Sunday, June 18, 2017

Taking a short break - no post this week or next

An exceptionally heavy workload and travel schedule have conspired to prevent me from writing this week and next. I expect to post again on Sunday, July 2.

Sunday, June 11, 2017

Can we create a durable future?

It is hard to imagine anyone today building something as durable as the Roman Colosseum. Most of the damage we see to the 2,000 year-old stadium comes from two earthquakes and the persistent looting of its marble, stone and brass infrastructure by humans using them for other building projects. Were it not for these unfortunate depredations, the Colosseum might be largely intact today.

We pen fantasies about the durability of our culture in science fiction novels, television programs and movies set hundreds and even thousands of years from now. By then we humans will supposedly be moving with magical ease at speeds greater than light, zipping through the known universe aided by voice-command convenience (or maybe even thought-comand convenience).

But our age seems to be populated by buildings and cultural artifacts that are designed for impermanence. It's not that we are technically incapable of making things that are durable when we want to, especially when it feeds our desire to turn science fiction into fact. NASA's Mars Rovers launched in 2003 were designed for a mission of 90 Martian solar days. The Spirit rover operated until 2010. The Opportunity rover is still operating.

We have even more impressive longevity from the Voyager 1 and Voyager 2 space probes sent in 1977 to study the outer planets, that is, Jupiter, Saturn, Uranus and Neptune. Both spacecraft were designed for 5-year lifetimes and both are still working after almost 40 years. Voyager 1 has reached interstellar space where it continues to send back data. Voyager 2 will join it in two or three years. NASA expects to continue to receive data for another decade or so from both.

On Earth we would consider such durability to be over-engineering, too costly for our purposes. We build computers to be obsolete in less than 2 years. We build shopping malls, office parks and other commercial and industrial buildings with the idea that they will be abandoned or torn down in perhaps two or three decades. I am reminded of a New Yorker cartoon in which a developer looking at a model of his newly commissioned building remarks: "Great design, but when it comes time, a bitch to implode."

Nothing lasts forever. And, a society that has no dynamism, that does not change with changing circumstances, cannot survive. But it is we who are creating the change that we have to adapt to. It is we humans who are causing climate change. It is we humans who are causing rapid depletion of soil, water and energy resources. It is we humans who are increasing our environmental footprint in sheer numbers and in consumption per person.

We've initiated a feedback loop that has no end--except catastrophe. What would more durable arrangements look like? If we turn to those arrangements that have withstood the test of time, we have a starting point:

1. Small units of governance. The city of Rome has been continuously inhabited for more than 2,500 years. The Roman Empire, for all its durability, came and went even as the city lived on.

2. Small-scale agriculture and craft. Agriculturally based villages with craft industry have thousands of years behind them. This way of living is being crushed by modern industrial farming and its need for ever increasing scale. But the local food movement and the desire of many to know where their food comes from have breathed new life into small-scale farming.

3. Trade in luxury goods. Some exotic and valuable items have long been traded across large distances because a particular climate is suitable for certain produce, for example, tea or coffee--or the know-how and infrastructure is well-developed, silk from China, for example. What this point implies is that necessities are better produced closer to home to ensure a continuous and adequate supply.

4. Locations favorable to agriculture and navigation. It should be no surprise that many of the world's most important and long-lived cities are ports. Water has been historically a primary mode of transport. It is also, of course, essential to prosperous agriculture, either from adequate rains or from flowing rivers that can be diverted for irrigation.

All of these will seem obvious to anyone who has thought about the topic, sometimes through the lens of what is called "relocalization." In its simplest form this merely means returning the production of daily necessities closer to where we live. That seems straightforward enough; but the complex webs of trade and logistics we now have that bring us those necessities will be difficult to abandon. For those wanting to build more durable arrangements, this implies building them alongside the global system we have now. (It does NOT, however, mean abandoning the knowledge we have gained in the industrial age, but rather using it more wisely to attain our goals.)

Building a relocalized system may seem unduly duplicative and wasteful. And, it will be until it isn't, that is, until the global system stops serving our needs. In many ways that system already has stopped serving us if you count as one of our needs the desire to build a durable human culture that can thrive far into the future.

The fantasy of a spacefaring society has us fixated on an ever evolving technological future that asks us to abandon one set of gadgets for another almost continuously--all premised on the availability of unlimited resources and a climate crisis that somehow won't turn out to be a crisis. Few people are even contemplating the need to build a durable society because few imagine ever needing one.

We humans like the novelty afforded to us by our rapidly changing society. The world of information and communications technology has brought that novelty to us in addictive oversupply through ever more powerful cellphones and other electronic devices. What strikes me about this supposed novelty is its overwhelming sameness. It seems like novelty largely because new participants appear. But it is actually monotony itself because the stories we are told are as relentlessly interchangeable as they are shallow.

The durable society is not a dull society. It is rather a deeper society. We get to spend more time with the very landscape of our lives--the people, the buildings, the everyday objects, and the activities--than the frantic pace of the electronic message now allows us. The slow food movement is one expression of this desire for deeper engagement.

That deeper engagement is really the foundation of a durable future. It should come as no surprise then that it is difficult to build a durable future in a world that people don't have time to understand...with others they don't really know.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, June 04, 2017

Baumol's cost disease, productivity and the future of growth

William Baumol, one of the most famous economists you've never heard of, died recently. Baumol's fame came out of the observation that there are sectors of the economy in which productivity is rising swiftly, for example, manufacturing, and sectors where it is rising slowly or not at all, for example, string quartet performances.

The conclusion he drew from observing the behavior of wages in these sectors was that wages had to rise in the low-productivity growth sectors even as they do in high-productivity growth sectors. This is because people will over time simply leave the low-productivity growth sectors for the better wages of the other sectors. This theory became known as Baumol's cost disease.

In practice, society still values string quartet performances enough to pay their practitioners sufficiently to keep them playing. Baumol extended his theory to any economic sector in which personal service is essential to that sector. Examples include education, health care, child care, and legal services. As it turns out, nobody (yet) wants a robot lawyer or nanny.

Baumol's theory explains why costs are rising so fast for educational institutions, health care organizations, municipal governments, and performing arts groups. Their productivity increases are limited, but their relative costs for labor continue to rise because of their low-productivity growth compared to other parts of the economy. In more productive sectors, rising wages can be offset by rising productivity which allows costs per hour of labor to remain level or, in some cases, decline.

Baumol realized that even in the mid-1960s when he first formulated his ideas (see here and here), technology was already enabling performing artists to reach larger and larger audiences through television, radio and record players. That certainly increased their productivity by allowing many more people to enjoy a particular performance. But these technologies and their more recent variants do not increase the number of performances that an artist can do.

The broader implication of Baumol is that as societies expand their service sectors, it is inevitable that overall productivity growth will decline. And that can mean that overall economic growth will tend to decline as well. We have certainly seen progressively slower growth in mature world economies over time, particularly since the 2008-2009 recession.

All attempts to reduce overall costs across entire low-productivity sectors (as opposed to small facets of them) have essentially come to naught--unless the sector is simply disappearing. (For example, does anyone remember the typesetting business which was wiped out by the advent of software capable of handling that task on a graphic designer's desktop computer?)

Some attempts have been made to reduce the cost of education. Back in the mid-1990s the University of Michigan proclaimed that it would become a million-person institution with its distance learning program. It took 20 years before the university created what it calls Massive Open Online Courses. They are free (though you can pay a fee to get a nice certificate of completion). Paying customers, however, still want actual live teachers in front of them just as they still crave live performers of music and plays. And, they want the recognized credentials that are included with attendance at the live instruction venue.

Municipalities provide a wide range of services including public safety, fire protection, building code enforcement, and public health. All of these services require people whose productivity is difficult to enhance on par with what is happening in manufacturing, particular high-technology manufacturing.

We have now accepted that maintaining an opera company or a symphony orchestra will cost more than ticket receipts can raise. What Baumol suggests is that we will have to be prepared to pay ever higher prices for those services we want from low-productivity growth sectors such as health care and education so long as productivity continues to grow relatively faster in other sectors.

With exceptionally low overall productivity growth in the United States and the world, it is likely that Baumol's cost disease is catching up with us--even if it isn't the only cause of that low growth.

The fantasy that we can make all services continuously more efficient simply can't get past the human factor in many cases. And, where that factor is being eliminated or reduced--for example, automated bank tellers, self-serve restaurants, and online learning--we are finding increasing bifurcation of the marketplace. The human touch is being reserved more and more for those who can afford it: private banking, high-end sit down restaurants, and ever more expensive college educations (that come with actual personal connections to instructors and with bona fide credentials).

Is our future one in which only the rich are inoculated against Baumol's cost disease? The alternative is increased public subsidies for those services which we deem socially important in order to make them widely available.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, May 28, 2017

Anti-progress: The case of airline travel

We are so used to rapid progress in so many fields, especially in the communications devices and computers that we can hold in our hands and that keep getting cheaper. In addition, the media is filled with thrilling advances in biotechnology, robotics and artificial intelligence. It's hard to imagine that there might areas of our lives in which progress has not only ceased but been reversed.

One area with which many readers are certainly familiar is air travel. I was struck by Robert Gordon's account of this phenomenon in his marvelous tome, The Rise and Fall of American Growth. Here is what Gordon discovers:

  1. Speed and comfort in the passenger airline industry have not improved since the 1960s.
  2. In fact, comfort has declined as airlines have squeezed more seats into the same amount of space. To get the same amount of space which the typical airline passenger enjoyed in 1977, that passenger must pay on average an extra $59. Gordon prices the discomfort of staying in the cheap seats at $15, since most people don't pay the extra fee.
  3. Passengers must now pay for meals previously included in their air fares which he estimates at $8 per meal.
  4. Passengers must now pay for checked bags previously included in their air fares which Gordon estimates at $25 per bag.
  5. He estimates that the cost of the meal, the discomfort and the checked bags amount to a 24 percent unmeasured price increase from 2008 to 2014 for a now inferior service.
  6. Gordon estimates that 200 million additional hours of passenger time are wasted each year in post-2001 airline security checks that he believes are an overreaction to one major failure, namely, the security of airline cockpit doors.
  7. He acknowledges that for those opting out of the extras, sitting hungry in a cramped seat is somewhat offset by the proliferation of entertainment options now available during flights.
  8. Despite what we've been led to believe, there has been almost no decline in the inflation-adjusted passenger price per mile since airline deregulation was initiated in 1978. The great decline in price occurred before then due to the increasing size and efficiency of airliners. What people saw after 1978 was a wider variation in fares depending when you booked.

Since airlines are one of the most energy-intensive industries in the world, the question arises whether the reversing of progress in airline travel is related to energy prices. For fuel alone the percent of operating costs varied between 2004 and 2015 from a low of 17 percent in 2004 to a high of almost 37 percent in 2015.

Airlines struggled with high fuel prices from 2011 through 2014 when oil hovered around $100 per barrel consistently. Now that prices have dropped, the airlines are certainly enjoying higher profits. (See link above.) But their drive to raise prices and cram more passengers in each plane seems to have coincided with pressure from fuel costs.

Thus, high energy costs appear to have the ability to degrade or reverse progress in a key area of the economy. And, any reprieve from those high costs may be short if an analysis done by HSBC Global Research, the research arm of the huge multinational bank of the same name, is correct.

The point is that the notion that everything in our lives is getting better and better, faster and faster isn't borne out in reality. Gordon's book provides abundant examples. But the example of air travel seems particularly appropriate to ponder on this travel-filled holiday weekend.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, May 21, 2017

Stock hedges, home insurance, and our misunderstanding of risk

"If you own stocks without a hedge, it's not rational." So says the world's most famous student of risk Nassim Nicholas Taleb in a recent interview with Bloomberg as many of the world's stock markets hover near all-time highs. "It's like buying a house without insurance," he explained. "We have tail risks today that we didn't have before, and every day it gets worse."

"Tail risks" refer to the possibility of unusual, rare, catastrophic events, often of a nature that cannot be anticipated or even imagined. Such events are frequently dubbed black swans, a term made famous by Taleb's book called The Black Swan.

So, what is the perceived difference between houses and stocks and what does that tell us about how we judge risks elsewhere in our lives and societies? First, houses. Houses are very expensive consumer items or investments or both, depending who is buying them and why. Taleb's point is that the value of a house will not track the market if the house burns down.

Every homeowner understands this and buys insurance. In fact, the bank requires insurance if the home has a mortgage. And, that's because, of course, homes don't rebuild themselves if they are destroyed.

The companies underlying stock listings, however, are not obliterated by a market crash. Of course, some companies may disappear if the crash is followed by an economic downturn; but the thousands of companies that make up the exchanges do not all evaporate.

Stocks have historically recovered after losses, even extreme losses. So, the hedging Taleb is suggesting is really about timing. Can an investor afford to wait for the rebound before having to cash in? If Taleb's concerns are borne out in the next few years, many near retirement or already retired may be answering this question.

(The history of stock markets reveals a mixed picture. Some rebounds to previous highs have occurred within months or years. Some have taken decades. The Japanese stock market has yet to revisit the peak of 1989 and currently stands at about half the level of that peak.)

With housing and stocks we have two different kinds of risk, both of which can be hedged so as to prevent a severe loss of net worth. Why do most people only hedge one, namely the home?

Now, most investors diversify their investments. They own some stocks, some bonds, some real estate and perhaps some other investment such as a business they control or an annuity. While diversification, if done properly, can reduce risk, it is not true hedge.

Hedges are designed to go up in value in inverse relation to the decline in value of the instruments they are hedging. Owning gold as a hedge against a stock market crash may or may not work. Gold is not a true hedge in this instance and in the last market crash, it plummeted along with stocks. Stock options that necessarily rise in value as stocks sink are a true hedge.

Of course, homeowners insurance does not insure us against a decline in real estate prices. It turns out that one can actually now hedge that risk with the appropriate financial instruments. But few people do that for their family homes. In fact, people rarely envision having to sell their homes for less than they bought them.

It is this one-way bias that links people's perceptions of both homes and stocks. It is almost inconceivable that any of us might be forced to accept catastrophic losses if only we can hang on long enough. What this view presupposes is that the future will look like the recent past (that is, the last century or so). It will be one of growth, growth, growth. Growth in population. Growth in economic output. Growth in financial wealth. Growth in the energy supplies needed to make all the other growth happen.

It would indeed be a black swan if growth failed to appear or was so stunted that few people obtained any benefits from it. (Has the second scenario already arrived?) But the twin crises of energy depletion and climate change make such a future ever more likely. These crises aren't hidden and they aren't cyclical. They are advancing in such a way that the risks of both are not staying neatly tucked under the "tails" of the bell-shaped distribution curve of possible outcomes. Our current actions make them inevitable.

Things could change. Human societies could revolutionize the way they live so as to avert disastrous climate change or fossil fuel depletion (that is, depletion without adequate alternative energy). But, it seems that such a revolution would be more akin to a black swan than any rendezvous with energy or climate Armageddon.

We've convinced ourselves as a world society that such outcomes are so unlikely that we are making what amount to token efforts to avert them. Renewable energy is being deployed rapidly, but not rapidly enough to replace the current fossil fuel infrastructure soon enough to prevent a climate catastrophe (and perhaps an energy insufficiency).

There is no insurance policy that will protect us against catastrophic climate change. We cannot get our habitable climate back on any time scale that matters to humans once it's gone. The insurance policy is us, that is, changes in our behavior and our technology done quickly enough to matter. There is no other hedge that will help us.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, May 14, 2017

The trouble with infrastructure

The trouble with infrastructure is that it breaks down and needs to be repaired, it wears out and needs to be replaced, and it gets destroyed and needs to be rebuilt. All that requires energy, resources, labor and money.

Conceptually, here's the problem we face. The bigger we make any part of our infrastructure--roads, pipelines, electricity grids, water and sewer systems--the more expensive it becomes just to keep it in operating order. The same is true for our industrial plant, transportation system, commercial buildings and private homes. Things fall apart over time; entropy makes sure of that. To keep things from degrading to the point where they cannot function requires resources, labor and money--all of which cannot be spent on new infrastructure or productive investment, that is, all of which must go to maintain what we have rather than grow the economy.

The ancient Romans came face to face with this reality. Expansion of the empire had been paid for with booty seized from conquered populations. But once the expansion stopped, so did the booty. The Romans increasingly had to tax themselves in order to pay for large armies to protect the now very long border and for the necessary improvements in roads and other infrastructure to maintain their administrative and military presence throughout the empire.

It didn't last. Eventually, the Romans had to pull back. They had to shrink the empire.

Today, we don't think so much in terms of territory as Gross Domestic Product (GDP) when evaluating our material progress as nations. It turns out that one of the ways to keep the GDP growing is to skimp on maintenance.

In the United States, water systems have been a good place to skimp. After all, much of that infrastructure is underground or at sites remote from the cities it serves. Few will notice. Here's what the experts are saying about the silent degradation of America's water infrastructure:

Estimates of current investments in water infrastructure indicate that the backlog of deferred investments is increasing and renewal cycles are close to 200 years across the range of utility sizes. Resistance to rate increases combined with lack of appreciation of the buildup of renewal needs reinforces the need for effective business cases for pipe renewal. Based on these and other evaluations, it appears that a substantial gap exists between current expenditures on water main renewal and the investment levels needed to sustain system integrity. (emphasis added)

The American Society of Civil Engineers (ASCE) has given near failing grades to the American infrastructure. In a report the ASCE describes the problems with the drinking water infrastructure this way:

Drinking water is delivered via one million miles of pipes across the country. Many of those pipes were laid in the early to mid-20th century with a lifespan of 75 to 100 years....While water consumption is down, there are still an estimated 240,000 water main breaks per year in the United States, wasting over two trillion gallons of treated drinking water.

But drinking water is just one example. A friend alerted me to recent train derailments at New York City's Pennsylvania Station. The derailments caused enough damage to curtail train service for days. The problem is a 100-year-old infrastructure not built for the increasing demands put upon it. The governors of New York and New Jersey want Amtrak replaced as the station's operator.

It's no wonder that the perennially underfunded Amtrak is having trouble keeping up with needed maintenance. But putting someone else in charge doesn't solve the problem of skimping on maintenance unless there is extra money. So, will the governors provide it?

Then there is America's oil and gas pipeline infrastructure. Most of those pipelines are more than 50 years old. We seem willing to pay for rapid expansion of this system as is evidenced by 125,000 miles of new pipeline built since 2010 to accommodate the oil and gas drilling boom in the country.

But maintaining that infrastructure is just a drag on profits--until the consequences become so big that the clean-up and repair costs dwarf the phantom returns which deferred maintenance makes possible.

To be fair pipeline operators don't want leaks or breakdowns. But neither do they want to spend more than they have to to maintain their systems. Who decides how much that should be is a problem regulators and companies are going to be hashing out as pipeline accidents continue to make the news.

All of this brings us back to the conceptual framework I presented at the onset of this piece. Here I turn to the much maligned and much misunderstood project called Limits to Growth. Limits to Growth, of course, refers to modeling of the trajectory of worldwide economic growth in the early 1970s and updated twice since then as detailed in three separate books.

The most frequent outcome of that modeling is the collapse of industrial society starting somewhere in the middle of this century. A common misunderstanding of that model is that collapse is the result of "running out" of resources. But a close reading of Limits to Growth produces a more nuanced and troubling answer.

It is the lack of capital needed to grow which produces the limits referred to in Limits to Growth. We will end up spending so much just to maintain our continually bloating infrastructure (in the broadest meaning of that word), to extract the needed natural resources to do that, and to fight the effects of pollution (through, for example, water and sewage treatment) and now climate change (through, for example, the building and maintenance of seawalls), that we won't have anything left over for investment. When that happens, growth stops. Eventually, the economy shrinks as poorly maintained infrastructure become less productive. This is a collapse, but perhaps not a rapid one.

Infrastructure investment is lauded as the gift that keeps on giving. And, long-lived public and private infrastructure can and does increase economic productivity. But infrastructure can also become the leech that keeps on sucking when it becomes overly large and when we choose temporary economic pain relief and stimulants over the true medicine of forging a new trajectory for our infrastructure which requires deference to the limits we face.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, May 07, 2017

Taking a short break - no post this week

An exceptionally heavy consulting and writing workload has forced me to take a short break from posting. I expect to post again on Sunday, May 14.

Sunday, April 30, 2017

Oil production cuts: Fool me once...no, make that any number of times

The jawboning of oil prices by the Saudi Arabian/Russian tag team should be wearing off after more than a year of actions that don't measure up to the words. Oil prices slumped recently, dropping from around $54 per barrel to just below $50 as of Friday's close.

As if on cue, the Russian energy minister announced Friday that Russia has now met its target of reducing oil production by 300,000 barrels per day. It only took four months to do something that should have taken just weeks. (The agreement came into force on January 1.) And, of course, we'll have to see if the Russians have actually done what they say they've done.

Only a week earlier, the Saudi energy minister indicated that there is momentum growing in OPEC for extending production cuts beyond June for another six months. This announcement comes only six weeks after the same minister said that OPEC would NOT be considering extending the cuts. This is reminiscent of last year's run-up to the production agreement in which Russia and Saudi Arabia kept alternating in making often contradictory announcements to sow confusion about the possibility of a production agreement and keep markets on edge without actually having to do anything.

I continue to question the sincerity of Saudi Arabia and Russia who I believe remain committed to undermining the production of tight oil (shale oil) production in the United States. Despite the cuts agreed to for this year through June, the March numbers just in suggest substantial non-compliance among non-OPEC signers of the production agreement and a reminder that major producers Libya, Nigeria and Iran have been exempted from cuts. Do Saudi Arabia and Russia really want prices to rise enough to make tight oil profitable all across the United States (and not just sweet spots in the Permian Basin)? I'm not convinced.

The Saudis and the Russians want to appear to being "doing something" about low oil prices. But they and their fellow producers aren't really doing enough to push prices higher. And, that may suit the Saudis and the Russians just fine.

Meanwhile, U.S. tight oil producers keep touting ever lower "breakeven" prices for their relatively expensive oil. But as petroleum consultant Art Berman has been pointing out for some time, these lower breakeven prices are almost completely the product of crashing oil service costs rather than technological miracles. And, they aren't limited to tight oil producers, but rather reflect conditions across the entire industry.

The oil service companies and equipment fabricators are faced with depression conditions and have slashed prices to keep some revenue coming in and maintain market share until the next upturn. Pricing for services and oilfield goods is dynamic not static. When conditions improve, costs will rise accordingly and so will breakevens.

One thing all this talk has done is fan speculative interest in the oil futures market where open interest has soared even as prices have traced out a mostly sideways pattern. Clearly, many speculators believe the hype about sharply higher oil prices. I believe they are going to wait quite a while longer--at least until Saudi Arabia and Russia are satisfied that the investment capital flowing to tight oil drillers in the United States has been largely shut down.

At some point low investment worldwide in oil exploration and development will start to make a significant dent in world supplies. Remember: depletion never sleeps. But the world economy may be softening; in its most recent Oil Market Report, the International Energy Agency revised oil demand growth downward in response to slower worldwide economic growth. That suggests that the expected uptick in oil demand growth may not materialize for some time, keeping investment generally low.

The longer investment remains low, the bigger the oil price spike will be when it does arrive in response to shrinking production capacity, rising demand or both. The oil bulls will eventually be right. But will they hang on long enough to enjoy their vindication?

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, April 23, 2017

"Reform" won't solve our biggest problems

"You never cure structural defects; you let the system collapse."

As I contemplated this proposition taken from a recent piece by Nassim Nicholas Taleb, I realized what profound implications accepting it would have for all those engaged in attempting to address our current social, political and environmental ills.

If it is true that modern capitalism is incompatible with effective action on climate change, if it is true that top-heavy, bureaucratic nations always eventually become captive to their wealthy citizens, if it is true that our centralized, complex, tightly networked systems in finance, agriculture, shipping and manufacturing are exceedingly fragile and prone to failure--if these all represent structural defects, then they cannot be addressed by tinkering or "reform." Those in charge cannot be persuaded to "do something" which is contrary to the structural necessities built into these systems.

The choices then are: 1) Do nothing, 2) insurrection (for which you might be jailed or worse) or 3) start building a decentralized replacement. Since I'm discarding choices one and two, I'll address choice three.

First, adopting choice three doesn't mean we should abandon critiquing the current systems under which we live. Quite the contrary. Those systems are where future adopters of decentralized replacements currently do business. They are the Brand X against which new systems can and need to be compared.

Second, we have good evidence that small-scale governments can actually respond to climate change when large-scale governments can't. Citizens of seaside communities experience the rising ocean waters first hand and have direct access to their elected officials as do those who experience droughts. And those cities have actually taken significant (but still inadequate) steps toward addressing climate change. It is counterintuitive that decentralized governments could act more quickly and effectively on issues of international scope than national governments until we see them in action.

Third, modern communications have become bifurcated. There are large media establishments very much wedded to the status quo and the power elite. The heavy concentration and centralized nature of this type of media makes them uniquely incapable of understanding and communicating much about the merits or even existence of decentralized alternatives.

Then there is the thriving and ever more seamless worldwide digital communication network which allows people across the planet to share their ideas, practices and discoveries with one another without mediation. We should not in this context, however, devalue good old face-to-face communication which still works best of all.

Much of what passes for "media" online is really an attempt to exploit readers for commercial gain and therefore much more a part of the centralized media system. But even here, little-known businesses with new approaches to serving small, niche needs provide an alternative to the conglomerated consumer companies of our age.

Fourth, the worldwide tightly networked systems which dominate our lives today are too fragile to last. But that doesn't mean they will dissolve all at once or at the same rate. Parts will decline, parts will evolve and parts will disappear on different schedules. Certain aspects of existing systems might actually be of some use in the new decentralized system. A warehouse used for international trade can just as well be used for regional trade.

We can boil at the inequities and destructiveness of the current system. There are times and places that are appropriate for that. But our best chance to traverse the the path to a more decentralized world while minimizing harm and maximizing success is to begin building it.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, April 16, 2017

Split personalities: We like some science, but not all of it

We modern folk are in a bind. We embrace what the sciences and the technology that flows from them have to offer, but we refuse to believe that we live in the world described by those very sciences.

Here I'm not merely talking about climate change deniers who, of course, fit this description. They merrily dial number after number on their cellphones, but they do so without realizing that in their climate change denial they are rejecting the very same science that underpins the phone they are using: physics.

But so many others live in this dual world as well. We humans imagine ourselves set apart from the natural world. And yet, our very bodies are the subject of scientific investigations. So we turn to our minds which we imagine set us apart from the natural world. But what is the mind? Do we not place the mind in the body? Are its manifestations not speech, writing, music, dance, and graphic arts which require the body for their expression.

The science of physics tells us that we live in a thermodynamic system. The universe is a thermodynamic system and so by definition must our Earth be one. Thermodynamic systems produce entropy, lots of it. Some two-thirds of all the energy we use in the United States is wasted. That's right, wasted. That entropy shows up as climate-changing carbon dioxide in the atmosphere which is also acidifying the oceans. It shows up as barren landscapes left behind by coal and other mining. It shows up as waste heat and waste products flowing from our factories, our homes and our vehicles.

In a broader sense, the entropy that we used to see and feel in the United States in the form of so-called "smokestack" industries has now been moved to China where another yet entropic problem, air pollution, chokes the urban population on a daily basis.

We think our presence is making the world more "orderly," but, in fact, we are filling it with new and dangerous expressions of entropy.

Geology tells us that metals, mined fertilizers, and our dominate form of energy, fossil fuels, are finite. The Earth is a sphere and has no pipeline to some other planet. And yet, there are people who claim with a straight face that resources including energy resources are infinite. This is so because "resources come out of people's minds." There's that word "mind" again. Just where does it reside?

We speak of leaving the planet and setting up colonies on Mars. But biology and physics tell us that those attempting to do so will suffer dementia resulting from the cosmic radiation that will bombard their brains. Humans on Earth are protected from this type of radiation by the Earth's magnetosphere. Not so in deep space or on the red planet which lacks a magnetosphere. There might be ways to protect such astronauts, but they would require much additional weight, both for the trip and for any enclosures or ships sent to the surface of Mars.

The point is that biology and ecology tell us that humans are evolved specifically to survive and thrive within the narrow strip of the biosphere. They can for brief periods with special apparatus live outside that. But long-term survival cannot be assured, in part, because the biosphere is far too complicated for us to understand and replicate. Attempts to do so have been miserable failures. The long and the short of it is that we aren't going to colonize space except as an expensive form of suicide.

Some look at measures of human well-being and declare that all is well and getting better. But this presupposes that we understand the biosphere better than we do. To analogize, you can live well on your savings until your savings run out. Likewise, humans can keep increasing their well-being by drawing down the natural capital of the biosphere (fisheries, soil, water, metals, fossil fuels), but eventually this drawdown will start to cut into the productivity of the biosphere as it has for many fisheries, water tables and some farmland ruined by erosion and salt. The drawdown will also affect the quality and price of fossil fuels and other minerals available as we seek the harder-to-get resources.

But perhaps what's even more important than what the sciences tell us is what they cannot tell us. Those on the cutting edge of their scientific disciplines are putting the lie to the idea that we are close to understanding how our universe works. Instead, what our latest researches are revealing is how little we know and how much more we have to find out.

Those who see comfort in this say that we can proceed full ahead on economic growth and the attendant speedup in resource extraction since we do not know for sure that they will kill us or seriously degrade our lives. What these people do is simply extrapolate the recent past into the future. It is a religious belief and not one based on sound thinking. What they do not take into account is the risk of systemic discontinuities, systemic ruin, that could come from climate change, resource extraction and new, untried technologies.

The approach is akin to playing roulette when we already know the wheel is stacked against us. In such a game, the more bets we put down, the more likely we will be ruined. But it feels great as long as we are winning.

It is the fate of the compulsive gambler to keep on gambling until he or she loses everything. That is our current trajectory, and it is a trajectory that requires a split personality regarding what we know from the sciences in order to maintain a false sense of security.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, April 09, 2017

Living world: Should natural entities be treated as legal persons?

This year the New Zealand parliament voted to give legal personhood to a river and provided for the appointment of two guardians to represent it. In India a court extended legal personhood to the Ganges and Yamuna rivers and the glaciers that feed them.

It defies our normal modes of thinking that natural entities such as trees, rivers, mountains, lakes, and glaciers should be given legal standing in courts and public life. And yet we take as a matter of course the legal rights of other inanimate entities:

The world of the lawyer is peopled with inanimate right-holders: trusts, corporations, joint ventures, municipalities, Subchapter R partnerships, and nation-states, to mention just a few. Ships, still referred to by courts in the feminine gender, have long had an independent jural life, often with striking consequences.

The quotation comes from a famous law review article on the topic of rights for natural entities entitled "Should Trees Have Standing? Toward Legal Rights For Natural Objects," written in 1972 by Christopher Stone, a professor of law at the University of Southern California.

Perhaps our most important blind spot is that we forget that we humans are natural entities as well. Scientists study our bodies just as they do the bodies of other animals--except that these scientists are not allowed to kill humans to dissect them or expose them to potentially harmful substances without informed consent. (Animal rights activists would argue that such protections should be extended to all animals.)

Ultimately, what's at stake is what our relationship with other natural entities will be and whether it is in our interest to grant them legal rights. It is well to remember that full legal rights for women, African-Americans, Native Americans, the mentally and physically disabled, and many other disadvantaged groups were once unthinkable, too. And yet, today few would argue against including these previously excluded groups within the realm of legal personhood.

But, one might say, these are people and belong to a special category. Nature cannot speak for itself as we humans do. To which law review author Stone replies:

It is not inevitable, nor is it wise, that natural objects should have no rights to seek redress in their own behalf. It is no answer to say that streams and forests cannot have standing because streams and forests cannot speak. Corporations cannot speak either; nor can states, estates, infants, incompetents, municipalities or universities. Lawyers speak for them, as they customarily do for the ordinary citizen with legal problems.

Now, perhaps the most important phrase in the above quotation is "in their own behalf." This explains why we might not regard it as sufficient merely to compel people by law and by custom to take care of natural entities. When natural entities do not have independent advocacy, it is all too easy to consider them merely as the instruments of humans. We call them "resources" and that means they are for our use as we please. Nature becomes merely a great vat of primordial clay from which we humans can take whatever we want and shape it to our needs without regard to the needs of any other entities.

This is the relationship of a master to a slave, Stone points out. That master is concerned about his slave as a piece of valuable property that he does not want stolen or injured by another; but the master reserves the right to injure the slave for his own purposes (through overwork, lack of food, poor medical care and, of course, involuntary servitude.)

In the United States we already have the Endangered Species Act. Lawyers speak regularly on behalf of species in court proceedings. The purpose of the act, of course, is not to protect individual organisms, but to insure the survival of an entire species. I wonder how we would be obliged to act if humans were classified as an endangered species under the law. What might we as a species be required to change to insure our own survival (or face an an angry and powerful federal judge)?

What we face instead of a judge is the rest of the natural world. In fact, scientists James Lovelock and Lynn Margulis proposed the Gaia Theory in the early 1970s. The theory re-imagines the Earth as a single biogeochemical system that is self-regulating in the way that a single organism is said to be. The organic and inorganic worlds influence one another. Geology, biology and chemistry are bound up as one field when we look, for example, at the carbonate layers of the Earth which were formed by living creatures. Life is not an afterthought on Earth; it is a major geological force on the planet.

This is not a new animism. This is not to say that rocks have the mental faculties of humans (though the opposite is sometimes said of people we don't like). But there is a flow of information and interaction which regulates key processes on the planet to keep it habitable.

Those engaged in climate change activism understand this and fear that the dawn of the Anthropocene means that the Earth will within the next several decades become increasingly hostile to the life which now inhabits it including human life.

But, the argument for legal rights for natural entities goes beyond human survival. It imagines that natural entities have worth in and of themselves and not just as materials necessary for human survival. This move has been essential for women and racial and ethnic groups who have achieved full legal rights. They have worth in and of themselves and not as mere instruments of others.

It may be profitable for a nation to lift up its oppressed peoples and include them in the mainstream of social, economic and political life. It may be good for all of us. But the worth of these oppressed peoples does not reside in their profitability, but in their status as autonomous individuals who have self-determination.

What goes unrecognized by most is that the natural entities we think are currently excluded from our legal and political lives are actually sitting in our courtrooms and legislatures across the planet. They sit quietly, implacably in their insistence that the laws of nature will not be contravened. Our understanding of such laws can be used to benefit us--to extract resources and to protect us from natural dangers--but we cannot repeal those laws for they do not arise from legislative or judicial fiat.

Slowly, haltingly, we are coming to understand this and providing representation for the entities of nature in our various institutions--representation that renders into human speech and writing the information that is running past us everyday in the environment as if it were coursing through a series of gargantuan broadband cables connecting everything on the planet.

This is why it is so disturbing to see an American administration who believes we should reverse this trend and go back to pretending that the natural entities aren't in the room. Those entities who are ignored turn to conflict to be heard. Already that conflict has taken the form of a great worldwide fever in the planet's atmosphere. It is in evidence in fisheries that have been depleted, soil that has been eroded or made too salty to sow, and water, air and land that continue to be fouled by toxic pollution.

We can easily see that these effects are due to the acts of humans. What we must now see is that they are also due to the reactions of nature. The conflict can only be resolved through dialogue, and that dialogue can only come into existence when we recognize that we are dealing with entities that have a life of their own.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, April 02, 2017

Communications breakdown: Can we even talk about our environmental and energy problems?

Conversations that seek genuine understanding by all sides ultimately require a common frame of reference. If we aren't talking about the same things, how can we understand one another?

We usually refer to this as talking past one another. Sometimes this happens because we haven't taken the time to understand what our conversation partner is trying to say. We are distracted and focused on something else. Increasingly, our public discourse--that which we all see on the airwaves, on the internet and in print--is mere polemic in service of some political or economic interest. There is no genuine attempt to explore the issues, only to advance a particular view of them--often for pay as is the case with public relations agencies and also fake think tank academics who merely parrot the positions of their funders.

We like to regard ourselves as living in an age of enlightenment. But enlightenment only occurs when we are intellectually honest. What intellectual honesty requires is the ability to entertain ideas and accept evidence that contradict our current views and to evaluate those ideas and evidence on some basis other than a financial or political interest.

The late William Catton, the sociologist and ecologist who stands as the 20th century prophet of our predicament, laid out this problem in his last book, Bottleneck: Humanity's Impending Impasse. By bottleneck Catton means a dramatic reduction in human population over the coming century due to climate change, fossil fuel depletion, soil erosion and other problems and the attendant chaos these will bring to our current governance and economic arrangements.

I am reminded of Joseph Tainter's admonition in The Collapse of Complex Societies that societies don't collapse because of resource shortages or climate change, but because of their inability to respond effectively to such developments. The cause: an elite governing class that has become insulated from the warning signs of such a collapse.

In ancient Mayan civilization sculptors were still working on monuments to their rulers as late as 909 A.D. after a century of drought. The question is: Who in their right mind would be expending resources on such a task under such dire circumstances?

Today we build ever higher temples to finance in our major cities even as major ecological catastrophes converge on our civilization. Like the Mayan rulers, ours believe our civilization is invincible. It is this myth of invincibility that makes genuine communication about vulnerabilities almost impossible because the myth has spread to practically the entire population of the planet. Even those who are struggling to get by, for whom the system has worked very poorly, even they want more than anything to get a larger share of wealth from our supposedly invincible engines of production. I do not blame them.

When the frame of reference on one side (and by far the most numerous and well-funded side) is the invincibility of modern technical society and when on the other it is that history teaches us that all civilizations destroy themselves when they reject the physical realities they face, then there can be no sensible dialogue. The frames of reference must overlap and that takes time and experience.

I am reminded that the horse became a sacred animal to the American Plains Indians only after Spanish explorers brought them to the New World and the Plains Indians realized their utility for hunting and warfare. My point is that talking to a Plains Indian prior to that time about horses would have drawn blank stares. Clearly horses did exist, but they were simply outside the experience of these native peoples.

We will only have a genuine public discussion about the vulnerabilities of our own civilization, one that will lead to commensurate action, when those vulnerabilities become glaringly obvious to a significant section of the public--when the horses, so to speak, show up in large enough numbers on the plain. In the meantime, we can only cultivate the ground for that day when we will be faced with talking not about solutions, but about damage control.

We should not, however, underestimate the value of damage control. A more benign phrase might be mitigation and management. However we style it, it is the one thing that will enable humans to get to the other side of the civilizational bottleneck which William Catton foresaw and which we will almost certainly face if we humans do not change our current trajectory.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, March 26, 2017

Taking another short break - no post this week

The aftermath of my father's death has been terribly busy and once again made it impossible to focus on writing a piece for this week. Most of what needed to be taken care of is now done, and so I fully expect to post again on Sunday, April 2.

Sunday, March 19, 2017

Taking a mournful break - no post this week

My father's death and upcoming funeral have made it impossible to focus on writing in the last week. He was an exceptional human being, and he will be sorely missed. I expect to post again on Sunday, March 26.

Sunday, March 12, 2017

Saudi Arabia and the war on shale oil that never ended

Last week when Saudi Arabia let it leak that the kingdom has no intention of leading OPEC toward another cut in production to accommodate the growing volumes of oil from American shale deposits, it was another sign that the Saudi war on shale actually never ended.

To properly understand this announcement, we need to return to last fall. Most people believed then that the cuts agreed to by OPEC under Saudi leadership marked the end of Saudi Arabia's war on shale oil in America. At the time I cautioned against such a conclusion, and said I was doubtful that there would actually be any decline in world oil production because the Saudis didn't really want a decline.

And, guess what? The OPEC cuts have yet to be fully implemented and have been offset by rising production elsewhere. And, the Saudis are now complaining that the Russians who, though not part of OPEC, agreed to cuts to support prices, are not keeping their end of the bargain. The Saudis are practicing a marvelous bit of misdirection to keep any blame away from themselves. With the Saudis, it's always necessary to look at the entire game board in order to understand their moves.

So, why are the Saudis content to allow oil prices to remain this low and possibly drift lower? I believe it's because their war on shale never ended; they mean to destroy the long-term financial viability of oil from shale deposits--and that job won't be finished until investors say, "Never again!"

Apparently, investors in American shale deposits have very short memories or they have not had enough punishment. They continue pour money into the Permian Basin located in Texas and New Mexico. The Permian is likely to be the only U.S. shale oil deposit that will see growth in oil production this year as low prices continue to take their toll on other shale plays such as the Bakken in North Dakota.

But there are only so many profitable sites in the Permian, and with the continuing rush of capital into the area, the good ones will start to run short at some point. We'll only know that's happened when the second great wave of wealth destruction in the shale fields begins as I suspect it will in the not-to-distant future.

And don't be surprised if the Saudis are content to let oil prices droop into the $20 range again just to get their point across.

As the next round of capital destruction begins, be prepared for stories about how dramatic efficiency gains in drilling operations are making it possible to bank profits in the Permian at an oil price of $40 per barrel. Then watch the same story repeat for $30 per barrel.

The last time we saw this movie there were dubious claims that oil in the higher-cost Bakken could be extracted profitably even with prices at $30 per barrel. As prices have stabilized around $50 per barrel, Bakken production has continued to decline. In part this has been because realized prices have been much lower due to lack of pipeline capacity. This has meant most Bakken oil must be shipped by rail tank car which is expensive.

Maybe this time investors will finally feel the pain from their shale investments so profoundly that even a subsequent substantial rise in the price of oil won't lure many of them back. If so, the Saudis will finally achieve their goal, and the war on shale will end.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, March 05, 2017

Our search for economic growth invites fraud

In his book The End of Normal economist James Galbraith makes a compelling case that our search for a return to the fast rate of economic growth experienced in the United States from 1945 to 1970 has led to fraud--fraud enabled by government actions that sought to "free the economy" from the shackles of "overregulation" and update the regulatory framework to meet "new challenges" such as globalization.

It turns out these sometimes well-intentioned moves signaled to the unscrupulous that Uncle Sam would be looking the other way when they duped customers, defrauded suppliers and swindled investors. In his book, Galbraith tells us how this happened.

First, we must understand that economic growth during the aforementioned period was exceptional and not the norm. Hence, the title of Galbraith's book and his main focus. During this period the economics profession embraced the idea that such growth was normal, and policymakers, politicians and most American citizens came to believe that it was.

The reasons for this exceptional growth were more the result of good luck than anything else:

  1. The United States had come through World War II almost completely unscathed with a vast industrial infrastructure built for the war, but now available for more pacific pursuits.
  2. The country was about to embark on a baby boom that would goose consumer demand for decades and power the economy forward.
  3. The United States was a resource-rich country with huge reserves of oil, natural gas, coal and uranium; large native deposits of key metals including copper, iron, and zinc; and vast fertile farmlands that turned out food and fiber enough for both America and the world.
  4. The country had a reputation for stable legal and governance arrangements which encouraged investment.
  5. The United States had unrivaled security, protected as it was by two oceans and a nuclear stalemate with the Soviet Union.
  6. The U.S. dollar became the linchpin of the world monetary system under what is known as the Bretton Woods agreement; now, everyone needed dollars to buy what America was making to revive their war-torn economies.

Everything went swimmingly--that is, for the economy--until the 1970s when oil shocks slowed economic activity and led to a puzzling combination of high inflation and high unemployment in the United States. These shocks had, in fact, become inevitable as America's own production of oil topped out and began to decline starting in 1970. America had a lot of oil, but not enough to continue to raise production continuously forever.

With the disappointing performance of the American economy in the 1970s, the Reagan administration promised better economic performance. Part of that better performance was to be delivered through deregulation which, as it turns out, was an invitation to fraud in the savings and loan industry.

When sound, profitable opportunities for ethical players abound, there is no need for chicanery. In fact, the ethical players cooperate to root out the unscrupulous ones in order to prevent widespread fraud from undermining confidence in the actions of the ethical players.

But, when there are few opportunities for the ethical participants--because the economy isn't growing very fast or growing at all--the unscrupulous find their opening. And, they open vast new fronts for profit and economic activity. Eventually, they become the dominant players, driving out the ethical participants who can't produce such extravagant returns while sticking to their principles.

Policymakers opened the way for this pattern by believing (wrongly) that the U.S. economy should be able to sustain the previously high growth rates experienced between 1945 to 1970 without the special circumstances that made that growth possible. High growth became "normalized" in the minds of policymakers. Those hunting for the reason behind slow growth often determined that government regulations were part of the problem. The troublesome regulations were then eliminated in order to unleash a wave of new investment that was supposed to return economic growth to the desired path. But the growth thus unleashed was illusory and often devastatingly fraudulent.

This is what happened due to the deregulation of the savings and loan industry in the 1980s. It is what happened in the home mortgage market in the 2000s. And, there was more than a hint of this is in the dotcom boom of the late 1990s which funneled money to many tech startups that had questionable business plans. The lack of solid business plans in the face of a surfeit of eager tech investors gave rise to crafty promoters offering an ample supply of not-so-solid business plans.

Here is how Galbraith summarizes the problem:

When resources to fuel economic growth are abundant, fraudulent activities are not generally tolerated. There are opportunities for "honest profit" and those pursuing such profits work to control the system, which means that they favor enforcement of laws against cheats and chiselers. However, when resources become scarce or expensive, opportunities for large profit for honest business are few. If the expected rate of profit--the rate that financial markets insist on as a condition for providing loans--nevertheless remains high, then fraud becomes a main channel to profitability, and fraudulent activities become part of standard practice. Fraud is a response, in short, to the failure of lenders to adjust to a decline in real possibilities.

In an era of slow growth that calls out for such an adjustment, we can only expect a continuation of fraudulent practices until the expectation for outsized profits comes down to a level consistent with actual conditions.

It is, of course, not in the interests of America's leaders (or world leaders, for that matter) to manage public expectations about growth downward. A political or corporate message based on slow or no growth is the path to electoral or professional oblivion.

It turns out that we have harvested the low-hanging fruit from the the tree of growth--electricity, the internal combustion engine, the spread of public health, the rise of major worldwide communications networks--and now we are left with marginal improvements according to Robert Gordon, who cataloged the special nature of the period from 1870 to 1970 in his book The Rise and Fall of American Growth. The cellphone, it turns out, is still a phone. (Yes, I know it is a camera now, too. But the camera is a fundamental invention that has not been superseded. It has only been improved and refined.)

It's not that we won't see profound inventions that change our lives in the future. It's just that we won't be introducing electricity to every household again. And, we won't be building a worldwide communications network for the first time, but rather refining what we have.

If someone tells you differently, you should be especially careful about buying any of the investments he or she is offering.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, February 26, 2017

The Dutch love affair with natural gas: A cautionary tale for the United States?

The story sounds familiar. For decades oil and natural gas drilling have been proceeding and creating prosperity for those involved. At some point significant earthquakes occur in areas where they were formerly very rare or nonexistent. Those quakes are linked to oil and gas drilling and production. The industry denies the link.

The quakes continue, get worse and finally get strong enough to do damage.

To those living in the United States, this reads like stories coming out of the fracking boom in states that include Oklahoma, Texas, Ohio, Kansas and Arkansas. To those living in Europe, it's the story coming out of The Netherlands, home to the Groningen Gas Field, one of the largest natural gas finds ever.

The Groningen field has been both a blessing and a curse for the Dutch. Since its discovery in 1959 the Dutch have reaped huge financial benefits from having their own secure and abundant source of natural gas. Beyond that, the country has until recently been a major exporter of natural gas to its European neighbors.

But the field has also proven to be a drag on the rest of the economy, inflicting what has been dubbed the "Dutch disease." In short, the Dutch disease refers to negative effects that a huge natural resource find can visit upon a society. These include a decline in other sectors of the economy and a strong currency which makes exports less affordable to foreign buyers. The moniker "Dutch disease" results from the fact that The Netherlands was the first place such effects were studied in detail.

What has caught the Dutch by surprise--and may someday soon catch America by surprise--is the speed with which its decades-long reliance on a large initial endowment of natural gas has turned into a liability.

First, there were the earthquakes linked to drilling and production operations in Groningen which have forced the government (part owner of the field) to scale back production to reduce the frequency and severity of those quakes. This production decline of more than 50 percent has meant a serious loss of revenue for the government which used those revenues for decades to supplement the government's budget. Government gas revenues dropped by more than half from €13 billion to around €5 billion from 2013 to 2014.

Second, as a result of the production cutbacks The Netherlands is now a net importer of natural gas, instantly losing its self-sufficiency status. Europe's gas now will likely have to come increasingly from Russia whose relations with Europe are replete with complications.

Third, the Dutch have failed to prepare for this day. Instead, they blithely made themselves deeply dependent on natural gas for their energy needs. Some 98 percent of Dutch homes use natural gas for heating and cooking. Renewable energy makes up a paltry 5.5 percent of the country's energy mix as of 2014.

Fourth, the Dutch are still obliged to honor long-term contracts which force them to deliver substantial quantities of natural gas to customers outside the country. The country is increasingly facing the strange predicament of having to import more and more natural gas to offset what it must ship abroad. This is in a country whose dominant field, Groningen, is now 80 percent depleted.

And, here is where the Dutch situation ought to be a warning to the United States. America is entering into more and more long-term contracts to export liquefied natural gas (LNG) to customers in Europe and Asia even as the country remains a net importer. There is good reason to believe that most estimates of future natural gas production in the United States are far too optimistic. Let me quote for the second time in three weeks from an independent analysis of U.S. shale gas production trends (the only class of natural gas experiencing production growth in recent years):

Shale gas production overall has declined by 4.7% since peaking in February 2016 (down 2.1 billion cubic feet per day...). All shale plays have peaked and older plays, like the Barnett and Haynesville, are down 38% and 52%, respectively.

Second, the U.S. electric utility industry has added significant natural gas-fired generating capacity in response to two trends: government regulation of greenhouse gas emissions and the low price and rising availability of natural gas. Despite the election of Donald Trump, who favors a return to coal, the low price of natural gas will probably allow the conversion to and expansion of natural gas-fired capacity to continue...until it can't. At which time we may be stuck with much higher electricity costs.

The promised natural gas deliveries will likely not be available at low prices. Production declines will result in a battle over who gets the remaining supplies, thereby hiking prices for U.S. consumers. The U.S. utility industry may rue the day it chose to make itself so heavily dependent on natural gas.

Finally, states that became addicted to money from the natural gas boom are finding the bust difficult to navigate. In comparison, the Dutch had one large boom that lasted for decades. The kind of exploration and development that is taking place in U.S. shale gas fields requires constant drilling just to maintain production at current levels. We can expect boom and bust in short spurts from here forward. That signals that the cost of exploiting the remaining shale gas resource (again, until now the only growth area in U.S. natural gas production in recent years) will almost surely stairstep higher as lower-quality deposits are tapped at greater and greater expense.

The Dutch have had a very long love affair with natural gas. But, as it turns out, a seemingly comfortable, stable relationship with natural gas can unravel just as quickly as a real love affair, leaving one dazed and asking how it all happened so fast.

Americans may not be as dependent on natural gas as the Dutch. But they have rushed into their own torrid love affair with natural gas and lost sight of the fact that affairs which start out torrid are the same ones that tend to flame out quickly, surprising everyone with their sudden demise.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, February 19, 2017

Taking a short break - no post this week

I'm taking a short break and expect to post again on Sunday, February 26.

Sunday, February 12, 2017

Does the Australian LNG export experience foreshadow soaring U.S. natural gas prices?

Two times last winter Australians living in the country's eastern region paid more than twice as much for natural gas as did Japanese customers taking delivery of liquefied natural gas (LNG) from the same region. (Australia has three separate natural gas pipeline networks which create three domestic natural gas markets, Eastern, Northern and Western.)

The price spikes had eastern natural gas users, particularly business users, hopping mad about what they perceive as foolish energy policy. That policy, they say, gives away Australian energy resources at bargain prices to foreign countries while making domestic industries that are reliant on those resources less competitive because of high energy costs. In addition, the new volatility in gas prices makes planning difficult and expansion financially risky.

The dust-up in Australia has some people thinking that the same thing could happen in the United States, something I pointed out in 2013. In the United States the Federal Energy Regulatory Commission has approved natural gas export terminals with a capacity of 17 billion cubic feet (bcf) per day. That represents 19 percent of current U.S. natural gas production. If all terminals for which applications are pending or expected are included, the number goes up to 42 bcf per day or about 47 percent of current production. Only one U.S. export facility is currently in operation in the lower 48 states. Another facility in Alaska has been exporting LNG to Asia since 1969.

It's worth noting that U.S. marketed natural gas production is down a little over 1 percent for the 12-month period ending November 2016. During the same 12-month period net imports were about 654 bcf or about 2.7 percent of total consumption. That's right. The United States remains a net importer of natural gas even as it contemplates a major expansion of LNG export capacity.

Back in Australia electricity blackouts in the state of South Australia are being blamed partly on the mothballing of a major new natural-gas-fired electric generating plant. The operator had contracted for large deliveries of natural gas at low prices to fuel the plant. But with the price of LNG exports from Australia soaring, it became so profitable to resell the gas for export that the plant was never opened. (That was before the domestic price spike. But by then the plant's gas was already committed.)

The rapid expansion of natural-gas-fired electricity generating plants in the United States leaves the country vulnerable to similar dynamics that also include higher electricity rates. Most utilities get to pass fuel price increases on to their customers. And, LNG exporters cannot withhold deliveries and sell their contracted gas back into the domestic market if prices spike. They are obliged by long-term contracts with their customers to deliver. In addition, LNG customers are typically bound by take-or-pay contracts which oblige them to take LNG deliveries or pay for them anyway. Which do you think they'll choose to do?

The U.S. natural gas industry argues that natural gas production is bound to rise and keep on rising for a long time. The U.S. Energy Information Administration (EIA) is forecasting a continuous increase in annual U.S. production through 2050 when production is supposed to reach 40 trillion cubic feet (tcf), up from just 26.5 tcf in 2016. The EIA is basing its forecast on dramatic gains in so-called shale gas production since conventional gas production continues to decline.

But the reality is already much different. As geoscientist David Hughes tells us in Shale Gas Reality Check published in December 2016:

Shale gas production overall has declined by 4.7% since peaking in February 2016 (down 2.1 billion cubic feet per day...). All shale plays have peaked and older plays, like the Barnett and Haynesville, are down 38% and 52%, respectively.

Higher prices might turn the trend around. But higher prices will also make LNG exports less attractive to world markets. A deeper reading of Shale Gas Reality Check--which provides detailed analysis of all major shale gas plays based on actual production trends, not company press releases--suggests a declining U.S. natural gas industry rather than a growing one in the years ahead.

The industry promise of large and growing supplies at low prices was a fiction from the beginning designed to get regulators to approve export facilities that would bring U.S. natural gas prices closer to world levels--and thus make the natural gas industry more profitable.

There is actually a principled argument for the industry position. But it would be popular neither with voters nor with the legislators who represent them, and the industry understood this. Here is the argument: The natural gas industry should be allowed to sell its products to the highest bidder anywhere in the world just like every other industry in America. If we are now truly in a global economy, then natural gas should become a global commodity and Americans should pay the global price.

Some governments, however, perceive that the central role of energy in the economy warrants special rules that retain domestic energy sources for domestic uses. After all, nothing gets done without energy. Along these lines the Australian government is currently getting an earful from irate natural gas business and household customers.

In theory environmentalists should be content to see fossil fuel prices including natural gas prices drift higher in the United States. That makes renewable energy more attractive to investors. But environmentalists fear that providing an outlet for America's shale gas via LNG to world markets will only make the environmental nightmare associated with fracking in shale gas fields that much worse. The industry would then be able to go after deposits that only higher world prices make viable.

In all likelihood many of the proposed LNG export projects in the United States will never be built. Glutted world LNG markets are giving investors pause. As it turns out, the U.S. natural gas industry wasn't the only one that saw opportunity in gaining access to the LNG export market.

Whether the United States will see more frequent natural gas price spikes or an overall long-term increase in domestic natural gas prices will depend partly on how investors and regulators perceive the availability of future U.S. natural gas supplies and the conditions of the LNG export market. On balance the evidence suggests that they remain too optimistic about both.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.