From Japan: An Interesting Comment On US Economic Planning, the Dollar, and Peak Cheap Oil

I shared a copy of this video with a friend in Japan earlier today.

Prof. Jeffrey Sachs of Columbia University on the Obama Budget

I received his reply, and it was much more interesting and insightful than I had hoped it would be.  Certainly a perspective that I have heard in none of the US based commentary today, a much longer term and more strategic view. 

I am sure there are plenty of problems which Japan faces that we could discuss.  It has an aging population, very low birth rates, heavy dependence on imports, and a weak military capability.  Its ability to attract and successfully assimilate immigrants is a challenge.  Every country has problems.

I am not quite sure I know the answers about peak cheap oil. But what I think I know is that the challenge to the US is an inability or an unwillingness to think and execute strategically, ie. long term, in non-military matters.  I believe this is a result of its system which is heavily oriented towards short term economic incentives, regional military conflicts, and financial speculation. 

The idea that you would allow what are essentially short term financial speculators to make important public policy decisions with far-reaching, long term consequences seems unusual or even lunatic in most parts of the world, and is certainly not a trend in historically successful organizations.

Within the metrics of energy and infrastructure, the US government is playing checkers in a game of Go.   Its greatest leverage now appears to be an ability to kick over the global economic playing table in an act of self-destruction.  And that threat is wearing thin.


A Japanese perspective on the US budget:

"Unfortunately, the risk of the whole ponzi scheme crashing sooner rather than later is going way up, rapidly.

They want the dollar to go down by 40%, but I think they are going to lose control, and they might wind up with a 90% panic drop in a few months.

As I said, Japan, around 1995, went into a full peak cheap oil panic. A lot of the government borrowing went to what is characterized as "building bridges to nowhere", but I would characterize it as building some bridges to nowhere, building some airports in nowhere, and fixing the entire rail and road infrastructure of the country.

All the bridges and tunnels have been steel plated reinforced, all the bridges are in perfect repair, and the Shinkansen system will next month be extended all the way from Aomori to Kagoshima.

In other words, I think they knew this 15 years ago and did everything that requires a lot of energy, such as steel, asphalt, cement, and completely the public transit infrastructure. The per capital floor space in Tokyo was doubled.

So, if we really do have a decade of serious energy problems coming, Japan has become about as energy efficient as it can be, with further improvements coming as appliances are replaced, etc.

The US has done nearly nothing, although I did note that the gasoline use declined by 7% in one year. There really is a lot of squandering going on. Now, however, the US needs to completely reconstruct its infrastructure, and it doesn't have the money or energy to do it.

This is why I have thought for more than a decade that the trigger for a really nasty collapse of the dollar would be peak cheap oil.

Do they realize that if the dollar drops by half that oil becomes $200 a barrel? Gasoline would be over $5, and the country would be paralyzed. If the dollar drops more than that, the existing infrastructure would become nearly useless and worthless.

I am afraid that the US has already passed the point of no return.  Had the cheap oil continued, the ponzi could have continued for a good while longer.

I think the realization that the cheap oil is gone is the primary motivation for the smash-and-grab behavior we are seeing in the US."

Perhaps, and it might also be the rationale for the increased military presence surrounding the largest known cheap oil reserves in the world.

Guest Post: Peak Oil - There Is No 'Plan B' By Chris Martenson

ChrisMartenson.com
Future Chaos: There Is No "Plan B"
By Chris Martenson
October 13, 2010

Note: This article builds on my recent report, Prediction: Things Will Unravel Faster Than You Think. It explores the coming energy crunch in more detail by looking at existing government planning and awareness, and the implications of what international recognition of Peak Oil as early as 2012 might mean.

The hard news is that there is no "Plan B." The future is likely to be more chaotic than you probably think. This was the primary conclusion that I came to after attending the most recent Association for the Study of Peak Oil & Gas (ASPO) in Washington, DC in October, 2010.

The impact of Peak Oil on markets, lifestyles, and even national solvency deserves our very highest attention - but, it turns out, some important players seem to be paying no attention at all.

ASPO conferences tend to start early, end late, and be packed with more data and information than should be consumed in one sitting. Despite all this, I was riveted to my seat. This year's usual constellation of excellent region-by-region analyses confirmed what past participants already knew: Peak Conventional Oil arrived a few years ago, and new fields, enhanced recovery techniques, and unconventional oil plays are barely going to keep up with demand over the next few years.

But there were two reports that really stood out for me. The first was given by Rear Admiral Lawrence Rice, who presented the findings of the 2010 Joint Operating Environment (a forward-looking document examining the trends, contexts, and implications for future joint force commanders in the US military), which spends 76 pages summarizing the key trends and threats of the world. "Energy" occupies six of those pages, and Peak Oil dominates the discussion. Among the conclusions (on page 29), we find this hidden gem, which uses numbers and timing that are eerily similar to those that I put forth in my April 2009 report, Oil - The Coming Supply Crunch:

By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.

(Source)

While there are two "coulds" in that statement, the mere possibility that such an imminent arrival and massive shortfall could be true should give every prudent adult a few second thoughts about what the future may hold. If surplus production capacity disappears in just a couple of years, there is an entire world of planning that should take place beforehand at the international, national, community, and personal levels.

More on the JOE report in a minute. Next I want to turn to a presentation given by Rick Munroe, who did his best to discover where within the civilian governmental departments lie the plans for what to do in a liquid-fuel-starved future.

To cut to the chase, it turns out that virtually every department that he contacted in both the US and Canada denied having any such reports. In one humorous exchange by email, Natural Resources Canada stated two things in the same email:

• “At this time the Department has no views on [Peak Oil].
• "There is no imminent Peak Oil challenge…."

It will be interesting to see how NRCan words their emails once they do develop a point of view.

The main conclusion from Rick's presentation was that Peak Oil is being examined closely and taken seriously by military analysts, but not civilian authorities. The few plans that do exist on the civilian side are decades old.

The implications of this are that North America "remains highly vulnerable to a liquid fuel emergency disruption" and, since because there are only a few dusty plans lying around, there will be greater chaos than necessary.

Now back to the JOE report.

OPEC: To meet climbing global requirements, OPEC will have to increase its output from 30 MBD to at least 50 MBD. Significantly, no OPEC nation, except perhaps Saudi Arabia, is investing sufficient sums in new technologies and recovery methods to achieve such growth. Some, like Venezuela and Russia, are actually exhausting their fields to cash in on the bonanza created by rapidly rising oil prices. (p. 26)

A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. (p. 28)

Well, the amounts needed from OPEC are quite, shall we say, 'ambitious,' as they amount to an additional two Saudia Arabias coming on line in order to make up the shortfall. A massive crunch is not otherwise avoidable. Let's be honest; there are no more Saudia Arabias to be found. Perhaps we could cobble one together out of thousands of smaller, less productive fields, but the likelihood of a few massive fields waiting to be found 1,100 feet underground is extremely remote. People in the business of actually producing oil know that producing from smaller wells takes more time, equipment, and manpower.

Meanwhile, I also happen to agree with their assessment that the details of the effects are difficult to predict but that the general theme will be one of reduced growth, and that's under the best of circumstances. More likely we'll have to figure out how to operate on zero or even negative growth.

So I came away from the ASPO conference pondering two completely polar trends that combine to create lasting discomfort. On the one hand, we have more and more private and military organizations coming to the conclusion that Peak Oil is imminent and will change everything, possibly disruptively. On the other hand, there appear to be no plans within the civilian government to deal with a liquid fuels emergency.

While we can expect that such plans will be tossed together when necessary, I would hope that Katrina taught us a few lessons about developing plans on the fly after the disaster has already arrived. Sure, things got done, but they were certainly suboptimal and led to more confusion and more chaos than if they had been carefully developed, practiced, and debugged.

The way that I understand the lack of planning on the part of the civilian side is that Peak Oil does not present any easy political wins, if any at all. Given the two-year planning cycle in DC, it's never a good time to bring up such an unpleasant subject. Politics trump necessity.

What can be rather easily predicted here is that when the next fuel crisis arrives, there will be more chaos than necessary. Some areas will get completely stiffed on their fuel allotments, while other areas will be reasonably well supplied. The reason that this can be easily predicted is because it more or less already happened in Europe during a protest by French fishermen inspired by high fuel prices. They blockaded ports in late May of 2008, and by early June, the action had spread across Europe. Shelves were quickly stripped bare of essential goods, tensions mounted, and petrol stations ran dry in a hurry.

And these were just the effects of a port blockade and tanker truck strike. What would happen with a real and persistent shortage of fuel? Well, if it were perceived to be due to a structural and permanent inability of the global oil market to meet demand, prices would rise stratospherically until demand was cut off. The only problem is, letting prices determine which industries idle back may not be the best plan.

Consider the case of agriculture. If full 'pass-through pricing' is the mechanism of rationing, which it currently is, then less food will be grown. With world grain stocks at historic lows, this is one area where we might not want to let Mr. Market dictate the activities of farmers based on fuel price. To do otherwise would require a plan of some sort, and none appear to be in effect.

That's the source of my discomfort. It's not necessarily that large organizations are beginning to share my sense of timing and impact of Peak Oil, although that will hasten the tipping point of awareness. It's that somehow I always thought that because Admiral Hyman Rickover knew well that this day would come (in the 1950's!), 60 years would have been sufficient lead time to assemble some credible plans.

No plans = unnecessary chaos.

The lack of planning also betrays a very common attitude, which might be summarized as, “We’ll deal with that when we get there.” I detect this attitude in a wide range of individuals and market participants, so it’s not at all uncommon. However, I think it's a mistake to hold this view. When (not if, but when) full awareness of Peak Oil arrives on the international stock, bond, and commodity markets we will discover just how narrow the doorways really are. Only a few will manage to preserve their wealth by squeezing through the doorway early; most will not make it through. As mentioned frequently on this site, our What Should I Do? guide for developing personal resiliency against a Post-Peak future offers a valuable resource for those just getting started in their preparations.

This thinking is explored in greater depth in Part 2 of this report (enrollment required), in which I discuss strategies to fill the official vacuum by developing our own plans for what we should do in response.

CFR: China Poised to Shock the Oil Market And Its Possible Consequences for Hyperinflation

I found this paper published by the Council on Foreign Relations to be a plausible argument in favor of the exhaustion of cheap oil, also known as Peak Oil. This growth in Chinese oil consumption into the 'knee of the curve' given its growing per capital income could very well cause an oil shock as the title of the paper suggests. As you may recall it was an oil shock that triggered the stagflation of the 1970's, a black swan event if there ever was one.

The weakness in its logic is assuming that things which happen in one country will necessarily happen in others, based on relatively simple vectors like per capita income. Examples of possible differences are the national infrastructure in roads, deployment of population relative to travel needs and the availability and pricing of public relative to private transportation. Since these are often significantly affected by policy decisions it is sometimes difficult to forecast them accurately.

Notice that China is under running the trends of the comparison countries at current levels. Why would we assume they would start tracking more closely to model once a certain threshold is surpassed? And then there are the growth assumptions for China, which could be optimistic. Extending aggressive trends is sometimes a dangerous forecasting method. It would also have been interesting to see where India fits on this chart.

Most of these factors modulate the timing of the outcome, but not necessarily the outcome itself. So the trend to cheap oil exhaustion remains persuasive; but as we all know, anything can happen, and sometimes it does.

As competition for oil increases it could have interesting effects on currency valuations, inter currency rates, and international relationships.

It was a bit of a coincidence that I had just reread How Hyperinflation Will Happen by Gonzalo Lira. It is a compelling read.

He had asked me to provide some feedback and any possible weakness in his argument, which I did in a comment at his site and in a few email responses.

Here is my edited comment from his site:

Although the scenario of a 'run on Treasuries' is possible as a path to hyperinflation, I do not think it is probable unless there is a significant 'trigger event' to precipitate it. The magnitude of the 'trigger event' required could lessen with time if the US financial situation continues to deteriorate.

Why do I say this? Because the TBTF banks have no incentive to join in the selling if the Fed stands to defend a price in the market. For JPM and Citi it is likely to be suicide to do so. Even the mighty Goldman is unlikely to buck the system, as it were. The NY Fed not only knows where the bodies are buried, it has helped to bury quite a few of them itself.

It took a 'Soros' for example to call the Bank of England out in their support for the pound in that famous incident. I see no such party of sufficient size and inclination now to take on the US Treasury and NY Fed in the debt markets.

I do think a trigger event or incident is possible. I believe it would involve an exogenous party of size, for example China, and an announcement regarding Treasury reserves.

I also think the Treasury run could be triggered by a precipitous decline in the value of the dollar. Note this implies the Treasury run would start on the shortest end of the curve, Fed notes of zero duration. Then the longer end would follow.

Very nice description of such an event, and chilling to say the least. But I think we are some distance from this without a substantial 'trigger event.'

And then I picked up this CFR essay which describes something which might fit the criterion of a 'trigger event.' After all, it was the oil embargo which precipitated the stagflation of 1970's. An oil shock could shake an already weakened US dollar as the trade deficit opened into a yawning chasm.

But I do remain convinced that hyperinflation is unlikely simply because the TBTF banks 'have the Fed's back' which is why they were allowed to continue to remain in business, with substantial subsidies, and grow even larger. All it takes to create a money machine is the Federal Reserve of New York and one or two captive Primary Dealer banks. The dodgy backroom deals are probably more abundant than we realize or suspect even now. And I do not even wish to thing of the loathsome creatures that would enjoy taking advantage of a crisis of this magnitude to further promote their oligarchy and a New World Order.

As a reminder, black swan events like market crashes and runs on banks tend to be on the edges of probability. But they can happen, and are more likely to happen at certain times. Therefore it is potentially fatal to assume that things will always remain the same, and that the big trend changes will never occur.

Council on Foreign Relations
China Will Force the World Off Oil
By Paul Swartz
August 23, 2010

As a country’s per capita income increases, its per capita oil consumption increases. Consumption growth tends to be modest up until $15,000 income per head, but then accelerates rapidly. China is quickly approaching this point. South Korea, which consumes 3% of world oil output, is too small to disrupt oil markets.

China is too big not to disrupt them. Were China’s per capita oil consumption to be brought up to South Korea’s, its share of global consumption would increase from today’s 10% to over 70%. In order to cap China’s share at 22%, which is the U.S. share today, global oil output would have to increase by a massive 13% per annum over ten years – well beyond the 1% growth averaged since 1975.

This rate of growth is inconceivable, even if vastly more expensive sources of supply, such as the Canadian oil sands, were developed at breakneck speed. If China’s recent economic growth pace continues, it will surpass South Korea’s current per capita GDP shortly after 2020 – meaning that the world may be forced onto alternative energy sources much sooner than it realizes.

Triple Digit Oil and Economic Change

Triple digit oil and the economic change that it would bring is something that intrigues, and will have a cascading impact on the real economy and globalization.

It is not that we will be running out of oil. Rather, we will be running out of cheap oil, light sweet Arabian crude, to be replaced eventually by synthetic oil rendered from tar sands and shale. The implication is $200 per barrel oil and $7.00 per gallon gasoline.

Demand for oil is peaking in developed nations like the US and Canada, and may never exceed the levels of the past few years. But demand growth in the developing nations is increasing, and perhaps dramatically.

World gasoline production has not grown in the past four years.

The oil shock may hit the economy within 12 to 15 months according to Jeff Rubin.

There are several things with which I do not necessarily agree, but his talk his interesting and thought-provoking. We do need to start thinking about how to make sure that peak oil does not translate into peak GDP.

This may require a shift from a global economy to more local economies. And I have been thinking about this for the past five years. It is coming. The only question is when.

Jeff Rubin, former Chief Economist of CIBC World Markets and the author of Why Your World Is About To Get A Whole Lot Smaller

Peak Oil: WhistleBlower at IEA Claims Oil Production Statistics Are Manipulated

Here's one for the peak oil crowd, and those who suspect that the US and others have been manipulating certain market information for their own purposes, to promote a hidden agenda, to manage public perception.

Skeptical as always for now, but let's see what happens with this story.

Guardian UK
Key oil figures were distorted by US pressure, says whistleblower
Terry Macalister
9 November 2009 21.30 GMT

Exclusive: Watchdog's estimates of reserves inflated says top official

The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.

The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by the British and many other governments to help guide their wider energy and climate change policies.

In particular they question the prediction in the last World Economic Outlook, believed to be repeated again this year, that oil production can be raised from its current level of 83m barrels a day to 105m barrels. External critics have frequently argued that this cannot be substantiated by firm evidence and say the world has already passed its peak in oil production.

Now the "peak oil" theory is gaining support at the heart of the global energy establishment. "The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year," said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. "The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.

"Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources," he added.

A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organisation was that it was "imperative not to anger the Americans" but the fact was that there was not as much oil in the world as had been admitted. "We have [already] entered the 'peak oil' zone. I think that the situation is really bad," he added.

The IEA acknowledges the importance of its own figures, boasting on its website: "The IEA governments and industry from all across the globe have come to rely on the World Energy Outlook to provide a consistent basis on which they can formulate policies and design business plans."

The British government, among others, always uses the IEA statistics rather than any of its own to argue that there is little threat to long-term oil supplies...