begun to recognise that the OI is no longer replenishing its reserves.  We have entered fire-sale times (as shown by the recent announcements by Saudi Arabia (whose main field, Ghawar, is probably over 90% depleted) to sell part of Aramco and make a rapid shift out of a near 100% dependence on oil and towards “solar”.

Given what Figure 1 to 3 depict, it should be obvious that resuming growth along BAU lines is no longer doable, that addressing CC as envisaged at the COP21 in Paris last year is not doable either, and that incurring ever more debt that can never be reimbursed is no longer a solution, not even short-term.  
Time to “pull up” and this requires a paradigm change capable of avoiding both the RQ and 1/RQ constraints.  After some 45 years of research, my colleagues and I think this is still doable.  Short of this, no, we are not going to make it, in terms of replacing fossil resources with renewable ones within the remaining timeframe, or in terms of the GIW’s survival.
Next: 

Part 2 – Enquiring into the appropriateness of the question

Part 3 – Standing slightly past the edge of the cliff

 

 

Bio: Dr Louis Arnoux is a scientist, engineer and entrepreneur committed to the development of sustainable ways of living and doing business.