Aug 20 2010

Friday Notebook: The New Simon-Ehrlich Teaching Story

August 20, 2010

Paul Kedrosky has cleverly turned the famous 1980 Simon-Ehrlich wager on future commodity prices into a new teaching story, recasting the old lessons from that economist’s tete a tete into a false moral. In his interview here, with Andrew Keen, Paul explains that not only was the original bet limited to a not-very-useful 10 year timeframe, but worse, a generation of economists interpreted the wager’s outcome as law. Both points are worth making. As Kedrosky correctly points out, once you start moving the 10 year bracket forward from 1980 then Ehrlich, who bet on scarcity and lost, starts to win. Indeed, the winner of the wager was the beneficiary of timing, not insight. But leave it to economists to convert ephemeral conditions into permanent ones. While it’s true that both the price signal and technology can bring forth more supply of resources, often at lower costs, this is only true up to a limit. Once those limits are reached, as we have seen in global Copper and also Oil for example, then better technology might be able to create more supply on a nominal basis, but not at a lower price, and not in real terms. Anyone who has studied the chart of declining ore grades of Copper, or accepted the massive cost escalation in simply keeping global oil supply flat, will understand.

Paul Kedrosky calls the Simon-Ehrlich wager The Bet That Ruined the World. As much as I like that phrasing, I am instead more excited with the possibility that Kedrosky’s recasting of Simon-Ehrlich will now supplant the antiquated, false teaching story originally derived from the bet. As the world now faces up to the fact that no cheaper substitute exists for the uber-dense 5.8 million BTU in a barrel of oil, a recasted Simon-Ehrlich is necessary to usher us more quickly to a confrontation with energy facts, and energy limits. Indeed, for Transitionists who dream of moving quadrillions of BTU demand, currently supplied by oil in global transport, over to a new electrified grid it behooves us to think harder about resources such as Copper. Like Kedrosky, and surely some of my readers, I have marveled over the possibilities of material upgrading and other technological wonders of resource substitution–the kinds of methods that often appear in presentations from places like MIT’s Solar Group. That said, we need to confront the fact that in conjunction with new lows in global copper ore grades, the price of copper–just like oil–has entered a new regime. Expecting a miracle of substitution in copper, or a price reversal downward away from the current regime, is certainly not realistic if we are on the threshold of hitting hard global copper resources to electrify world transport. Simon-Ehrlich recasted is another important step, therefore, towards the realism we need to actually solve the challenge of energy-transition.

-Gregor

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Author: Gregor Macdonald   Posted in: Economics  Future  Psychology  fossil fuels  transition   Tagged:              
Aug 16 2010

The Federal Reserve Enters Decline

August 16, 2010

The Federal Reserve is an artifact of the Abundance Economics that have governed Western economies over the past 250 years. For nearly 250 years exactly we have climbed the ladder of ever increasing energy density, and ever increasing energy supply. That era has now come to an end. You can see that view, the end of the abundance era, expressed by a number of different writers, whether it’s today’s longish piece from Matterhorn Management, last year’s piece by Richard Heinberg on the End of Growth, or some of the shorter (free) posts I write here at Gregor.us. To keep things simple, oil is no longer available to fund world growth. Oil is certainly available to fund existing systems as they are currently set up, but not new growth. You can only fund new growth with an energy supply that is growing. That’s why the developing world has turned to coal, not oil, to fund its growth. Based on the most recent data, let’s update the chart of global crude oil production:

The credibility of the United States Federal Reserve is closely aligned with its ability to induce economic activity, by the provision of money and credit. But you can see the problem: if there is not an expanding supply of energy, credit is less useful as credit cannot be paid back very easily in a future of either flat, or declining growth. Now that the return on the Fed’s credit provision has gone into decline, then its incumbent on the Federal Reserve to rethink its approach. But the Fed, governed by post-war economists, is apparently unable to learn from new information.

There is another limit to the Fed’s provision of money and credit: and that is the quantity of debt already being carried in the economy.  As debt levels rose in the US economy over past decades, the Federal Reserve simply kept repeating itself in a kind of argumentum ad infinitum, providing ever more money and credit as though completely unaware of the levels to which debt was rising. Now, presently, the Fed has declared a war on debt-deflation. But, the Fed indicates no understanding of the core thrust of debt-deflation. I’ll help out: there can be no kick-starting of economic activity, until debt levels are reduced significantly. What the Fed is looking for is not the effects of more credit provision, but instead, debt jubilee.

The Federal Reserve is now in permanent, irreversible decline because it has no tools to fight both the limits placed on the economy by oil, and, current debt levels. Were the Fed to conduct debt jubilee on a scale sufficient to restart demand, that would vaporize the currency. But even if it were possible to manage a workable debt jubilee, then the economy would come more squarely back into confrontation with the energy limit. And there too the Fed would discover that its role as provider of money and credit was reduced, as credit itself relies on future growth.

The Federal Reserve came into existence during the fattest part of the abundance curve, made possible by the extraction of energy-dense fossil fuels. The early part of the last century was the moment when the world started to transition from Coal to Oil, with the fullness of oil’s resource spread out before the industrial economy like a broad forest. As an artifact, not a creator, of this abundance the Fed was merely a mediator of wealth and performed (at best) a smoothing operation as the economy traded credits on future labor and future growth. Like most institutions in decline, the Fed can either reform itself now and embark on a substantially new mission, or, it can decay into irrelevance as it attracts lower quality intellects, and is dismembered of its power. Indeed, if you look around the edges, that process of decay in the Federal Reserve has already begun.

-Gregor

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Author: Gregor Macdonald   Posted in: Oil  Policy  fossil fuels   Tagged:                
Aug 14 2010

The Ascent of Middle East Food and Energy Demand

August 14, 2010

At the EIA’s International Energy Outlook (IEO) presentation this May the issue of future oil exports from OPEC nations came up, and in an interesting way. Readers may be familiar with the phenomenon of declining net exports, from major oil producing nations, as a result of internal demand from growing, domestic populations. The phenomenon was modelled last decade by Jeffrey Brown and Samuel Foucher. Their Export-Land Model showed that the rate of decline from oil exporters can become quite accelerated. While that may seem obvious, it was a point worth making last decade when it was widely presumed that gross production from large oil producing nations was largely available for export. The tipping, of both the UK and Indonesia, from net oil exporters to net oil importers should have put an end to such a presumption. More importantly, the rise of domestic oil consumption in Saudi Arabia was also a warning. Saudi oil exports have declined now for five years.

Given that Saudi Arabia’s exports have already been in decline for some time, it was surprising to hear EIA Deputy Administrator Howard Gruenspecht not only fail to acknowledge that fact, but forecast a rather sanguine outlook on future OPEC export supply in the IEO May press conference. It is particularly noteworthy that he gave such an empty and meaningless answer to the questioner, James Schlesinger former Energy Secretary under Carter, who made a point of probing in this exact area. | see: dialogue starting after the 37:00 minute mark of Video: International Energy Outlook 2010.

Secretary Schlesinger: …we see the growth of demand within the OPEC countries, domestic demand, and some of the projections show internal demand in Saudi Arabia rising to 8-9 million barrels a day as opposed to your top projection of 15 million barrels per day…similarly with other OPEC nations …the consequences being less oil available for export to the international market.  Have you factored that into your projections, and what might the implications be?

Howard Gruenspecht: …we think that in the OPEC region, there will be an interest in substituting natural gas for the growth in domestic oil demand in the mid-east region, which does tend to free up oil for the world market.

And there you have it. An answer that only a post-war economist could give: soaring domestic demand for oil in OPEC nations, already cutting into exports, will dial back in the years ahead and convert to natural gas–in order to free up oil for exports…to us here in the West! I had to replay the exchange several times, to get the full measure of Greunspecht’s ridiculous answer. Readers are encouraged to listen to the exchange to get a full measure of the cavalier manner in which Gruensphect, who is clearly out of his depth, answered Schlesinger’s other questions.

While the EIA’s future projections remain a largely theatrical exercise, and are demonstrably unserious, there is another critical resource balance coming into play between Middle East states and the rest of the world in the area of food, and agricultural land. As you might imagine, arable land in the Middle East is not exactly found in an optimal ratio to those growing populations. And this is why Kuwait, Qatar, Bahrain, and Saudi investors have gone into Africa. Below is a very good graphic published last year by the Economist Magzine, which accompanied their article: Outsourcing’s Third Wave.

According to the Arab Organization for Agricultural Development (AOAD), the Arab nations are suffering from a persistent shortage in all types of farm products and the gap has steadily worsened over the past two decades. Food imports into the Middle East have soared to new highs, and are now running above $25 billion a year on a net basis. There is a particular need, and shortage, of cereals and grains. Is it any wonder that central and eastern Africa has become a target for Middle East nations, looking to lease easily improved farmland?

While the EIA’s IEO 2010 correctly notes the trend to further world reliance on OPEC oil as Non-OPEC oil production growth stalls out, clearly the demographic trends as expressed by food demand are another way to see how wrong the EIA’s forecast has become, about future oil available for export. Also according to the AOAD:  The Arab population was estimated at nearly 351 million at the end of 2009. Since 1990, it has grown by nearly 2.34 per cent annually compared with global growth of about 1.16 per cent.

Accordingly, not only will Middle East nations need more of their own fossil fuels to fund domestic construction, but the improvement of leased, foreign farmland to match their above trend population growth will also require fossil fuels. To the declining oil export model of Brown and Foucher, it appears we will need a new model of Increasing Agricultural Imports to the Middle East. As for the EIA’s call that these nations will somehow level off their demand for oil, and switch to natural gas? That makes no sense at all. On a number of levels.  The Middle East is not going to voluntarily transition away from oil, even marginally. And, the natural gas that our flaky EIA in Washington imagines will be used to “substitute for oil” will instead be used for new power generation and to make fertilizer.

-Gregor

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Author: Gregor Macdonald   Posted in: EIA  Economics  OPEC  Oil   Tagged:                
Aug 05 2010

Eating Gasoline in America

August 5, 2010

Deep in the consensus-reality shared by post-war economists is the belief that the US economy transformed itself over the past thirty years, and now operates with much less sensitivity to energy costs. Indeed, in the cheap oil era and as the US developed its FIRE economy (finance, insurance, real estate), the energy inputs needed to create GDP certainly declined. But this also served to lull economists into yet another false rulemaking as they converted temporary conditions into permanent ones. For, beginning in the year 2000, the US economy–which had admittedly made great advances in power sector efficiency–became quite sensitive again to energy as the price of oil discovered America’s Achilles heel: our leverage to gasoline.

The research now establishing economic sensitivity to high oil prices, especially for commuters from America’s suburbs, is myriad. Indeed, depending on how high gasoline prices go, housing affordability itself is now more likely to fall with distance. This was only exacerbated in the past ten years as home buyers, looking to escape housing inflation, migrated further and further from city cores, to the peripheries. More broadly, we now understand that poverty is now a phenomenon of the suburbs, according to a study released this year by The Brookings Institute. And given that trend, I have taken another look at one of my favored indicators: food stamp usage. Below is a chart of food stamp users (the SNAP program) in one of America’s quintessential post-war, car commuting regions: San Bernardino County.

The chart begins in 2004. In late Spring of that year, oil prices would lift above 40 dollars a barrel for the first time and they would rise above 55 dollars later that year, before dropping back by December. Food stamp usage had been roughly flat in 2003 and also took off in 2004. It’s possible that some will conclude that the rates of change in oil prices had the greatest correlation with pressured household budgets. Along with 2004, 2007 also saw a large percentage change in oil prices. Readers can draw their own conclusions of course. One of mine is that the continued advance in food stamp usage in the post 2008 crisis period, to its current 276 thousand users, would combine the can’t-get-no-relief pressure from gasoline prices along with the broader effects of the burst credit bubble and collapsed economy.

San Bernardino County began the post-war period with roughly 200,000 residents in 1945. It would hit a 2.1 million residents 65 years later, in 2010. A ten-bagger. We thus are handed a grim comparison: the county now has more persons on food stamps than its total population when it began its classical post-war buildout: the vast housing divisions and towns, all served by large freeways running west to Los Angeles.

Food stamp data is an excellent portal through which to gauge economic sensitivity to gasoline prices, because to be in need of food stamps and to qualify for them helps us locate a threshold of economic pain, in the American household budget. Why? Because the average food stamp benefit per month is roughly 340.00 dollars per household. If your family needs an extra 85 dollars a week to put enough food on the table, you can be confident that a change in petrol prices from two dollars to three dollars, or especially to four or five dollars a gallon, matters. And not a little. Especially if one is commuting 60-90 miles per day.

The Department of Agriculture released this week the latest figures on national food stamp usage. The SNAP program nationally now serves 40.8 million people as of May. A new all time high. Without introducing more recent issues into the discussion, such as the second wave of food inflation now underway from the grains complex, it seems we can now assert a few things about the data. First, it’s fairly shocking that an agricultural supergiant such as the US should now have to provide a second, printed currency to 14% of its population, to buy food. Second, this is clearly informing to the ongoing debate over inflation and deflation, as the totality of US wages, energy costs, and living expenses has resulted in a lurch downward in purchasing power. The notion that food is “cheap” is now proven to be wrong. Very wrong, at least, for Americans. And finally, as the food stamp subsidy is distributed each month to 40 million Americans, there is little doubt that this merely offsets other basic running costs for utilities and petrol. Every household that takes them is surely struggling also with their electric, natural gas, and gasoline bills. In other words, food stamps are really Food and Energy stamps.

-Gregor

Food Stamp/SNAP Program Data for San Bernardino County through April 2010: State of California Department of Social Services.

Photo: Freeway Interchange, Los Angeles, 1967, by Ansel Adams.

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Author: Gregor Macdonald   Posted in: Americas  California  Oil  transport   Tagged:              
Jul 26 2010

Saudia Arabia and Russia

July 26, 2010

In a recent interview on the Keiser Report I found myself casually mentioning that Russia had now surpassed Saudi Arabia to become the number one oil producer in the world. This is not an event that happened last month, either. The leap forward emerged as far back as 18 months ago, in October of 2008. It seems in Russia, big things often unfold in October.

As subscribers to Gregor.us Monthly know, I like to break up the world of global oil production into four parts. There is OPEC, anchored by Saudi Arabia. And then there’s Non-OPEC, anchored by its top producer, Russia. With the most recent EIA data out for April crude oil production, I made up charts for Saudi Arabia, and Russia, and thought it might be instructive to pose a few questions. First, let’s take a look at Russia:

As I have discussed previously, without Russia the world of Non-OPEC supply would have fallen down into a hole shortly after 2003. Indeed, without Russia Non-OPEC production (Non-OPEC ex-Russia) would have fallen every year from 2004 through the present day. What’s been a surprise is that Russia has been able to sustain its current ~9.5 mbpd for over four years now. A number of analysts are reasonably confident that Russian oil production has now entered a plateau. Now let’s look at Saudi Arabia:

As we look at the chart of Saudi Arabia crude oil production, I like to consider the following propositions:

1. This is a chart of the central bank of oil, with lots of spare capacity, that works to dampen oil price increases.

2. This is a chart of the central bank of oil, with lots of spare capacity, that works to perfect oil price increases.

3. This is a chart of what had once been the central bank of oil, as it transitions to a secondary role.

4. This is a chart of an oil producer doing its best, within technical and geological limits, to maximize its profit.

Regardless of which we choose among these possibilities (or others), it’s clear that Saudi Arabia has been a very different kind of oil producer than Russia, in the past ten years. I would encourage readers to think about, in particular, the period starting in late 2005 through late 2007 when against a backdrop of steadily increasing prices Saudi Arabia production fell by nearly a million barrels per day. Per the interview mentioned above, with the Keiser Report, we might also want to consider the decision to develop fields such as Khurais. | see: Khurais Update: Got Seawater?

Based on the totality of information over the past ten years, I think one can get much closer to reality in Saudi Arabia’s production profile than many presume, given the country’s secrecy. I would also remark that the untested assumption that Saudi Arabia has ~3-to-4 mbpd spare production capacity is one of those slippery and large concepts that can easily lose its shape, in the wrong hands. What do you think?

-Gregor

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Author: Gregor Macdonald   Posted in: OPEC  Russia  non-OPEC   Tagged:          
Jul 23 2010

Friday Notebook: Artful Data

July 23, 2010

Scale is a difficult dimension for society to grasp whether we are talking about national debt, geologic time, or global energy systems. Here at www.gregor.us I primarily use writing to disclose the fullness of scale, and am constantly aware of what a challenging task that can be. Over the years however I have conducted a kind of ongoing tour of visual displays of scale, to see how others are handling the problem. There is of course the classic short film by Charles and Ray Eames, Powers of Ten. Also, whenever someone clever comes along and creates a unit such as a Cubic Mile of Oil, I take note.

What’s clear is that the problem of using a two-dimensional form to illustrate scale, depth, time, and development remains a hurdle.  This year I’ve found myself dipping into books by Edward Tufte to broaden my perspective in my own chart-making, and this past week I found a new book titled Diagram Graphics, which I’ve been studying. Let’s take a look at one example, below: a 1990 branching graphic of the various software programs that ran on Apple Computers, from MacLife Magazine:

When I see a diagram such as this, it opens up some compelling choices to those of us who chart energy use and supply. For example, China was very much in the news this week as it surpassed the US in energy consumption. But as I pointed out, the energy profiles of China and the US could not be more different with the US a big user of Oil, and China a colossal user of Coal. Accordingly, the more organic looking approach as seen here could be used to not only display China’s energy use profile, but each “branch” could be sized for thickness to show growth rates of oil, natural gas, hydro, and coal. By doing so, one could begin to approach better in a flat, two-dimensional form the richer aspects of a country’s development as it travels down the energy adoption path.

–Gregor

Photo: BNN of Japan designed graphic for MacLife Magazine, 1990 from Diagram Graphics by Abe and Nishioka.

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Author: Gregor Macdonald   Posted in: Art  China  Scale   Tagged:          
Jul 21 2010

China’s Just a Place

July 21, 2010

The mainstream press is abuzz this week with the “news” that the United States, after 100+ years, has now been surpassed as the world’s No. 1 energy consumer. IEA Paris, following the BP Statistical Review in June, has decided to call this race in favor of China. However, this is really not a story of today. Rather, it’s a story of the past decade. Only the confluence of several powerful forces could have delivered China to its current position. The press should have been paying closer attention. Moreover, the real story here is in China’s growth in coal consumption–the energy source China drew upon to first match, and then surpass, the United States.

Let’s take a look first at BP’s data assessment for 2009 energy use, vs. IEA Paris. Our unit of account here is the mtoe–million tons oil equivalent. This is a unit of energy, not volume, and measures BTU. Also, a note: IEA Paris apparently is including Hong Kong in their data so I have added Hong Kong also to mainland China from the BP Statistical Review (which tracks them separately). For 2009, BP has China edging the USA by nearly 19 mtoe, and IEA Paris has China exceeding the USA by a more substantial 82 mtoe. | see below: BP vs IEA Paris: China and USA 2009 Energy Use in MTOE.

What the chart doesn’t tell you is the composition of each country’s energy consumption. While many are aware the US is a heavy user of oil, there is less attention paid to China’s heavy use of coal. Let’s compare the two, shall we? Oil in the US represents nearly 39% of total energy use from all sources. But in China, oil barely represents 19% of total energy use. Most important of all: China’s coal use is four times its oil use.

Whereas in the United States oil demand is not a reflection of strong exports, in China the extraordinary mix of coal to oil use is very much of a reflection of worldwide manufacturing, and global demand for those goods. In other words, China is just a place where the world performs a great deal of its physical labor. Perhaps this is why Beijing is “unhappy” with this week’s media focus on the country’s energy demand. Or, perhaps not. China appears to be refuting the data itself, rather than making the more salient point: much of that coal demand is from you and me, here in the West. China’s coal consumption is merely our own power consumption, offshored. And while the composition of that demand will surely tip in the year’s ahead to a more domestic focus in China, this is yet another illustration that the world’s demand for energy is still very much satisfied not by oil, but by coal.

-Gregor

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Author: Gregor Macdonald   Posted in: China  coal   Tagged:              
Jul 16 2010

Friday Notebook: Oil and Sugar

July 16, 2010

A trip this week to the new Institute of Contemporary Art in Boston was a chance to discover that a number of artists right now are addressing issues of land, population, water, resources, and energy. Tara Donovan’s landscapes, which are often made of light-catching plastic for example, recreate topographical mysteries. And, as the new ICA building practically hangs out (and over) Boston Harbor, I saw Donovan’s work as an exploration of shorelines. Indeed, in her broader work, that she can make landscapes out of plastic cups goes to both her talent, and perhaps her concerns: water, light, and land. Also investigating issues of scale and repetition is Kader Attia, who has made a few installations that address population and global slums. Or, as they are often called, mega-slums. At the ICA, he has a four minute film titled Oil and Sugar No. 2 that shows crude oil being poured over a block of white sugar cubes. The film struck me as both timely, and, as a meditation on collapse and how large systems break down. While I was not able to find the film online in its entirety (no surprise) you can at least catch a few frames in this short video posted below, that covers Attia’s recent work.

–Gregor

Video: short video on the work of Kader Attia from CultureBox.

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Author: Gregor Macdonald   Posted in: Art  Boston  Systems   Tagged:        
Jul 12 2010

Global Crude Oil Supply Update

July 12, 2010

Global crude oil supply fell in April, after a surprising revision upwards to the March totals, of approximately 200 kbpd. Volatility in the data is currently coming out of the North Sea. This will continue as Norway is expected to see production falls when the next few months of data is reported. Globally, oil production stood at 73.552 mbpd in April. On an annual basis, through the first 4 months of 2010, global crude oil production is averaging 73.458 mbpd. The current peak year for global crude oil production remains 2005, at 73.719 mbpd.

-Gregor

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Author: Gregor Macdonald   Posted in: Oil   Tagged:      
Jul 09 2010

Friday Notebook: Drive, Roads, Infinitum

July 9, 2010

Bottomless wonders spring from simple rules which are repeated without end.  –Benoit Mandelbrot

Andrew Filippone’s short film Commute is reminiscent of both the early days of cinema, when the miracle of moving images was used to resolve questions about motion, and also the avant-garde period much later in the 1960′s when filmmakers used the camera to break the world down, into component parts. In my ongoing work into the economic sensitivity of our built environment to energy costs, I found this short film to be helpful. If, for no other reason than its ability to refresh our awareness of what a repeated action, like a daily car commute, means in energy terms. For those interested in these questions, I also highly recommend some of the quantification work done by Saul Griffith in his 2009 presentation at the Long Now Foundation and his particular attention to embodied energy in US road infrastructure. (see below the video for all references and links).

-Gregor

Film: excerpt from Commute (53 minutes; video; color; sound; 2002) | Andrew Filippone Jr., Director/Producer/Camera/Editor | Stefan Girardet, Music & Sound Design | Synopsis: Five consecutive days of travel on Southern California’s 101 freeway become one in this split-screen meditation on stasis, silence, and inaction. | H/T Alexis Madrigal

Quote: Benoit Mandelbrot, from his 2010 TED Talk. | H/T Paul Kedrosky

Saul Griffith: see minute 17:00 of Griffith’s 2009 Long Now talk, and pay attention to Slide No. 28 from the deck to that presentation.

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Author: Gregor Macdonald   Posted in: Americas  EROEI  Oil  Scale  transport   Tagged: