The Gas Ceiling
Dec. 21st, 2010 08:18 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peristaltorA few years ago, I kinda saw the direction our energy shortages would have on the overall economy and coined a term to describe the phenomenon -- "The Gas Ceiling." It's a play on the Glass Ceiling, the invisible employment/income level above which women could not achieve in a male-dominated corporate business environment, but refers instead to the unknowable ratio of the currently available petroleum fuels to the current economy's demand for those fuels. This article articulates the idea well:
And every time we hit that ceiling, we find it lower relative to the floor. Meaning we can stand only as tall as the last time, but probably not that tall. Our economies will contract. Why:
This makes using the remaining energy available to improve the efficiency of energy-dependent systems (like transportation) problematic: experimenting with new fuel injection systems, building prototype high-mileage cars, installing electric transit and electrifying older routes -- all will compete for money, which (as noted above) is generated by burning fuel. Less fuel means fewer dollars. The competition will come down to the very immediate need for individuals to get to work with the cars they own now, verses some speculative system that (cross you fingers!) might work.
I find the "completely ignorant" and "willful denial" folks the most problematic. Sadly, most of the prognosticator "economists" fall into that category, even some of my closest friends. The rise in our standard of living started, after all, way back in 1820 (or so -- it's troubling to come up with exact numbers):
George Stephenson's Rocket, the first
commercially practical steam locomotive.
1820 . . . a few decades after coal started to efficiently power industrial processes and a few years before this fossilized energy was used to propel transportation. We have been living in a period of increasing expectation for almost 200 years. The economic models on which we depend have only ever been subjected to temporary shortfalls in fuel supplies, never systemic, increasing and permanent shortages. We literally don't have the tools -- conceptual or, by extension, mathematical -- to appreciate our predicament, let alone predict what will likely happen next.
In the last few posts on monetary policy (now tagged How to Make Money), I noted that our economy has never been designed for resilience, that instead it is predicated on systems that increase our money supply or simply go bust. We have no mechanisms in place to carry our society through deflationary periods of bust that will prevent further cascading loan default and continuing economic shrinkage. We instead have constructed a system that tries to walk a tightrope between rampant inflation and collapse spirals.
Without a recovery/depression prevention mechanism, it's no wonder that our economists have been instilled with a selective historicity, education that answers "What will happen if the recessions continue?" with "They never have in the past, so things will undoubtedly look rosier in the future." Nassim Nicholas Taleb has written two books (so far) about why this answer is simply wrong.
As a society we are all about to incur Taleb's revision of belief. The first linked article author concludes with a question or two: "All of which begs a final question: If the answers are transition to renewables, and rebuilding our infrastructure for high efficiency, then where will the money and energy to do it all come from? And how long will it hold out?"
The answer may come not from economists, but from archeologists, especially those studying the remains of cultures that no longer exist, or those that made the necessary transition successfully. Whichever we as a society choose, expect a few surprise bumps on the noggin along the way.
In 2009 the peak demand story seemed confirmed, as prices stabilized around $70 in June, and U.S. consumption remained well off its previous high. Most people thought the nearly 2 mbpd decline in U.S. petroleum demand from 2007 through 2009 owed to efficiency and people driving less.
In reality, only about 15% owed to reduced gasoline demand. The other 85% was lost in the commercial and industrial sector: jet fuel, distillates (including diesel), kerosene, petrochemical feedstocks, lubricants, waxes, petroleum coke, asphalt and road oil, and other miscellaneous products.
Very simply, when oil got to $120 a barrel it cut into real productivity, and forced the world’s most developed economies to shrink. At $147, it wreaked serious damage.
As I explained in “Investment Themes for the Next Decade,” the new normal will be cycles of bumping our heads against the supply ceiling, falling dazed to the floor, rising back to our knees, then finally standing, only to bump our heads against the ceiling once more.
And every time we hit that ceiling, we find it lower relative to the floor. Meaning we can stand only as tall as the last time, but probably not that tall. Our economies will contract. Why:
The reason is simple: Energy is the only real currency. Every dollar of fiat currency or GDP was ultimately derived from cheap energy. Trying to print your way out of energy decline is like prescribing ever-higher doses of aspirin for a headache caused by a brain tumor. Yet those at the levers of monetary policy are, by all appearances, completely ignorant (or in willful denial) of this fundamental fact.
This makes using the remaining energy available to improve the efficiency of energy-dependent systems (like transportation) problematic: experimenting with new fuel injection systems, building prototype high-mileage cars, installing electric transit and electrifying older routes -- all will compete for money, which (as noted above) is generated by burning fuel. Less fuel means fewer dollars. The competition will come down to the very immediate need for individuals to get to work with the cars they own now, verses some speculative system that (cross you fingers!) might work.
I find the "completely ignorant" and "willful denial" folks the most problematic. Sadly, most of the prognosticator "economists" fall into that category, even some of my closest friends. The rise in our standard of living started, after all, way back in 1820 (or so -- it's troubling to come up with exact numbers):
From 1820 to 1970, over every decades, average real wages rose, enabling a rising standard of consumption. These 150 years rooted workers' belief that the US was a "chosen" place where every generation would live better than its parents. (Richard D. Wolff, Capitalism Hits the Fan, Olive Branch Press, 2010, p. 51.)
George Stephenson's Rocket, the first
commercially practical steam locomotive.
1820 . . . a few decades after coal started to efficiently power industrial processes and a few years before this fossilized energy was used to propel transportation. We have been living in a period of increasing expectation for almost 200 years. The economic models on which we depend have only ever been subjected to temporary shortfalls in fuel supplies, never systemic, increasing and permanent shortages. We literally don't have the tools -- conceptual or, by extension, mathematical -- to appreciate our predicament, let alone predict what will likely happen next.
In the last few posts on monetary policy (now tagged How to Make Money), I noted that our economy has never been designed for resilience, that instead it is predicated on systems that increase our money supply or simply go bust. We have no mechanisms in place to carry our society through deflationary periods of bust that will prevent further cascading loan default and continuing economic shrinkage. We instead have constructed a system that tries to walk a tightrope between rampant inflation and collapse spirals.
Without a recovery/depression prevention mechanism, it's no wonder that our economists have been instilled with a selective historicity, education that answers "What will happen if the recessions continue?" with "They never have in the past, so things will undoubtedly look rosier in the future." Nassim Nicholas Taleb has written two books (so far) about why this answer is simply wrong.
Consider a turkey that is fed every day. Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race "looking out for its best interests," as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.
[This is the gist of] . . . the Black Swan problem in its original form: How can we know the future, given knowledge of the past; or, more generally, how can we figure out properties of the (infinite) unknown based on the (finite) known? Think of the feeding again: What can a turkey learn about what is in store for it tomorrow from the events of yesterday? A lot, perhaps, but certainly a little less than it thinks, and it is just that "little less" that may make all the difference.
(Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable, Random House, 2007, p. 40.)
As a society we are all about to incur Taleb's revision of belief. The first linked article author concludes with a question or two: "All of which begs a final question: If the answers are transition to renewables, and rebuilding our infrastructure for high efficiency, then where will the money and energy to do it all come from? And how long will it hold out?"
The answer may come not from economists, but from archeologists, especially those studying the remains of cultures that no longer exist, or those that made the necessary transition successfully. Whichever we as a society choose, expect a few surprise bumps on the noggin along the way.