Sunday, January 29, 2006

Is a Run on the (Resource) Bank Behind Rising Inequality?

How, then, can society tell if it is in overshoot?...[One symptom is] declining respect for the instruments of collective government as they are used increasingly by the elites to preserve or increase their share of a declining resource base.
    ---Limits to Growth: The 30-Year Update, p. 177

Most people alive today have never experienced a genuine bank run. Today, we are nearly oblivious to such a possibility. Beefy construction workers, college students, elderly men and women, and middle-aged executives all respect each other's place in the teller line, confident that their money will be available when they arrive at the counter.

But, how would this scene look if everyone in line believed there wasn't enough money to go around? Would those who are more powerful--either because of their position or physical strength--force their way to the head of the line? Would the business executive call over the vice president of the bank on whose board he sits and ask that vice president to get his money? Would the construction worker stand idly by as the college student in front of him withdraws the last of the bank's money--money the worker needs to feed his family? (In an ideal world everyone in line might agree to divide up what money is left based on who has the most pressing needs. But I digress.)

Rewind to 1980, the year after the last oil shock. Oil and other commodities had been rising in price for more than a decade. The message of books such as "Limits to Growth" and "The Population Bomb" had entered the popular culture. The perception was that critical natural resources were only going to become more scarce over time. For those aware of the implications a run on the resource bank--the basis for all wealth--seemed imminent.

How did this manifest itself? For the middle class and the poor it meant narrowing life choices and declining living standards (experienced as higher prices without a commensurate rise in income). For the rich it must have seemed a mortal threat to their future power and wealth. To maintain their relative position, they sought to get to front of the line and get what they could before it was too late.

Along came a new president with an ideology that meshed perfectly with this desire. He introduced supply-side economics to the American public and assured them that by giving tax breaks to the wealthy, America would return to its former prosperity as those wealthy people invested and created jobs. What took place, however, was the devastation of the industrial economy and continued high unemployment which did not consistently reach low levels until the late 1990s. But the rich got richer, much richer. Through their powerful alliance with government they were able to get to the front of the line and redirect resources financial and otherwise to themselves.

Long after the fears of scarcity abated, the trend toward greater concentration of wealth continued as the influence of the wealthy over government policy increased. It is all too easy to believe that the dramatic shifts in income distribution in the United States and much of the world over the last 25 years are simply related to free market ideology, supply-side economics, globalization or merely greed. But if we view the evolution of economic and social policy during this period as the long tail of an initial response to natural resource scarcity--a response directed by the wealthy and powerful that put them at the front of the resource line--we can see that the contest over who will benefit from the Earth's remaining natural bounty continues to this day.

The logic in 1980 was that even to maintain one's living standard, one had to secure an increasing share of the world's remaining resources. In other words, henceforth one's own well-being would have to come at the expense of someone else's well-being. That turned out not to be necessarily the case as economies eventually expanded and natural resources ultimately glutted world markets.

But those initial policies and practices have remained and even intensified. In 1980 a new economic ideology, supply-side economics, gave convenient cover to the rich to portray their rush to the front of line as a virtuous and selfless act. That ideology is now more than ever deeply embedded in the minds of policymakers and people worldwide (though it is by no means universally accepted or praised). As we enter a new age of resource scarcity, we are already well into the next run on the resource bank. The most visible manifestations are a global contest over energy resources and a new round of tax cuts in the United States for the wealthy aimed at "stimulating" the economy. (Here I must point out that "stimulating" the economy is really nothing more than increasing the rate of drawdown of finite resources.)

Supply-side ideology promised a rising economic tide that would reduce inequality. While many people throughout the world have indeed been raised into the middle class in the last 25 years, inequality has greatly expanded not only between the rich and the poor, but also between the rich and the middle class.

Now, the renewed scarcity of vital natural resources, especially oil and natural gas, has initiated another scramble to get to the head of the resource line. But unlike 25 years ago the policies that make it easy for the rich and powerful to cut in line and grab an increasing share of the world's wealth are already firmly in place. It is a tragic irony that those policies will provide no solution to resource depletion and will ultimately undermine the social and ecological stability upon which the wealth of the world's most privileged depends.

Sunday, January 15, 2006

Demand Destruction: Who Gets Destroyed?

Economists who comment on the possible effects of world peak oil production love to ridicule those who make statements such as "demand at some point will exceed supply." Strictly speaking, those economists are right that supply and demand are always in balance. The variable that changes to make it so is price.

So an economist who accepts the possibility of an oil peak may still believe that the marketplace will allow us to make a relatively smooth transition to a new energy economy as the price encourages the development of alternatives to oil and as demand is destroyed. The latter phrase is often glossed over. But demand destruction is at the core of misconceptions by economists about the likely course of events leading up to and following an oil peak.

A smooth transition away from oil mediated entirely by market prices essentially assumes two things: 1) a very gradual decline in oil supplies after the peak and 2) a recognition in the market price that the peak is coming long before it arrives.

Both assumptions are called into question by Robert Hirsch's study of oil depletion curves in various countries across the globe. Hirsch's study indicates that any world peak is likely to have a sharp crest followed by a swift decline in oil production--anywhere from 3 percent to 13 percent per year if the historical record can be relied upon. Hirsch also notes that "in all cases, it was not obvious that production was about to peak a year prior to the event." This would help explain why the second assumption listed above is likely to turn out to be wrong as well. Market participants are unlikely to see the peak coming. This means that prices will only start to signal that alternatives are needed for oil long after it is too late to prevent tremendous disruptions.

Douglas Reynolds gives a more detailed explanation of how energy and other mineral markets misinterpret price signals as indicative of future supplies. When finite mineral resources are involved, the market typically creates "the appearance of decreasing scarcity," something I've commented on previously in Faith-based economics II: The case of oil's sudden scarcity.

The final argument on which the smooth transition idea rests brings us back to demand destruction. An economist will properly point out that people will stop using oil for some applications and will turn to alternatives where they are available. All that is true enough. But it is worth asking what they mean by "applications." In reality, it is the poor who will stop using oil for "some applications," both in industrialized countries and across the world. If alternatives are not available or are just as expensive, they will simply have to forgo the benefits of those "applications." That will help keep a lid on oil prices, but it won't solve the problem: too little oil for all the activities that power and feed 6 billion people.

With a sudden decline in oil availability it is almost certain that agriculture, which is heavily dependent on oil and oil derivatives, will be less productive; that many marginal factories will close in short order; that tremendous financial turmoil will occur in world markets; that many people will have to do with less heat or without heat at all; that skyrocketing prices for transportation will prevent commodities including food from freely circulating around the world, and so on. In short, there would be no smooth transition.

The heightened price of oil would certainly encourage conservation--i.e., demand destruction--but that conservation might come in the form of terrible hardship for millions and perhaps billions of people and possibly death for many. That would give a rather gruesome connotation to the notion of demand destruction. High prices would also encourage the development of alternative energy sources, but that's assuming that world society does not become so disoriented and chaotic that such efforts cannot actually be effected.

If one assumes that the oil peak is far off and that technology will allow us to make a smooth transition to the next energy economy (and solve other related problems that threaten to annihilate us such as global warming), then there is no need to worry about the effects of sudden demand destruction in the oil markets. But, if the peak arrives soon, say, within the next 10 to 15 years, then no bloodless abstraction such as "demand destruction" will be able to obscure the fact that it is people who are going to get destroyed, and lots of them.

Sunday, January 01, 2006

After the Peak: What will become of the Joffrey Ballet?

For those who have begun planning for a low-energy future, the main concerns are rightly food, transportation, heat, health care and local production of goods of all kinds. On a recent trip to Chicago, however, I began thinking about the fate of our great artistic and cultural institutions. In the spirit of the oft-quoted Biblical saying, "Man does not live by bread alone," I wondered whether anyone will conclude that Chicago's world-renown Joffrey Ballet is worth saving as energy supplies become more and more scarce.

Chicagoans of all types nearly filled the auditorium for a recent performance of The Nutcracker which I attended. I found the performance intensely beautiful and occasionally (and intentionally) delightfully amusing. It involved not only the professional Joffrey dancers but also young singers and dancers from the Chicago community. Can we do without such unifying community events? Can we live by bread alone?

Everyone who thinks seriously about a post-peak world will probably agree that the arts need to be an integral part of that world. Yet, we know only too well how easily they are neglected in our current world even though we have been rich in energy for a long time. How much more might the arts be slighted in an energy-deprived world!

While in Chicago I also visited the Shedd Aquarium and wondered how such a place might function in a post-peak world. Both the Art Institute of Chicago and the nearby Field Museum of Natural History seemed much more likely to remain viable since their exhibits are largely static and, of course, inanimate. The Shedd Aquarium, on the other hand, must continuously filter 3 million gallons of water, hold the temperature of that water as low as 38 degrees (for the penguins) and feed an entire underwater zoo of animals daily. The aquarium seems certain to be shuttered even under the most mild assumptions of a post-peak world. Perhaps marking it as an inevitable casualty would allow us to go in search of less energy-intensive ways to teach the public and especially our children about the natural world which lies beneath the sea.

At the other extreme, a local jazz singer I listened to in a hotel bar and a one-man show on the life of George Gershwin both seemed much more likely to survive a peak than any of the other forms of entertainment or cultural attractions I saw. The relatively low energy content of these two performances seem to favor them in an energy-challenged future.

Still, should we close down the more energy-intensive Joffrey Ballet in a post-peak oil world? Should we let all the great theater, opera and ballet companies in the world go defunct? Should we close the museums and aquariums? Should we shutter the world's symphony orchestras? And, what about our libraries? Will we allow these great storehouses of cultural memory and knowledge to fall into disrepair and disuse?

No doubt popular entertainments will survive, kept alive by small groups in every community. And, arts and crafts are likely to flourish in a world where household objects are increasingly the product of local craft work. Folk knowledge will become an important part of our education again. But what about knowledge of the remarkable scientific and cultural achievements of the fossil fuel age? Will that knowledge be lost?

Without planning, decisions about the great artistic, cultural and scientific institutions of our society may end up being afterthoughts. Under the cloud of an emergency we could lose many of the most important parts of our heritage. And, should that happen, we would surely end up testing whether man can live by bread alone.