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What Happens Once We've Burned All the Resources?

Why we're inheriting a 'slower moving' world
Wednesday, October 3, 2012, 1:03 AM
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Executive Summary

  • Why purchasing power and quality of life will decline in OECD countries, even as economic 'growth' is maintained
  • Why 'energy mix' is as critical as 'energy supply'
  • The potential of natural gas as a "bridge" fuel
  • Why we're inheriting a "slower moving" world

If you have not yet read Part I: The War Between Credit and Resources, available free to all readers, please click here to read it first.

Low-Quality GDP

Declinists have been surprised by the ability of policy makers to slow the rate of our post-Peak-Oil financial collapse using quantitative easing. But the global economy stopped funding new industrial growth with oil starting seven years ago. Accordingly, the transition to coal as the source to fund growth was well underway before the financial crisis began.

And it remains vexing, to be sure, to understand how the world economy has been able to move forward – at least a little – in the post-2008 environment.

Nevertheless, we now have those answers and no longer need to forecast an imminent black swan or tail event...

 

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Executive Summary

  • Why purchasing power and quality of life will decline in OECD countries, even as economic 'growth' is maintained
  • Why 'energy mix' is as critical as 'energy supply'
  • The potential of natural gas as a "bridge" fuel
  • Why we're inheriting a "slower moving" world

If you have not yet read Part I: The War Between Credit and Resources, available free to all readers, please click here to read it first.

Low-Quality GDP

Declinists have been surprised by the ability of policy makers to slow the rate of our post-Peak-Oil financial collapse using quantitative easing. But the global economy stopped funding new industrial growth with oil starting seven years ago. Accordingly, the transition to coal as the source to fund growth was well underway before the financial crisis began.

And it remains vexing, to be sure, to understand how the world economy has been able to move forward – at least a little – in the post-2008 environment.

Nevertheless, we now have those answers and no longer need to forecast an imminent black swan or tail event: either collapse or a large upside surprise. Instead, by continuing to piece together constant reflationary policy in combination with natural gas and coal resources, the world's been able to leverage the forward motion of large populations in the Non-OECD countries to produce a hobbled version of economic “growth.” This is not fast growth. And this version of growth is not improving our life quality. Global industrial growth now is now dirtier than ever, as the next layer of fossil fuels begins to be extracted.

The global economy therefore is rebounding but it's doing so even as incomes and purchasing power decline in the OECD.

When recent data was released (again by the Census Bureau) showing that U.S. incomes had continued their decline, this time back to 1996 levels, many analysts wondered how the economy could still be growing as incomes fall. A simple answer is that GDP is composed of a number of economic inputs, and the U.S. can enjoy, for example, strong exports and strong corporate profit growth – plugging into demand in the developing world – while life quality declines for U.S. workers. This low-quality GDP will broadly define economic life over the next decade.

Net Change in Occupational Employment, During and After the Great Recession

(Source - National Employment Law Project)

In the same way that the economy has rebounded into lower-quality BTUs (coal), so, too, have labor markets rebounded into lower quality, lower paid, jobs.

This is not a short-term trend. I have no doubt that many workers in the OECD will continue to go back to work, but they will return to jobs with lower-quality benefits and lower wages. The above chart also echoes data on the robust growth in part-time jobs and the stagnation of growth in full-time jobs.

Eye on the Reserves

One of the cautionary tales resource economists learn well is the danger of extrapolating present-day production rates out by 25, 50, or 100 years. Journalists are often (and rightly) the butt of jokes – for example, for mindlessly reciting that we have 100 years of coal supply left at current consumption rates. They miss the obvious: As consumption grows, the “100 years of supply” quickly reduces to maybe half that amount.

But what if we are modeling a new, slow/flat growth world in which consumption growth rates for fossil fuels barely move higher year to year? What if we model a world in which the greatest change is in the energy mix, not in the quantity of energy used? In such a scenario, the world transitions laterally to natural gas and coal, having been stopped out of further growth by oil. The world also adds wind and solar quickly, but from a very low base. The result: We get a very different world of global energy use while no longer growing. It’s the energy version of a transition to low-wage jobs.

Perhaps we should explore, then, the heretical view that Reserve-to-Production ratios (R/P) for selected fossil fuels are not as unhelpful as they used to be when they were set against strong growth forecasts? For example, global coal reserves, according to the BP Statistical Review, are currently the most plentiful of world fossil fuel resources, with an R/P Ratio of 112 years. I doubt very much, given the global transition to coal, that the world has a full 112 years left of global coal supply. Moreover, at the outer ends of coal extraction, the oil-input cost to machinery will grow ever more expensive, thus making coal extraction later this century more costly than now. But frankly, at the moment I am only concerned with the next 20-25 years. Especially given my view that natural gas resources will be called upon in addition to coal.

(Source: BP R/P Reserves-to-Production ratios (years) for Coal)

As readers of my previous reports know, my ongoing base case holds my forecast of future oil consumption growth rates mostly staying flat, given the obvious fact that oil supply itself is mostly flat. And while it's true that the global oil industry has been able to (finally) add about 2.00% extra oil supply above the seven-year ceiling of 74 mbpd, we know that such additions are exceedingly price-dependent. Natural gas and coal, however, have been seeing more consistent consumption growth rates – especially in the post-2008 period – of a couple of percentage points each year. And as readers also know, we are very close right now (if we are not there already) to the point where coal takes the lead from oil, to once again become the primary energy source for the world.

But the ability of coal to eclipse oil does not require strong global growth or imply that consumption growth rates for coal (and natural gas) cannot slow down. As the Reserves to Production chart from BP illustrates, R/P ratios for coal are, of course, a lot lower in 2011 than they used to be in 1991. But just as Peak Oil was never about “running out of oil,” the transition to lower-quality global GDP, and slower growth, was never about running out of BTUs. We are not running out of coal.

Natural Gas Dreams vs. Reality

One of the reasons I like natural gas as a story of forecasting peril, is that just about everyone has been proven wrong with regard to the future trajectory of global natural gas supply. It was just seven years ago that I heard terrific presentations at the ASPO Boston conference (2006) illustrating the grim outlook for North American natural gas supply. Lo and behold, natural gas production in the U.S. has now reached new all-time highs. So in one sense, it appears that the peakists of natural gas were terribly wrong, and were shown to be wrong in fairly short order. However, as many readers understand, it is only by quickly accelerating the number of natural gas wells that the U.S. has been able to produce these all-time highs in supply. The reason for this is that natural gas production from fracking has very different flow characteristics, with the early flows spiking to impressive heights only to dissipate to lower flow rates. Put enough of these “curves” together, however, and sure enough, aggregate production can reach a big, fat, high.

Natural gas supply pessimists will surely get their due eventually, however, both from the exhaustion effect as too many wells roll over at the same time, and as the environmental impact on deep water/aquifer supply comes to light. But the world has tremendous reserves of shale gas to plunder and extract before we reach that point on a global basis. And remember, just as with the ethanol program, governments can subsidize the worst ideas and create their own reality for longer than many of us would reasonably anticipate. Do not underestimate the willingness of governments to subsidize (for example) natural gas extraction in the future, even when environmental damages can be proven or if drilling is uneconomic.

Here is the latest data from BP on global natural gas reserves, showing a 63 year R/P ratio. Again, for now, I am not really concerned with trying to forecast whether the world actually makes it to the year 2075 (2012+63) using natural gas reserves at current rates. What concerns me more is how much reflationary policy and how much BTU we intend to extract and burn over the next 20 years. And unfortunately, I conclude we can keep the show running for at least that long.

(Source: BP R/P Reserves-to-Production ratios by region)

Conclusions

Direction of the Global Energy Mix

Any long-range forecast is, by definition, more art than science. If one tries to project figures several decades ahead exclusively based on presently available data, one can go astray just as easily as the data-free conjecturer who muses upon the clouds. That said, I believe it’s not impossible to posit the general direction of primary energy use over the next two decades.

We know, for example, that nuclear power has stagnated for some time and is losing market share.

We know that hydro power has experienced small growth, but future growth will almost certainly be limited by drought and population growth, as the world seeks to create more arable land and cannot devote water resources to energy supply.

We also know that oil supply will eventually enter actual decline. But even before oil supply enters decline, increasing portions of the global population will be kicked off oil by through price.

We also know that wind and solar options are growing exponentially, and the barriers to their growth, while notable, are overshadowed by their simplicity – especially in the case of solar.

Finally, there is little doubt that the global powergrid is the next, primary distribution system for any small amount of consumption growth for energy. And it's clear to me there’s “enough” natural gas and coal to receive future demand as it migrates from oil to the powergrid.

I might also add that there are likely more additions coming to natural gas and coal reserve estimates, as regions in Russia, Canada, and inner Asia are explored. And now, a key point that has been made by me and David Rutledge of CalTech: Do not forget: the Oil Age blunted the extraction, use, and search for natural gas and coal resources.

Here are my very rough but directionally useful projections for our global energy mix by 2030.

Again, the goal here is not to hit these numbers on the nose, but rather to show the direction the world is heading. This is a much slower-moving world, on all levels. It may even be a stagnant world. But it is not a collapsed, dead-star world.

Rollout of QE in the Years Ahead

I am keeping to the schedule that I featured in my previous report, When Quantitative Easing Finally Fails, in which I forecasted that QE3 would arrive imminently but then quickly lose its impact by late next year. Here is a rough calendar of fiscal and monetary initiatives into 2015.

  • Late 2013: QE3 loses effectiveness and fiscal bodies take up the torch, pursuing New Deal 2.0 type programs that do not start until 2014.
  • Late 2013: Europe's ECB moves more directly to open-ended QE.
  • Early 2014: U.S. Fed moves more directly to NGDP Targeting as open-ended QE3 proves insufficient.
  • 2014: Japan and China continue fiscal stimulus (infrastructure programs) and also move towards QE.
  • Late 2014: OECD governments finally consider Debt Jubilee for individuals, in everything from mortgage, to credit card, to education debt.

The decline of cheap resources, a trend which cannot be stopped, is now being met with a supply of cheap credit. This war, if you will, started over ten years ago and is the reason gold woke up after sleeping for two decades. As readers can discern, I have taken collapse off the table as a significant risk. Instead, I am now more concerned with environmental risk. As we have seen more frequently of late – and especially over the past decade – weather- and climate-related damage to resources and food supply is no longer occurring at a low level that can be ignored or dismissed.

At some point that I am not ready to forecast, the War Between Credit and Resources will receive some sort of major push-back from populations. But to reach such a point, human economies will have to shift their goal from growth to sustainability. At the moment, such an idea does not yet enjoy mass appeal.

~ Gregor Macdonald

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