How to Read This Blog


HOW TO READ THIS BLOG:

To get the most out of this blog, I recommend beginning with the earliest post and proceeding in chronological order. For the most part this blog, like a planning document, builds on data and rationale in a linear manner. You may find value in individual posts taken in isolation, but I suspect your experience will be richer if you follow the intended progression.

Monday, June 27, 2016

WPS 5: Projection of Future Conditions- Simple Arithmetic, Peak Oil, and Collapse

Into the Future...

So now the time comes to take the information we've gathered during our inventory of existing conditions and to project a "most likely" set of future conditions.

For the history of community planning (which has only existed in its current form since the industrial revolution), one nearly sure-fire way to make projections is the good old regression equation.  Simply put, you look back over the past data and draw a best-fit line or curve, then project this line into the future.  In a case where the entire data set represents "growth," the projection mathematically MUST reflect a continuation of that growth.  Housing, population, and financial conditions are often modeled this way.

Graph with regression line

Another common approach is to build more complex models that attempt to duplicate human behavior or choices, and then use these models to make your projections.  There can be as many or as few variables as you want, and they can feed back into one another in any way the modeler desires.  Of course, when the time comes to run the model you have to begin with a reference data set, and that data set will be the various perpetually growing variables we've been exploring.  Thus the model simply adds another layer of complexity (and perhaps realism) to the linear or exponential projection.  If the past trend has been growth, the modeled future will continue to reflect that growth.  Transportation models are an excellent example of this.



What very, very few people ever attempt to do is question the sustainability of these growing variables in the first place.  Regression equations and models are generally built without any upper limit or constraint.  Here in the real world, we've never tested the limits of our resources before.  The industrial revolution and its associated explosion in growth is only 200 years old, and there is literally no precedent in the history of Earth to look at as a model for just how far this growth can extend.  It appears to us that growth is infinite; are we to assume that the resources to fuel that growth are infinite as well?

Most planning documents fail to ask one simple but very important question:  How far can the current set of growth-based arrangements proceed before encountering the limits of the physical world?  We have to know the answer to this question before we make any assumptions about the future validity of past trends.

It turns out we are not the first to ask this question, and here again is where we must refer to real experts- in mathematics, in the dynamics of growth, in natural resources and environment- to formulate our answer.  Lest skeptics question these sources, I should point out that these are not crackpot conspiracy theorists- they are respected academicians who have made substantial contributions to their fields.


Simple Arithmetic

On this quest our first visit will be at the most abstract level, the level of simple arithmetic.  Professor Al Bartlett, PhD, was a professor of nuclear physics at the University of Colorado.  He was a man who knew mathematics well.  In the 1960's, Bartlett began to question the seemingly infinite growth taking place on our finite planet, and made some shocking discoveries.

The greatest shortcoming of the human race is our inability to understand the exponential function. - Albert Allen Bartlett

Bartlett compiled his findings into a presentation called "Arithmetic, Population, and Energy" which he first gave in 1969.  In his presentation, he outlines many of the trends we have already explored in our inventory of existing conditions.  He then proceeds to show the patent absurdity that a continuation of these trends would lead to within the scale of human lifespans.  The error, he contends, comes in people's inability to comprehend the real impacts over time of exponential increases, even when they seem small.  It is absolutely worth an hour and fifteen minutes of your life to watch his presentation, here:


Introducing ideas of limited natural resources, Bartlett walks through the real impacts of exponential growth and shows that perpetual growth (in population, in consumption, in energy production, or anything else) in a finite world is an impossibility.  He evaluates historical patterns of oil exploration in a highly simplified way and shows that oil reserves should be depleting by the early 2000's, all the while mathematically disproving the statements of politicians and industry pundits to the contrary. Similarly, he takes statements about the quantity of coal reserves and historical consumption and shows that a depletion in coal reserves should occur within 100 years.  None of these arguments even take into account the complexities of economic feasibility- just raw extractability.

Ultimately, Bartlett concludes that a massive reduction in human population is coming in the near future.  He outlines two columns of factors that increase and decrease population and points out that if humans fail to choose adequate measures from the right column to reduce their own populations, nature will choose for us.



Clearly, if we follow the reasoning of Al Bartlett, our model of the future should not include continued exponential growth for any extended period of time.  Instead, it stands to reason that we should expect a fairly substantial shrinking event.  To determine in more detail the dynamics and timeline of this reversal of growth, we will need to look to some other models and projections.


Peak Oil and Economic/Social Collapse

Marion King Hubbert, PhD, was a geophysicist and geologist with a lifetime of experience in the oil industry, federal government, and as a professor at Stanford University and UC Berkeley.  He made a number of contributions in geophysics, but his most relevant work to this exercise is what he is best known for:  Peak Oil.

Marion King Hubbert00.jpg

Hubbert's peak theory claims that the rate of oil production in any area will follow a bell curve based on production and discovery rates.  The point at the top of the curve represents the peak of oil production.  It should be noted that reaching peak oil does not mean that there is no longer oil under the ground, just that the rate of production of oil has reached its zenith and begun to decline.

How do we know that there is any validity to this theory?  Because in 1956 Hubbert used the model he developed to predict a peak in oil production in the United States between 1965 and 1970.  At the time, his contemporaries were critical- but he was proven right when US conventional oil production peaked in 1970.

Hubbert's projection for global oil production was a peak in a half century (from 1956)- or roughly 2006- but that actions of OPEC might delay the peak for an extra 10 years to 2016.  As we have seen, global conventional oil production peaked in 2011.  Here is Hubbert's chart showing his prediction of global peak oil and the inevitable decline in production following the peak.



Hubbert's work shows us generally what to expect from 2011 into the future: the rate of conventional oil production will only decline.  It may be offset by adding petroleum liquids or other substitutes, but we have arrived at the downside of the curve.  This is a radically different picture than the models typically used in planning exercises- it has a growth side, but then a reversal and decline in the future.  It is definitely NOT infinite, progressive growth.

While this is a great start to developing meaningful projections of the future in a finite world, it is still fairly one dimensional and subject to a variety other influences.  This brings us to the work of several contemporary researchers who provide rich insight into refinements we should make to the Hubbert model, and how the coming decline in oil production will impact the rest of the economy and human factors like energy use, health, and population.

Ugo Bardi is a Professor of Chemistry at the University of Florence in Italy.  He has done work in crystallography, electrochemistry, and most importantly to us, depletion models exploring the exploitation of finite resources.  He maintains an excellent website exploring his interest in resource depletion and what it means to the future of humanity at http://cassandralegacy.blogspot.com/ .

Bardi's entire body of work on the trajectory of energy and natural resources is worth spending time with, but perhaps his most important contribution for our projections is the application of the "Seneca Cliff" to peak resource modeling.  Bardi quotes Lucius Anneaus Seneca's observation that while growth occurs slowly, ruin or collapse happens much more quickly.  In effect, this shifts the shape of the resource curve from being an even bell to something more like this:

Applying the Seneca effect, we begin to see that the impacts of a decline in oil production might occur much more rapidly than even the Hubbert curve would lead us to believe.  Further, this new curve has applicability beyond just oil.

More details about the Seneca Effect and Bardi's work with it can be found on his blog at this link:  http://cassandralegacy.blogspot.it/2011/08/seneca-effect-origins-of-collapse.html

In our interconnected system, powered by cheap energy, something dramatic like the peaking of oil production will not happen in a vacuum.  As the lifeblood of industrial civilization, a decline in the production of oil will ripple throughout the economy and have consequences for all sectors.  To help us model these complex interactions we turn to Gail Tverberg, professional actuary and resource shortage researcher.  Tverberg is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries.  She has produced incredible work on natural resource limits and their relationship to the economy and finance which can be accessed on her blog, https://ourfiniteworld.com/ .

Tverberg's work illustrates how oil production costs, finance, debt, and price interact to power the modern industrial economy (see previous posts exploring these topics as "existing conditions").  She attributes the 2008-2009 financial crisis to reaching the limits of oil supply, and observes that various forms of debt (personal, corporate, national, derivatives, quantitative easing, zero-interest rate policies, etc.) have been used to prevent the collapse of the economic system.  Her projections anticipate a worsening of the financial crisis that reaches a critical tipping point into rapid collapse.  A full treatment of this subject is available on her website, and was published in the journal Energy in 2012:

https://ourfiniteworld.com/oil-supply-limits-and-the-continuing-financial-crisis/

Tverberg adopts the rationale applied by Bardi in the development of a Seneca Cliff style decline, and predicts future energy production will follow the curve shown below.  This dramatic drop in energy production will be accompanied by a rapid collapse of civilization, and all of the factors identified in our evaluation of existing conditions.

Figure 4. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.


While the source material generated by Bardi and Tverberg should be consulted for a full comprehension of the factors influencing the dynamics of energy and economics in the future, I would summarize in the following very big-picture general terms:

1.  Industrial civilization is powered by fossil fuels, which are finite.  For the global economy to work, it must grow- always and forever.  There are no examples of steady-state or shrinking economies.
2.  The huge amount of energy returned on energy invested provided by fossil fuels has allowed explosive growth in agriculture, technology, and population.
3.  Because fossil fuels are finite, their production follows a curve that inevitably will peak.  This peak may occur as a result of physical scarcity, but is more likely to occur when it becomes uneconomical to continue to grow production.
4.  As time progresses fossil fuel resources become more difficult to extract and process, providing a lower energy return on energy invested.  As a result, more of civilization's energy goes into producing energy and less is left for the rest of the economy.
5.  We are at a point where fossil fuel energy is peaking or has peaked, and the consequences are visible in the form of entropy:   falling wages, inflation for some goods, deflation for others, loss of jobs, overall slowed economic growth, and increasing levels of pollution.
6.  The governing world institutions have delayed the consequences of peak energy through various economic means, such as using debt to pull additional societal investment into energy infrastructure.
7.  We have reached or are reaching the limits of debt's ability to perform this function.
8.  It is highly likely that when the next economic shock occurs (recession, debt crisis, unwinding of derivatives, major terrorist event, etc.) there will be few remaining options that will delay a rapid "Seneca Cliff" style reduction in economic activity.
9.  With the reduction of economic activity, workers will not be able to support energy consumption and energy companies will not be able to afford to extract high-cost resources.  This will lead to a permanent contraction in energy use and economic activity.
10.  Industrial civilization cannot function in a period of prolonged contraction because investment requires a promise of future increased returns.  In a contracting environment, all investment ceases and the monetary system collapses.
11.  Without investment in energy production, the production of energy will cease.  Without energy, industrial civilization will collapse.


Next

In the next post we will continue our exploration of future conditions by discussing the seminal study modeling these complex interactions and projecting future conditions:  The Limits to Growth.  We will also examine the consequences of climate change in the future and draw some conclusions about likely timelines.



Tuesday, June 14, 2016

WPS 4: Inventory of Existing Conditions- Human Health and Environment


Human Health

In the previous post we explored the extreme stratification of wealth and power among the world's humans, so our next task is to evaluate the state of human health (and consequently lifespan) across this spectrum.  Like wealth inequality, those of us living in the First World are largely unconscious of just how the majority of the world lives.  We may assume that our general state of health and sanitation is the norm, and that deficiencies are the outlier.  So let us turn to the data to evaluate the validity of this assumption.

For most of human existence (prehistory and history up to the industrial revolution), humans lived on average 30-40 years.  Of course, this does not mean that humans could not or did not commonly live to much older ages, just that when we average all of the ages of death together it ends up being in the 30's. This is largely attributable to high levels of childhood mortality, with only about 60% of live births surviving to age 15 in traditional hunter-gatherer societies.  This is actually a comparatively high survival rate, with many mammal species maintaining only a 40% survival rate to reproductive age.  We might speculate that even the most primitive societies derive some survival benefit from the use of simple tools and learned techniques that provide an advantage over species without these abilities.

Research shows that humans have always had the potential to live approximately 7 decades, and it would be "normal" to have some members of a population reaching this age regardless of the time period.  However, it is undeniable that modern sanitation, water purification, food production and transport, and medical practices have decreased the death rate for children immensely while also increasing the number of people living to older ages.  In the developed world more than 99% of live births now survive to age 15, providing a huge boost to the "average" life expectancy.

Historical Human Lifespan Unfortunately, such measures of average lifespan depend heavily on infant mortality and do not r...


Like wealth distribution, the benefits of improved health and life expectancy vary greatly among the world's population.  At the risk of this post becoming a "map overload", this global view is probably the best way to spot correlating factors and areas facing the greatest challenges in the area of human health.  First, a look at life expectancy by country:


Across the developed world, in the wealthiest countries, life expectancy is generally at or above the seven decade level.  Across the poorer countries (particularly in Africa and parts of Asia and South America), life expectancy is much lower and in some cases is actually no higher than it was prior to the industrial revolution.  As with all complex outcomes, there are obviously many factors that play a part in these life expectancy statistics; however, there are several important correlations that we should examine to help us understand these relationships.  Intuitively we can understand that modern medical care plays a huge role in expanding lifespan and improving overall health, but there are several other factors that play an even more substantial role and are more fundamental to maintaining even base levels of health and longevity.

The first factor to examine is the most basic to life: access to clean drinking water.  Humans will perish quickly without water, and unsanitary water is one of the easiest ways to transmit deadly diseases that can have a huge impact on health outcomes.  The pattern of access to clean drinking water is similar to the pattern of life expectancy, with many equatorial and especially African countries suffering the greatest lack of access.  In some cases well over half of the population lacks access to clean water.




After access to clean water, access to stable supplies of nourishing food is the next most important factor in human health.  Again, the pattern of malnutrition around the globe mirrors our other health factors.  The same parts of the world experiencing the shortest lifespans also suffer from the greatest lack of access to clean water and the greatest rates of undernourishment.

File:Percentage population undernourished world map.PNG




Finally, without crossing too far into our next category of data (environmental conditions), it is worthwhile to show a a correlation between the geographic distribution of these health factors and the incidence of drought.  We can see that significant parts of the world experience drought disasters, and that the extent of these droughts largely matches with the areas of poor water access, nutrition, and life expectancy with a few exceptions.  Highly industrialized countries such as the United States, Canada, Australia, southern Europe, and to some extent China seem to avoid some of the poor health indicators despite being associated with a prevalence of drought disasters.

Number of drought disasters as recorded by EMDAT (1974-2004)
The data shows us that for large parts of the world, the technology of modern civilization has increased lifespans and decreased mortality.  There are, however, still examples of places where these advances have failed to substantially improve the human health situation.  There is a strong correlation between drought conditions, access to clean water, population nutritional status, and health outcomes like life expectancy.  The places that are already experiencing pressure from these combined factors will be an important area of reflection in our projection of future conditions, as they provide us with points of comparison to our own experiences of enhanced health and lifespan within industrial civilization.  In a world without modern methods of water purification, food production, and medical care made possible by industrial civilization, the demographics of global health and lifespan  might more closely resemble those we currently see in the most health-deprived parts of the world such as central Africa and parts of Asia.

Perhaps the most important overarching data point for us to carry forward in our analysis is this graph of the long term trend:

Photo

From this perspective, much like our earlier perspective on population growth, we can see that the current explosion in life expectancy and health is purely a product of the industrial revolution and the incredible advances in technology enabled by our expanded energy consumption.  Improved sanitation, water transport, food production and distribution, and medical technology have all contributed to a massive improvement in human health.  The ability to burn fossil fuels for energy to support industrial civilization is the sole reason for this departure from the norm of the 30 year human life expectancy.  Without getting too far ahead of ourselves, we can probably make the assumption that in the absence of our current levels of energy consumption, technology, and industry, basic measures of human health would eventually revert back to their mean and we would once again see the 60% survivability to adulthood and average life expectancy in the 30's that was historically typical for humans.


Environment

Of course, the survivability of all species, including humans, is dependent upon maintaining suitable habitat.  Species evolve as part of an ecosystem, which will naturally experience change due to climate, geology, species competition, and any number of other factors that have shaped environments since time immemorial.  At our current moment in time, however, the activities of a single species are exerting an influence on the natural environment in ways never before experienced.

Industrial civilization is literally changing the face of our planet in profound ways.  In order to support the massive explosion in human population, cities and their associated infrastructure expand to cover ever greater land area and agricultural production must constantly grow through greater mechanization, centralization, and scale.  Industrial agriculture and urbanization have spread across the globe, and as a consequence of these intensive land uses the earth's soils have degraded and eroded to a fraction of their original productive capacity.  Only comparatively small areas on each continent currently maintain stable, non-degraded soils.

Picture


Part of the strategy for dealing with degraded soils and lost productivity is to increase the application of fertilizers.  To keep pace with rapid population expansion, agricultural production must increase year after year on soils that are more and more degraded, resulting in a steady increase in the application of even more fertilizers.  It should be noted that commercial fertilizers are produced with the use of large amounts of fossil fuel energy, as well as natural gas as a direct input.  They are fossil fuel products in a very literal sense.

World Fertilizer Consumption, 1950-2013
Another strategy for extracting greater efficiency from declining soil quality is to reduce the loss of food product from drought, pests, and weed competition.  Genetic modification has allowed industrial agriculture to create new varieties of crops never before seen by nature that grow faster, more efficiently, and can resist massive applications of poisons that would quickly kill the original, naturally evolved plant species.

Equipped with massive fields owned or controlled by contract relationships, heavy farm machinery powered by fossil fuels, genetically modified crops, and large quantities of pesticides, herbicides, and fertilizers produced directly and indirectly by fossil fuels, a new model of food production has come to dominate the world.  It is possible to witness this model at work with only a quick day trip from most metropolitan areas, to the "countryside" where food production takes place.

Each year, huge diesel powered tractors break open the earth.  The soil itself no longer contains the nutrients essential to grow crops because these fields have been broken open year after year and planted with the same crops, which extract the same nutrients. More diesel equipment passes over the field, spreading fossil fuel fertilizer across the dead soil to "enrich" it with the ingredients necessary to support life.  Several more passes with fossil fuel powered equipment plow and till the soil, set up neat rows, and spread genetically engineered seeds.  Water diverted from rivers and streams miles away is periodically flooded into the field.  Occasionally, more large trucks pass over the field spraying pesticides and herbicides liberally on the crops (which are immune to their effects due to the manipulation of their genes).  At some point, aircraft fly back and forth over the field dropping poison from the sky to ensure the crops face no natural competition.  Finally, harvest comes and more massive machines powered by oil products strip the crops, carry them over roads to plants where they are processed by machines, packaged, and shipped long distances over more roads and even across oceans to their final destination, where people drive in their gas powered cars to purchase them.



The point of this lengthy exposition is to point out the extent to which high technology and fossil fuel energy are inseparable from modern civilization's food production process.  Agriculture consumes about 3% of the worlds total energy but produces nearly 20% of greenhouse gas emissions, in large part because of the dependence on oil products to power equipment.  There is currently very little in the food production process that can reasonably be converted from oil to renewable energy sources like solar or wind.

In addition to the need for increased productivity of existing agricultural lands, population growth also demands the continual addition of new productive capacity in the form of farmland.  The result of this expansion, as well as the drive for wood and wood products, is deforestation.  Since the advent of civilization and human population expansion, the world has lost approximately half of its original forest cover.  Of this, only a small fraction exists as large undisturbed ecosystems.



Other species heavily dependent on forests and other natural habitats are also experiencing the impacts of human encroachment.  The massive diversity of earth's animal life lives in the same forests and fields being converted to crops and suburbs, drinking the water and eating the food that comes in contact with the pesticides, herbicides, and fertilizers of industrial agriculture.  For many species, the pressures are too great and are happening too fast for meaningful adaptation or evolution.  The current rate of animal extinction is approximately 1,000 times higher than natural background levels, with dozens of species going extinct every day.  This is the worst rate of die-offs since the extinction of the dinosaurs 65 million years ago, leading some scientists to identify this as a period of "mass extinction."  This is only the 6th mass extinction event to have occurred in the history of the world, and the only one ever caused by the actions of a single animal species.

MacBlog_extinct
There are many other areas of environmental impact that have not even been mentioned yet, but it would take pages and pages over many posts to explore and innumerate them all.  We have not discussed the waste products of industrial production, from landfills to chemical byproducts.  We could dedicate paragraphs to the Great Pacific Garbage Patch, the plastic soup filling up vast expanses of the largest ocean.  There is much more that could be said about these impacts and the truly horrifying transformations taking place in the natural environment as a consequence of civilization, but we have to carry on with our analysis.  And there is one final environmental factor to discuss that is of the most critical importance to everyone and everything living on the planet today.

No discussion of the state of the environment would be complete without an analysis of human carbon dioxide emissions and human-caused climate change.  If civilization's primary inputs are fossil fuels, then one of the primary outputs is carbon dioxide.  Since the industrial revolution, the amount of carbon dioxide in the atmosphere has continually increased as a result of human activity.  The rapidity and scale of the rise in CO2 is truly unprecedented in the history of the planet- in the past it might have taken tens of thousands of years for levels to rise as much as they have in the past 200 years.

Graph of monthly co2 concentration as measured at Mauna Loa

Current atmospheric CO2 measurements are now exceeding 400 parts per million, a level not seen since the Pliocene era 3.6 million years ago.  At that time, global average temperatures were about 8 degrees Celsius warmer than today, the arctic tundra was lush forest, and sea levels were about 20 meters higher.  So why have we not seen warming and dramatic changes yet that look more like the Pliocene?  Because the increase in CO2 emissions has happened so rapidly that the warming effects are still taking hold.  There is approximately a 10 year lag in the warming effect of CO2, so today we are just feeling the warming of emissions that happened in 2006.  It is true that atmospheric CO2 levels are cyclical, but our current levels are far outside of any natural cycle seen in the past.


Figure 2. The concentration of CO2 in the atmosphere, measured over the past 800,000 years. It never came close to 400 ppm. Present day is on the right of the curve.

Last year, the nations of the world gathered to discuss an agreement on climate change at COP21 in Paris.  Recognizing the potentially catastrophic consequences of exceeding certain thresholds in temperature change, the participants agreed to a non-binding target of holding warming to 1.5 degrees Celsius above pre-industrial levels.  Currently, temperature anomalies are already more than 0.8 degrees above this baseline.  It is highly likely that a certain amount of additional warming is already "baked-in" based on current CO2 levels (not even accounting for additional warming factors that may come into play)- but we will discuss this more in our projection of future conditions.

temperaturechart

The impacts of this warming can be seen in the form of increasing sea level rise (3.4 mm per year), dramatically decreasing arctic sea ice, melting land glaciers, and shifts in local and global weather patterns (droughts, hotter summers, colder winters, more powerful storms).  We can expect that if/when warming continues, the impact of these changes will become greater.

Next

This rounds out our discussion of the current conditions of our planet.  Obviously there are many other important subject areas we could include and much greater depth could be dedicated to each of these areas, but this core understanding should be considered the minimum necessary to be comprehensive in our planning process.

In the next posts, we will proceed to projecting the future conditions of the planet.



Wednesday, June 1, 2016

WPS 3: Inventory of Existing Conditions- Economy and Geopolitics

Economy

In some ways it's even difficult to grasp the economy as  "thing."  Economy is what people do when they interact and exchange goods, so it's pervasive, social, cultural, and intertwined in everything we do.  The economy today is one highly networked, globalized system where jobs and employment in China (or anyplace else) depend on supply, distribution and consumption in Canada (or anyplace else).  The old distinctions between "capitalism" and "socialism" no longer really exist, perhaps with a few very minor exceptions.  What really exists is "globalism."  National and regional economies are linked together by complex ties of trade, debt, and money circulation.  While there are various differences in the level of public and private sector participation in economic activity, all of the actors are constrained by a single ruling principle: continual growth and expansion.  The chart below shows this growth at a global level from 1950 to present.

Gross World Product, 1950-2011

In the quest for continuing exponential economic growth, debt is one way to stimulate real activity and consumption.  By making debt more available to producers and consumers, more capital can be developed and more products can be consumed with just the promise of future repayment.  Since the 1980s, all forms of debt have seen a rapid expansion- from mortgages to credit cards to the debts of entire countries.  When fossil fuel resources were first tapped and provided a high energy return on investment, growth was organically rapid.  As extraction costs rise and the return on investment shrinks, it takes more and more debt to get the growth engine to continue at it's previous pace.  The next chart illustrates the rapid increase in debt and it's relationship as a percent of Gross Domestic Product (GDP).

debt


This drive for growth is entirely baked into the economy as an underlying assumption of the entire monetary system.  Few people stop to realize that the issuance of money is equivalent to the creation of debt in the form of principal plus interest- therefore there will never be enough money in circulation to repay the outstanding debt.  This is a part of the "trap" that keeps the system functioning: we take on debt to secure the basics of survival, and then must compete for a limited money supply that does not equal outstanding debt in order to attempt to repay what we owe.


“It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.” 
--Henry Ford, founder of the Ford Motor Company.


It isn't necessary to our discussion to explore the dynamic of money creation, but it is a fascinating topic.  If the reader is unfamiliar, I'd suggest watching "Money as Debt" for a simple, animated explanation.



One further element of the current state of the economy that is important to recognize is the prevalence of derivatives.  These are a particular type of debt instrument defined by a contract on the performance of other assets.  These are the tricky financial games that allow leveraging of debt and money supply far beyond the original value of either.  They help to fuel booms in industries like real estate, technology, and energy by making investment in those areas highly lucrative.

The unwinding of derivatives in a deflationary environment of debt defaults was largely responsible for the rapid acceleration of the housing crisis.  Since that time, there has been no progress in the regulation or elimination of derivartives, and they have grown to dwarf every other aspect of the financial and monetary systems.  The infographic at the following link provides an elegant illustration of the various supplies of money and debt (notice how debt far outstrips the money available to repay debt), compared to the total value of derivatives.  This should go onto our list of "very scary charts" because we know how dangerous these financial instruments can be.  The massive value of derivatives, far outstripping any other financial asset, should make us question what would happen if the growth engine stopped or even reversed for any extended period of time.  It would seem that any reversal could be highly unstable and unpredictable.

http://money.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization/

So getting back to the vital tie-in between debt, the economy and energy:  We know the cost of pumping oil out of the ground and delivering it to market, and it's based on the availability of easy-to-extract oil.  However, the cost of production is not the same as the price that the economy can afford.  The complicated interplay of price and affordability is apparent when looking at the 2007-2008 period when oil prices nearly tripled from $50 to $140 in the initial stages of the Great Recession.  The high price of oil exacerbated the economic crisis unfolding at all levels.  Simply put, the economy needs oil cheap enough that workers can still afford to buy the energy and products being produced.  When prices get too high, recessionary forces come into play and oil prices drop again like they did in late 2008, back to below $40 by early 2009.

Since 2009, oil prices as well as the prices of many other commodities have been buoyed by increasing levels of debt, financialization, and monetary stimulus (the printing of money).  The Federal Reserve's rounds of quantitative easing (QE) and near-zero interest rates have allowed a massive shifting of newly created money into the energy extraction industry, where Wall Street math whizzes package, leverage, and re-sell the debt of energy companies as derivatives.  The same thing is being done in countries around the world, some of which have even ventured into negative interest rates.  This is essentially the same set of practices that led to the housing crisis only multiplied and amplified, and the result this time is the development of the Shale Oil Boom and the expansion of otherwise unprofitable oil extraction methods like the mining of tar sands.

Sitting where we are, in the middle of 2016, we can reflect on a chart of oil prices and notice that the point where the price of oil took off coincides with the launch of QE1 and the point where oil lost it's support and began plunging coincides with the end of QE3.  Basically the accumulation of debt has allowed oil prices to rise enough to support higher cost methods of extraction.  But since 2015 the world economy, and particularly the energy sector, has been approaching the limits of debt to support these higher oil prices.



For further explanation of the dynamics of oil and energy prices there is no better source than professional actuary and internet blogger Gail Tverberg.  I'm attempting to summarize a few key points, and this relationship between debt and oil price is a critical element; but I could never do justice to the level of detail on this topic presented by Gail in her blog https://ourfiniteworld.com/ .  Gail also does a good deal of predicting what happens next, which perhaps gets ahead of our exercise at hand, but I will again refer to her work when we detail projections of future conditions.

In 2016 we are seeing extreme tension between two trends: the need for lower prices to power a faltering economy and lower-income workers versus the need for higher prices to justify costlier extraction methods.  This is another major red flag that there will likely be a break in the trend that doesn't match up with past experience.  If prices get too high then consumption falls and recession resumes; if prices get too low then energy companies go bankrupt and production is impacted.  It appears that $100 oil was difficult for the economy to bear, and now prices have fallen so that oil is much more affordable but no longer economical to extract.  Oil is not the only commodity facing the same downward pressure on price, it's just the most important one.
This leads us to the question of how these risks and rewards are distributed across the billions of people inhabiting the planet.  There is a huge misconception held by most people living in the "developed world" that our way of life is the norm and the suffering of the poor is an outlier condition.  This allows us to generally feel good about the system we invest our lives in, as if poverty was an unfortunate side effect of an otherwise beneficial set of living arrangements.  After all, most of the people we know live much like us.  Maybe we have one or two friends who have fallen on hard times, but they have a safety net of family, charity, and state welfare programs to keep them at some level of subsistence.

Here in the First World, we certainly experience wealth disparity- but we are largely shielded from the shocking levels of inequality that our economic system produces on a planetary level.  Most of the world lives at a level of destitute poverty we can hardly even imagine.

The chart below reveals the stratification of global wealth by quintile.  Those bottom 4 quintiles in the chart- 80% of the world population- are living on less than $10 per day.  Do you make more than $10 per day?  Then you and I fall into that massively unbalanced umbrella at the top of the chart.  Almost half of the world is living on less than $2 per day.



I'd note this as another concerning chart in our inventory- a huge number of the participants in the system are just barely being supported at a level to maintain life.  These people would be highly susceptible to any disruption in the system that would result in a reduction in the distribution of those already scarce resources.  

The globalized economy is an engine that generates tremendous wealth for a very small minority of the 7.4 billion people on the planet.  For most of the world population, only a minuscule amount of the economic output of the system "trickles down."  The idea that Civilization is a positive thing for most of humanity is an illusion that we should discard in light of this data.  If poverty were just an unfortunate side effect of Civilization, wouldn't there be some equalization of this massive inequality?  How can it be that in a Civilization of equal opportunity, and justice, and human rights, the massive majority of the world that is poor and suffering cannot somehow obtain a larger proportion of the world's wealth?  These questions bring us to our next topic of discussion.


Geopolitics

The reality is that our First World existence is no more fair or equitable than the feudal aristocracies of the past.  The luxury and wealth we enjoy is forcibly extracted from the mass of humanity and is then maintained by massive military force with the potential to annihilate the entire planet.  Crushing inequality is not an accident- the entire purpose of Global Civilization is to maintain the exploitation and oppression of the masses for the benefit of the few.  There is no other explanation for the above chart showing the real distribution of global wealth.  We simply do not perceive it this way because we are sitting at the heart of the Empire.

All of the economic and energy drama we have been discussing is playing out on a global scale because the world has grown into a single networked system.  It's clear that maintaining these massively complex economic arrangements, where a tiny minority exerts almost complete control over the world's resources, requires an equally massive and complex system of politics, laws, war-making, and general threat of force.

We've previously identified the essential dynamic of 1) the need for constant growth, 2) the criticality of cheap energy to that growth, 3) the impending end of access to cheap energy, and now 4) a Civilization based on a massively exploitative system designed for the benefit of an elite minority. In light of this dynamic it is obvious that understanding efforts of the ruling elite to secure access to energy resources, especially lower-cost energy resources, goes a long way to explaining the political tensions and outright conflict happening today.  Overlay this with the reality that there are still nation-states with their own national interests to protect and we have a recipe for intensification.  It is no surprise that when the Council on Foreign Relations looks at conflicts most likely to expand this year, they are centered on the Middle East- a desert land with few natural resources worth fighting over, save one.


Preventive Priorities Map

These countries are critical not only to the extraction of oil, but also to it's processing and transportation.  Additionally, we can begin to see the formation of a "front line" in the global military chess game playing out between the world's superpower nation states.  Looking more closely at US military deployments and bases a virtual encirclement of Russia and China becomes apparent.  This strategic positioning is aimed at securing access to natural resources, cutting off access from enemies, and building up a massive military presence in close proximity to Russia and China.  Aside from outright military deployment, the United States, China, and Russia are also actively involved in proxy encounters through puppet regimes in other countries.  In 2014 both Russian and US interests intervened in Ukraine, leading to the ousting of the president and his government, the "election" of a new pro-western government, and the breaking-off of the Crimea region in a bid to join Russia.

It is no surprise that these relationships are strained and at times outright confrontational.  Can you imagine if we reversed the map below and Russia had military bases ringing the mainland United States, perhaps in Canada, Mexico, and the Caribbean?

http://i.imgur.com/xgBMhBb.jpg

In this respect, the United States and it's allies have clearly obtained the upper hand.  In any armed conflict there are personnel and equipment right at Russia and China's doorstep, ready to engage.  For them to reciprocate, a huge effort to deploy over long distances and vast oceans would be necessary.

This sheds some light on the extent of global nuclear proliferation, as an approach of mutually assured destruction allows some leverage to the underdogs. In May 2016, the US activated the Aegis Ashore missile defense system in Romania, effectively reducing the Russian first-strike nuclear capability.  This continues an escalation of the nuclear arms race, as Russia takes measures to regain the upper hand in spite of the newly deployed missiles.  This increasing tension is a major driver for the current reading of the "Doomsday Clock" at 3 minutes until midnight (nuclear annihilation).  This metric is produced by the Bulletin of the Atomic Scientists, and tracks the relative closeness of a doomsday scenario by it's relationship to midnight.  The only time the Clock has been set this close to midnight was in 1984 and 1953: both major hot points in the cold war.

Screen Shot 2016 01 26 at 3.36.10 PM


All of this tension, conflict, intensification, and strategic positioning is taking place at a time when the power of government is expanding and the trust of the governed is falling to never before seen levels.  Around the world austerity, migration, strained social services, and gridlocked political processes are taking a toll on citizen's faith in the ability of governments to handle these complex problems.  The most recent surveys of American citizens show a clear trend of lost confidence, with an astounding 7% expressing a great deal or quite a lot of confidence in Congress.

Americans' Level of Confidence in the Three Branches of Government

Hey, with government like this, who needs enemies?

Next

In the next post, we will continue to discuss key topic areas that describe the state of Civilization, including human health and environment.