Discussion of Energy-Related Issues

[Gumby]

It's not the size of the drink, it's the size of the straw.

Sorry to dig up a 2-month-old discussion, but I saw this post today:

http://earlywarn.blogspot.com/2011/06/c ... leets.html

If China doesn't slow down it's rate of growth, then it sounds like the straw may be way too small to deal with future demand. If so, the quote from Bernanke suggests that gasoline may continue to be the major source of inflation in the global economy. $3.89 gasoline may seem quaint a few years from now.

[AdamA]

If China doesn't slow down it's rate of growth, then it sounds like the straw may be way too small to deal with future demand. If so, the quote from Bernanke suggests that gasoline may continue to be the major source of inflation in the global economy. $3.89 gasoline may seem quaint a few years from now.

Is it truly inflation, if that's the case, or does that just mean the gasoline will get expensive if we start to run out of it?

[Pkg Man]

If China doesn't slow down it's rate of growth, then it sounds like the straw may be way too small to deal with future demand. If so, the quote from Bernanke suggests that gasoline may continue to be the major source of inflation in the global economy. $3.89 gasoline may seem quaint a few years from now.

Is it truly inflation, if that's the case, or does that just mean the gasoline will get expensive if we start to run out of it?

It is not inflation if only gasoline is rising, that is a change in relative prices.  Inflation is a rise in the general price level (all prices). 

[Gumby]

If China doesn't slow down it's rate of growth, then it sounds like the straw may be way too small to deal with future demand. If so, the quote from Bernanke suggests that gasoline may continue to be the major source of inflation in the global economy. $3.89 gasoline may seem quaint a few years from now.

Is it truly inflation, if that's the case, or does that just mean the gasoline will get expensive if we start to run out of it?

It is not inflation if only gasoline is rising, that is a change in relative prices.  Inflation is a rise in the general price level (all prices). 

I think Bernanke was suggesting that if gasoline prices were to rise (because of scarcity), it could cause prices for all general goods to rise, regardless of the money supply situation. I mean, even the price of vegetables are directly affected by the cost of gasoline.

[AdamA]

I think Bernanke was suggesting that if gasoline prices were to rise (because of scarcity), it could cause prices for all general goods to rise, regardless of the money supply situation. I mean, even the price of vegetables are directly affected by the cost of gasoline.

Right...but that's just stuff getting scarce and expensive.  May adjust supply/demand curve, but won't cause inflation unless wages or credit increase. 

At some point, it doesn't even matter how much money circulates.  When something becomes truly scarce, those who have possession are not going to give it up easily in exchange for devalued currency. 

[Gumby]

I think Bernanke was suggesting that if gasoline prices were to rise (because of scarcity), it could cause prices for all general goods to rise, regardless of the money supply situation. I mean, even the price of vegetables are directly affected by the cost of gasoline.

Right...but that's just stuff getting scarce and expensive.  May adjust supply/demand curve, but won't cause inflation unless wages or credit increase.  

At some point, it doesn't even matter how much money circulates.  When something becomes truly scarce, those who have possession are not going to give it up easily in exchange for devalued currency.  

Yes, of course. But, the Fed is supposedly worried about Deflation at the moment. So, consider the pressures of deflation (from demographics and a sour economy) where the price of gasoline causes the price of nearly everything to rise dramatically due to scarcity (of oil/gas). Everything becomes more expensive but money is very tight. That sounds awful. But, it doesn't sound that far fetched either.

There was a time that oil used to reliably trade around $35/barrel (in 2011 dollars). Those days are long gone — due to increased demand that outpaces supply. Production of oil has barely increased since the 70s. If demand is only going to increase, as projected, we are in for some serious hurt.

[MediumTex]

I think Bernanke was suggesting that if gasoline prices were to rise (because of scarcity), it could cause prices for all general goods to rise, regardless of the money supply situation. I mean, even the price of vegetables are directly affected by the cost of gasoline.

Right...but that's just stuff getting scarce and expensive.  May adjust supply/demand curve, but won't cause inflation unless wages or credit increase.  

At some point, it doesn't even matter how much money circulates.  When something becomes truly scarce, those who have possession are not going to give it up easily in exchange for devalued currency.  

Yes, of course. But, the Fed is supposedly worried about Deflation at the moment. So, consider the pressures of deflation (from demographics and a sour economy) where the price of gasoline causes the price of nearly everything to rise dramatically due to scarcity (of oil/gas). Everything becomes more expensive but money is very tight. That sounds awful. But, it doesn't sound that far fetched either.

The thing that probably makes the scenario you describe a real disaster is when short term rates are already at 0%.  Normally in such a scenario there is at least some mitigation that can occur through easing interest rates. 

In the current environment, sustained high energy prices can really create a lot of problems.  I think, however, that there is no need to worry about sustained inflation in such an environment, since the whole economy would probably tip back into recession pretty quickly, which would set off a new round of demand destruction as people ran out of money to pay higher prices for everything and just stopped spending.

I think that one significant difference between the current environment and the 1970s is that during the 1970s the whole economy was not in the midst of a post-asset bubble deflationary trend and demographics were very different.  These two factors (plus strong labor unions that could demand higher wages in response to higher prices) set the stage for sustained 1970s inflation in a way that seems unlikely today--i.e., the current secular trend with asset prices is deflationary, demographics point toward secular economic contraction and the U.S. worker has very little leverage against the threat of offshoring of jobs, which puts a lid on wage increases.

We've created quite a dilemma for ourselves.

[Gumby]

I think that one significant difference between the current environment and the 1970s is that during the 1970s the whole economy was not in the midst of a post-asset bubble deflationary trend and demographics were very different.  These two factors (plus strong labor unions that could demand higher wages in response to higher prices) set the stage for sustained 1970s inflation in a way that seems unlikely today

Except that China and India will be consuming world resources at a faster pace than we will — which will drive up the cost of everything.

Be sure to see the slideshow...

http://businessinsider.com/jeremy-grant ... ces-2011-6

For example, (from the slideshow) China accounts for 9% of the world's GDP. And it's already using 53% of the world's cement. If we have a deflation while resources are becoming very scarce, isn't that a perfect storm for disaster?

[Gumby]

More from Grantham's presentation:

Summary of the Summary

The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.

Summary

[list][list][*]Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and flowing in population.
[*]From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.
[*]Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
[*]The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.
[*]Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.
[*]The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).
[*]The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.
[*]But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
[*]Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.
[*]Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.
[*]Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.
[*]From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
[*]We all need to develop serious resource plans, particularly energy policies. There is little time to waste.[/list]

[/list]

[MediumTex]

I think that one significant difference between the current environment and the 1970s is that during the 1970s the whole economy was not in the midst of a post-asset bubble deflationary trend and demographics were very different.  These two factors (plus strong labor unions that could demand higher wages in response to higher prices) set the stage for sustained 1970s inflation in a way that seems unlikely today

Except that China and India will be consuming the resources at a faster pace than we will — which will drive up the cost of everything.

Be sure to see the slideshow...

http://businessinsider.com/jeremy-grant ... ces-2011-6

I think it's certainly fair to say that high energy prices are here to stay, though the factor that I think is going to surprise people will be the extreme volatility in energy prices that is also likely to be with us to stay.

Part of the peak oil theory that doesn't get much attention is the post-peak price volatility that it predicts.  People often imagine the price of oil grinding up to $200, $300 and beyond per barrel.  IMHO, the more likely scenario is repeated price spikes, followed by price collapses, so that the future price of oil will look like the heart rate monitor of a patient in cardiac arrest being repeatedly shocked back to life, only to flatline again.

If you look at the price of oil since about 2007, this theory has more or less matched reality--in 2008 prices spiked, the economy went into recession and prices collapsed.  When the Fed was able to revive the patient through a Pulp Fiction-style shot to the chest, the price of oil immediately shot back through the roof, and now we are on the verge of another recession triggered by high energy prices, except the patient is now much sicker than he was in 2008 and the Fed doesn't necessarily have another kitchen sink to throw at the problem.

Such interesting (and scary) times.

[MediumTex]

More from Grantham's presentation:

Summary of the Summary
The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.

Summary

[list][*]Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and flowing in population.
[*]From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.
[*]Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
[*]The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.
[*]Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.
[*]The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).
[*]The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.
[*]But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
[*]Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.
[*]Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.
[*]Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.
[*]From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
[*]We all need to develop serious resource plans, particularly energy policies. There is little time to waste.[/list]

It looks like Grantham might have been reading William Catton's "Overshoot."

If you want to see the entire elephant that Grantham is touching on in his description of tusks and trunks, check out Catton's book.  You may or may not agree with Catton's argument and conclusions, but his logic is much tighter and his analysis much broader in scope than you are likely to see anywhere else when the topic Grantham is touching on comes up.

[Gumby]

It looks like Grantham might have been reading William Catton's "Overshoot."

If you want to see the entire elephant that Grantham is touching on in his description of tusks and trunks, check out Catton's book.  You may or may not agree with Catton's argument and conclusions, but his logic is much tighter and his analysis much broader in scope than you are likely to see anywhere else when the topic Grantham is touching on comes up.

Interesting. I'll try to check it out.

Grantham seems to be waking some people out of their shells a bit.

Here's one interesting anecdote he recently recounted:

Four years ago I was talking to a group of super quants, mostly PhDs in mathematics, about finance and the environment. I used the growth rate of the global economy back then – 4.5% for two years, back to back – and I argued that it was the growth rate to which we now aspired.

To point to the ludicrous unsustainability of this compound growth I suggested that we imagine the Ancient Egyptians, whose gods, pharaohs, language, and general culture lasted for well over 3,000 years.

Starting with only a cubic meter of physical possessions (to make calculations easy), I asked how much physical wealth they would have had 3,000 years later at 4.5% compounded growth. Now, these were trained mathematicians, so I teased them: “Come on, make a guess. Internalize the general idea. You know it’s a very big number.”?

And the answers came back: “Miles deep around the planet,”? “No, it’s much bigger than that, from here to the moon.”?

Big quantities to be sure, but no one came close.

In fact, not one of these potential experts came within one billionth of 1% of the actual number, which is approximately 10 raised to the 57th power, a number so vast that it could not be squeezed into a billion of our Solar Systems.

Go on, check it.

If trained mathematicians get it so wrong, how can an ordinary specimen of Homo Sapiens have a clue? Well, he doesn’t.

So, I then went on. “Let’s try 1% compound growth in either their wealth or their population,”? (for comparison, 1% since Malthus’ time is less than the population growth in England). In 3,000 years the original population of Egypt – let’s say 3 million – would have been multiplied 9 trillion times! There would be nowhere to park the people, let alone the wealth.

Even at a lowly 0.1% compound growth, their population or wealth would have multiplied by 20 times, or about 10 times more than actually happened. And this 0.1% rate is probably the highest compound growth that could be maintained for a few thousand years, and even that rate would sometimes break the system.

The bottom line really, though, is that no compound growth can be sustainable. Yet, how far this reality is from the way we live today, with our unrealistic levels of expectations and, above all, the optimistic outcomes that are simply assumed by our leaders.

I guess that answers our question if infinite growth is possible. It's definitely not possible!

[MediumTex]

I guess that answers our question if infinite growth is possible. It's definitely not possible!

The trick is to be able to create an optimistic scenario for humanity when armed with this information.

I think that humanity's basic problem is that we evolved based upon making decisions that were optimized for short time periods (such as one human lifetime or less).  As we have discovered great caches of non-renewable resources and seen our societies erupt in size and complexity as a result, this bias in our decision making toward shorter term results has created the conditions for some spectacularly bad outcomes.

It's certainly impossible to predict how this will unfold over the next 1,000 years or so, but past eras of civilization have followed a predictable course of ascendance and then decline, as natural resource constraints rendered certain ways of life obsolete.  This was Joseph Tainter's basic argument in "The Collapse of Complex Societies", which was a book with a lot of filler, since the basic premise was so easy to describe and the argument for the validity of the premise so easy to make (in many ways Tainter's argument seems almost too obvious to require much documentation from past societies).

If you had walked up to one of the Egyptian pharoahs and told him that in a few thousand years the only thing that would remain of his way of life and his system of beliefs would be some monuments and markings on stones, he probably would have scoffed at you the same way people today are quick to scoff at people who suggest that this high-tech high-consumption world we have built is not sustainable.

I think that one of the basic concepts people don't fully appreciate is that we have built a world economy that requires perpetual growth.  For example, if you think about the premises behind many forms of debt, it is that the future will always be larger than the present, which will allow people to fund future consumption AND pay off past debt out of future earnings.  When this set of economic premises begin to be invalidated--even on a small scale--as they were in 2008, it helps one understand just how poorly our economic system functions when growth ceases.

I think that when faced with this degree of structural cognitive dissonance, it is entirely understandable that central bankers and politicians would throw everything they have at the problem, but everything they have is ultimately unlikely to buy more than a little extra time until certain underlying forces that do not appear in economic models begin to intrude on certain carefully cultivated human delusions.

The good news (sort of) is that I think a lot of this stuff will unfold long after most of us have "run out of runway"  (to quote LoneWolf), though sooner or later these ideas WILL become impossible to ignore and the same process is likely to unfold as we have seen throughout history, and it will likely lay the groundwork for some future civilization that IS able to provide better answers to the problems of sustainability and survival than we have come up with in the last 200 year burst of explosive economic, industrial and population growth.

Not to pile on, but even assuming that we do solve all of the problems described above, we are also going to have another Ice Age at some point (if history is any guide to these things), and that is going to be a real challenge for whatever human populations may be around then, even if they have come up with an economic system that doesn't destroy the ecosystems necessary for human life.  

The ultimate challenge for humanity is to find a fate for itself that differs materially from that of the dinosaurs and every dominant species that came before us.  The ability to pull this off will be the ultimate test of whether our superior intelligence really confers any long term survival advantage.  

[Gumby]

That was supposed to be optimistic?

I guess now we have Soylent Green to look forward to  ;D

[MediumTex]

That was supposed to be optimistic?

I guess now we have Soylent Green to look forward to  ;D

Sorry.  I get a little carried away sometimes.

I always imagine modern humanity as this great computer that is plugged into a fossil-fuel powered energy source, and as long as there is power in the plug, the computer will do amazing things.  Unplug the computer, however, and the ability to translate human imagination into reality becomes much harder.

In many ways, modern people are like the Bionic Man, except we aren't aware that we are bionic--we think we got this strong through the force of our cultural, political and moral beliefs.

[rickb]

Eventually the Sun will go supernova as well.  If humanity wants to survive we're ultimately going to have to find other planets to live on.  Off hand, I'd say rebalancing human life on 4 planets might work fairly well.

[MediumTex]

Eventually the Sun will go supernova as well.  If humanity wants to survive we're ultimately going to have to find other planets to live on.  Off hand, I'd say rebalancing human life on 4 planets might work fairly well.

  That's great.

If you look at our space adventures thus far, however, in the past three decades our manned space program seems to be going backwards.

Looking forward, I don't think more than a handful of humans will ever leave the earth's orbit (I would be happy to be wrong about this, though).

I once did a calculation of the amount of energy expended to build the pyramids and found that the first manned moon mission consumed approximately the same amount of energy that was required to build the largest of the pyramids in Egypt.  I thought this was interesting because both of these accomplishments were, in a sense, monuments erected at or near the height of each of these cultures and civilizations.

It sort of tickles the imagination to think about 1,000 years from now people sitting around and telling stories about humans who visited the moon, and how the story could be perceived as pure mythology.  Unlike the pyramids, there is no lingering reminder that the moon missions actually took place, which makes it that much easier to convert the events into mythological narratives, with appropriate embellishments here and there (e.g., Neil Armstrong might become a Zeus-like figure, while Buzz Aldrin could be Poseidon).

If you've ever studied "cargo cults" (or watched Mad Max: Beyond Thunderdome and remember the kids who lived at the airplane crash site), you know how very easy it is for people to convert the accomplishments of industrial capitalism into supernatural events.  It's probably not so far-fetched to think that our own descendants might do the same thing with the wonders of our current world. 

One requirement for the kind of mythological-ization (I just made that word up) I am describing would be a massive loss of knowledge between generations.  One catalyst for such a loss of knowledge could be an EMP event at some point in the future when most of human knowledge is stored electronically (as opposed to on paper, as much of it is now).

[Lone Wolf]

It sort of tickles the imagination to think about 1,000 years from now people sitting around and telling stories about humans who visited the moon, and how the story could be perceived as pure mythology.  Unlike the pyramids, there is no lingering reminder that the moon missions actually took place, which makes it that much easier to convert the events into mythological narratives, with appropriate embellishments here and there (e.g., Neil Armstrong might become a Zeus-like figure, while Buzz Aldrin could be Poseidon).

It really does.  After all, even today we have our own strange little subcultures that view the moon landings as mythology.  I like to think that 1,000 years in the future some doubting Thomas will unearth this video of Buzz "Poseidon" Aldrin" punching an aggressive moon landing conspiracy theorist in the face.  I'd have a completely different view of mythology if archaeologists had dug up old Youtube video of Poseidon sucking some dude into a maelstrom or spearing him with his trident.

If you've ever studied "cargo cults" (or watched Mad Max: Beyond Thunderdome and remember the kids who lived at the airplane crash site), you know how very easy it is for people to convert the accomplishments of industrial capitalism into supernatural events.  It's probably not so far-fetched to think that our own descendants might do the same thing with the wonders of our current world.

Cargo cults are fascinating.  I'd encourage anyone who even remotely enjoys anthropology to read about them.  Humans are capable of utterly confusing cause and effect, sticking them together in a blender and then downing the whole dysfunctional smoothie in one gulp.  (Reading about cargo cults was actually one of the things that made me have my first doubts about Keynesian economics many years back.)