Deconstructing the Financial Meltdown: Wall Street’s unraveling
By Monica Perez Nevarez
October 10, 2008
The history of the financial markets is one of continuous booms and busts, and some experts categorize the current situation as but one more “correction” in a long line of recurring cycles. Unfortunately, this one is amplified by underreported hyper-inflation, fever-pitch greed happening within a globalized economy, inextricably linked financial markets, and a viral malaise stemming from the convoluted alchemy of derivatives trading.
History Repeats
Eighty years ago, when the pace of life was considerably slower, the Florida real estate crash of 1927 was an important factor in triggering the Stock Market crash of 1929, a harbinger of the Great Depression. After the crash, a public outcry for stiffer regulation in order to prevent future crashes ensued. In 1933, Congress passed the Glass-Steagall Act, which established the Federal Deposit Insurance Corporation (FDIC) and included banking reforms to control speculation.
Under this law, banks, brokerages and insurance companies were barred from entering each others' industries, and investment banking and commercial banking were separated.
Five decades later the banking industry began to successfully lobby the government to roll back what they considered to be a legislative straightjacket and an outmoded residue of Franklin Roosevelt’s New Deal. The Depository Institutions Deregulation and Monetary Control Act of 1980 and the Gramm-Leach-Bliley Act of 1999 repealed the precautionary provisions contained within Glass-Steagall and opened the floodgates of financial cross-pollination and mergers. Bank Holding Companies could now own a portfolio of financial businesses under one roof which included commercial banking, insurance, mortgage houses and investment banks. Along with modernizing the banking laws, the Gramm-Leach-Bliley also stipulated oversight from Congress, which was subsequently ignored.
Without the constraints of the Glass Steagall Act, and little or no actual oversight, the deregulated banking industry bloomed and the economy grew. The demise of Barings Bank, founded in 1762 and the oldest merchant bank in London until its collapse in 1995, should have been a wake-up call extolling the downside of derivative trading, but was seen as a mere cautionary tale in the larger euphoria of an expanding economy.
In the broader world, the new millennium saw globalization interconnect the economies of all nations; telecommunications brought the farthest reaches of the planet into the office or living room instantly; and a slew of nascent tech companies salivated over their Initial Public Offerings (IPO’s). Unseen, there was one more element in the mix.
According to Robert Prechter, President of Elliott Wave International (www.elliottwave.com), the first decade also saw the rise of a silent predator: inflation. In a recent video (seen here http://www.youtube.com/watch?v=SjS60TaD_J8 ), he explains that if stocks today were priced in real money, that is to say, in gold, we would have seen a substantial decline in stock values in the last ten years. “It’s been a silent crash because of the increase in the amount of credit and the drop in the value of dollar. The same thing happens with oil; its price in dollars has gone up, but priced in gold, it’s priced about where it was seven years ago, so it reflects the amount of inflation we have been enduring in the last decade which we did not see.” These forces, along with an insatiable and seemingly unstoppable financial sector, became the foundation of the Tech Bubble of the early 2000’s.
Greed, inflation and the fear of being left behind in the biggest boom in recent history infected other sectors of the economy. Beginning in 2001, the implosions of Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom, attest to that fact. The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act, regulated publicly traded corporate accounting practices, but did little to derail the banking juggernaut, which quickly began to look for other places to invest in.
Connecting the Financial Dots
Before the globalization era, problems in the economy caused problems in the financial markets when economically strapped consumers and businesses had trouble repaying their loans, but the consequences were usually limited to a specific segment of the banking industry. This time, the viral malaise in the mortgage sector infected the stock market, the loans sector, hedge funds and investment houses, heralding a domino effect throughout the American economy, and therefore, the world economy, that according to Henry Paulson, Secretary of the US Treasury, threatens to collapse the entire system.
Ironically, Paulson, Ben Bernanke of the Federal Reserve and President Bush had been publicly touting a ‘strong’ economy for over a year before the dominoes started to topple, hoping that their words alone would bolster enough consumer confidence to steady the financial ship, in response to a small cadre of analysts and experts that were predicting a looming crash in the financial markets during that time.
To make matters worse, the financial downturn had the makings of a political and national security issue, as China and other foreign investors hold most of the US government’s outstanding debt, which has also spiraled out of control.
On September 30, 2008, the total U.S. federal debt passed the $10 trillion mark, or $32,895 per U.S. resident. Adding unfunded Medicaid, Medicare, Social Security, and similar obligations, the debt rises to a total of $59 trillion, or $196,348 per household. And of course, there’s the almost one trillion dollars being spent on the wars in the Middle East, which put further pressure on the system.
Current GDP (a measure of national income) is $13 trillion dollars, and the CIA ranks the US debt load as a percentage of GDP in 26th place when comparing it to other national debt ratios. To put these numbers in perspective, it’s like a man with a thirteen thousand dollar yearly salary assuming debts of almost sixty thousand dollars: depending on interest rates and inflation, the payments could eat up more than half of his monthly income, leaving scant resources to pay the regular bills that due to inflation have increased substantially.
After the dot.com bust, there were millions of dollars looking for investment and nowhere to place them except real estate. Add a dash of governmental incentive in the form of a Presidential and Congressional housing initiative, and what had started as a conservative strategy to get more people into homes snowballed into the irrational exuberance equivalent of “day trading” in real estate.
Coincidentally, a large percentage of Baby Boomers found themselves nearing retirement age with fewer savings than what they expected to be able to live on. They saw the opportunity to invest in real estate as a safe and quick way to bolster their retirement portfolios, a way much "safer" than investing in the relatively complicated stock market. The combination of low interest rates, no-money-down mortgages and ever-increasing home prices fueled a bubble the likes of which, in absolute numbers, had never been seen before. At its height, annual home appreciation rates of 25% to 30% in hot markets were common.
[graph here]Robert Shiller’s plot of U.S. home prices, population, building costs, and bond yields, from his book Irrational Exhuberance.
To paraphrase a recent article in Time magazine, in the fall of 2006, real estate was booming and the world was awash in cheap money after three years of unprecedented growth. There was no fear of buying a house with nothing down, because housing prices were only going up. And there was no fear of making half-baked mortgage loans, because "house-price appreciation" would increase the value of the collateral if borrowers couldn't pay. The idea that there could be depreciation was never considered. For businesses, there was money available to buy other corporations, but since manufacturing jobs were migrating to Asia in droves, real estate was an attractive option for many that had lost jobs or lived with reduced salaries.
Then Wall Street expanded on a novel idea that had cropped up in the nineties: "securitize" the mortgage loans. The thinking was that everything was safe, because by chopping up the mortgages into small pieces, they were spreading the risk around the globe. Little did they know that precisely because they were spreading the risk, they were also spreading the subprime virus that is now consuming the world markets (subprime is a banking term for junk mortgages that do not conform to traditional due diligence parameters).
Enter the Dragon
During the first half of this decade, financial companies had noticed that growth in world wealth had stabilized, but profits from derivatives trading had skyrocketed since 2003 (see graph below). Derivatives are complex instruments devised as a form of insurance, to transfer risk among parties based on their willingness to assume additional risk, or hedge against it. Their value depends on the value of other underlying financial instruments, as opposed to a tangible product or service. The main types of derivatives are futures, forwards, options and swaps. For quick profit junkies, these are the drug of choice.
[graph here]Total world derivatives from 1998-2007 compared to total world wealth in the year 2000, http://en.wikipedia.org/wiki/Derivative_(finance)
There is a wide range of derivatives contracts available to be traded in the market, based on different types of assets such as commodities, equities, stocks, residential mortgages, commercial real estate loans, credit, bonds, interest rates, exchange rates or indexes. There are even derivatives contracts on an index of weather conditions. These are far removed from the original purpose of derivatives, and much more convoluted.
“Derivatives are weapons of financial mass destruction”
Warren Buffett, 2003
Initially, derivatives were used as a tool to transfer risk by taking the opposite position in the underlying asset. For example, a corn farmer and a tortilla producer could enter into a futures contract to exchange cash for corn in the future. Both parties reduced a future risk by buying derivatives in case their original deal fell through: for the farmer, the uncertainty of the future price was mitigated by buying forwards, and for the tortilla maker, the availability of corn was assured by buying a swap that would pay out in the event of non-fulfillment of the contract.
But once financiers realized that almost anything can be securitized (made into a tradable commodity), derivatives became a whole new avenue in which to make money. BIG money.
The Opening Salvos
Here is how leverage works: when things go well, an investor is immensely profitable; if the markets go against you, things can go down the tubes in a hurry. This is where the greed comes in. Since you can invest in derivatives with only a small percentage of the value down, if you choose right, the upside is huge. For example, if you borrow 35 times your capital and those investments rise only 1%, you've made 35% on your money (after paying back the borrowed sum). If, however, the market moves against you — as they did with Lehman Brothers during the summer — a 1% or 2% drop in the value of your assets puts the entire company’s future in doubt.
When there was a slight downturn in the economy, Lehman began to rely on investments in derivatives to produce profits, increasing its exposure while trying to overcome its losses, very much the same way as Nick Leeson did by speculating on futures contracts for Barings Bank a decade before. Lehman ultimately could not overcome its losses, so it went bankrupt. And that is what can happen to countless other financial institutions that are still equally over-leveraged in derivatives across the entire global economy.
Even though loan officers on the ground knew that deregulated mortgages were an obvious risk since 2005 when the market began to heat up, the enormity of the consequences would not be apparent to the general public until companies began asking the government for bailouts, after it was clear that many of those loans would not be paid.
Falling Dominoes
In the nine months beginning on June 2007, Bear Stearns rescued one of its struggling subprime-linked hedge funds for $3.2 billion; Goldman Sachs was bailed out for $3 billion; an $80 billion structured-investment vehicle (SIV) fund for short-term debt was created; Citigroup Inc. had its $58 billion SIV bailout; the Federal Reserve created the $20 billion Term Auction Facility; President Bush signed a $100 billion “Economic Stimulus” bill; and JP Morgan bought Bear Stearns for $29 billion.
If all these well-funded multinational corporations were susceptible, what could be expected to happen to all the smaller players in the financial markets?
Then in one extraordinary week late last September, the Federal Government bailed out Fannie Mae and Freddie Mac, the two largest mortgage companies in the US, and dumped more than $5 trillion dollars of the firms' debt onto taxpayers, nearly doubling the federal debt. Lehman Brothers declared bankruptcy, and Merrill Lynch wooed white knight Bank of America in order to avoid a similar fate. Then, the US Treasury and the Federal Reserve rescued American International Group (AIG), a $1 trillion insurance company, to the tune of $85 billion for 80% equity, citing that “the firm was too large to let fail, and that it was an exceptionally good deal to make”. Within two weeks, the government had funneled $35 billion more dollars for a total of $120 billion into AIG, after new valuations on their assets were performed.
To the US Treasury, which has a list of over 90 banks holding worthless mortgages or mortgage securities that are potential future bankruptcies, the sound of falling dominoes brought home the realization that the entire financial system could fall apart, and an immediate infusion of cash into the system was the only way to stop the hemorrhage.
Paulson and Bernanke pushed hard for a Congressional bailout package of $700 billion, which was rejected on its first pass through Capitol Hill, but was signed into law after an additional $140 billion of pork was added to it. This measure is seen by all as the first in a series of measures that will be needed to stem the economic meltdown in the next twelve to eighteen months. See it in its entirety here: http://senateconservatives.files.wordpress.com/2008/10/bailouttext.pdf
The Root of the Problems
The downside of financial internationalization is that many of the mortgages and mortgage securities owned or guaranteed by Fannie Mae and Freddie Mac were bought by foreign central banks. The Federal Reserve and US Treasury felt compelled to bail out Fannie and Freddie because if they didn't, foreigners wouldn't continue funding US trade and federal-budget deficits. So what had begun as a financial problem was becoming a political and national security problem that had to be dealt with. Meanwhile, Paulson and Bernanke kept saying that a $13 trillion U.S. economy and a $54 trillion world economy would survive a “correction” of a couple of trillion dollars.
The government felt it was imperative to save AIG because as the largest insurer in the world it had sold credit-default swaps (CDS’s, or securities that insure against a company defaulting on its obligations) to thousands of other companies. For example, if ABC Inc. bought $10 million in XYZ Company bonds, for instance, they would also hedge their bet by buying a $10 million CDS from AIG where AIG agreed to pay $10 million if XYZ defaulted on its obligations.
These transactions need collateral, and that collateral has to be paid up front. Unfortunately for AIG, the amount of collateral depends on a company’s credit rating. So if a company’s credit is downgraded, say, after rating agencies revalued the subprime mortgages and mortgage securities they hold — as happened with AIG— they have to post more collateral immediately. When Standard & Poor and Moody’s downgraded AIG’s credit rating, they had to post $14 billion overnight, which it did not have. And if it did not post it immediately, the next week AIG would have had to come up with $250 billion. And that is the downside of derivative trading: the numbers are huge both coming up and going down.
What scared the government was not the loss of one of the biggest companies in the world; it was what that loss would mean to all the companies it had insured. AIG has $1 trillion in assets, more than 70 million customers and many of the world’s biggest and most important financial firms as clients. If AIG went bankrupt, all its customers who thought they had hedged their bets would suddenly have "unbalanced books", which could lead to their own potential demise, which could lead to still more companies failing, and eventually to what economists call "systemic failure." In other words, a financial meltdown.
The derivatives markets dwarf the stock market in size. The Financial Times has published estimates that the size of the derivatives markets is currently estimated to be $450 trillion dollars US and the notional value of credit default swaps is $62 trillion US. These staggering sums do not include government and corporate bond markets or the commercial paper markets, which are also huge.
The ratio between global GDP and global debt is reaching a point where it is becoming harder to afford the payments; the instability of the market and the desperate bets on derivatives make the situation even more precarious. These numbers also point to the fact that more and more of the world’s wealth is created from speculation, and not from producing tangible goods. It stands to reason that at some point limits must be set on speculation, but free market forces were aligned against regulation, and when a tipping point was passed, the dominoes simply started to fall.
Black September
There is another downside to globalization in the financial markets: interconnectedness. By the time the opening bell rang in the New York Stock Exchange Monday Sept. 29, $1.2 trillion had already vanished from the US stock market, and all of it had happened elsewhere. Here is a brief timeline.
Shortly before 6 p.m. New York time on Sunday, Sept. 28, Belgium, the Netherlands and Luxembourg agreed to rescue the failing Fortis Bank for $16 billion. A few hours later, the German government pledged $43 billion to save Hypo Real Estate, a commercial property lender. Both rescue packages were refused and the government had to go back to the drawing table to settle the deals.
At 2:50 am, news came that the British Treasury had seized lender Bradford & Bingley and quickly sold the bulk of it to Banco Santander of Spain. The German DAX was off 256 points, or 4.2 percent, and stocks had tumbled throughout Europe.
In Tokyo, where stocks had opened higher in early trading on Monday, traders faced reports suggesting the financial crisis was taking a toll on the global economy and began to sell off. Markets across Asia followed suit. The Nikkei 225 sank 1.5 percent. In India, stocks fell nearly 4 percent. In Hong Kong, HSBC bank raised key lending rates because of the credit market turmoil, so the Hang Seng tumbled nearly 4.3 percent. As one market fed off the information of another market, all tended downwards, pushing the system further into negative territory.
As investors in New York were waking up, the credit markets were flashing red as banks reported higher borrowing costs. Investors continued to seek safety in Treasuries. The yield on one-year Treasury bills, for instance, fell to almost zero, meaning investors were willing to accept no return on their money just for the assurance that they would get their money back.
What had started 24 hours earlier, with a modest sell-off in stock markets in Asia, had turned into Wall Street’s blackest day since the 1987 crash. The broad market, as measured by the Standard & Poor’s 500-stock index, plunged almost 9 percent, its third-biggest decline since World War II. The Dow Jones industrial average (DJIA) fell nearly 778 points, or 6.98 percent, to 10,365; a week later it had fallen to 8,144.
While the European financial markets have different regulations than the US, they do not have one ‘supranational’ organization that can monitor and control the markets like the US Treasury and the Federal Reserve. Each nation has to fight this meltdown independently. But in an unprecedented move on October 8, the European central banks joined the US, Canada, Australia, China, Switzerland and various other countries’ central banks in unilaterally cutting their lending rates to 1.5%, in the hopes that this would calm the markets. Unfortunately, the stock market responded by continuing to go down, showing the government that easier credit was not what they were looking for.
Are we Facing a Depression?
Suze Orman recently stated on CNN’s Anderson Cooper 360 show that the economy is like a patient that is in intensive care, and will likely stay in intensive care for another year or year and a half. Then the patient will need to be in the hospital for another similar length of time, after which the patient will need outpatient therapy for another year or two. So while she did not think this was going to turn into a Depression, she did think that the situation was a delicate one that would last five to six years. Her prediction for the stock market bottom was a prescient 8,200, explaining that we still have some ground to lose before we can recover. The market hit bottom at 8,144 two days later.
Fareed Zakaria of CNN’s Global Public Square Oct 5 show put the possibility of a Depression into perspective: “In 1929 the stock market saw a 40% loss of value with the DJIA dropping from 381 to 229, ending in 198 at the end of the month, and $30 billion lost in one week. In 1987 the stock market lost 22% of its value, or $500 billion dollars, when the DJIA dropped 508 points from 2247 to 1739 in one day. Last week we saw the DJIA lose 7%, or more than $1 trillion dollars in one day. In terms of percentage it’s not as large as the 1929 crash, but it is a very large, very worrisome situation that will have serious repercussions for a long time to come. But it is not as bad as the crash of ’29.”
Unfortunately, a week later the market was 47% off of last year’s high (in the 14,000’s). Notwithstanding, Lou Dobbs was even more forceful: “We are not going to be in a depression!” he said emphatically on his Oct. 8 show. Let’s hope the pundits are right, and all we get is a deep recession.
Robert J. Samuelson summed the comparison up in his Oct. 5 Washington Post column, http://www.washingtonpost.com/wp-dyn/content/article/2008/10/05/AR2008100501251.html thusly:
“There have been 10 previous postwar bear markets, defined as declines of at least 20 percent in the Standard & Poor's 500-stock index. The average decline was 31.5 percent; those of 1973-74 and 2000-02 were nearly 50 percent. By contrast, the S&P's low point so far [Friday Oct.3] was 30 percent below the peak reached in October 2007.”
“The Great Depression that followed the stock market's collapse in October 1929 was a different beast. By the low point in July 1932, stocks had dropped almost 90 percent from their peak. The accompanying devastation -- bankruptcies, foreclosures, bread lines -- lasted a decade. Even in 1940, unemployment was almost 15 percent. Unlike postwar recessions, the Depression submitted neither to self-correcting market mechanisms nor government policies. Why?”
“Capitalism's inherent instabilities were blamed -- fairly, up to a point. Over-borrowing, over-investment and speculation chronically govern business cycles. But the real culprit in causing the Depression's depth and duration was the Federal Reserve. It unwittingly transformed an ordinary, if harsh, recession into a calamity by permitting a banking collapse and a disastrous drop in the money supply.”
“From 1929 to 1933, two-fifths of the nation's banks failed; depositor runs were endemic; the money supply (basically, cash plus bank deposits) declined by more than a third. People lost bank accounts; credit for companies and consumers shriveled. Economic retrenchment fed on itself and overwhelmed the normal mechanisms of recovery. These channels included: surplus inventories being sold, so companies could reorder; strong firms expanding as weak competitors disappeared; high debts being repaid so borrowers could resume normal spending.”
“What's occurring now is a frantic effort to prevent a modern financial disintegration that deepens the economic downturn. It's said that the $700 billion bailout will rescue banks and other financial institutions by having the Treasury buy their suspect mortgage-backed securities. In reality, the Treasury is also bailing out the Fed, which has already -- through various actions -- lent financial institutions roughly $1 trillion against myriad securities. The increase in federal deposit insurance from $100,000 to $250,000 aims to discourage panicky bank withdrawals. In Europe, governments have taken similar steps; Ireland and Germany have guaranteed their banks' deposits. Fed Chairman Ben Bernanke, a scholar of the Depression, understands the error [of acting timidly]. The Fed's lending and the bailout aim to avoid a ruinous credit contraction.”
“The economy will get worse. The housing glut endures. Cautious consumers have curbed spending. Banks and other financial institutions will suffer more losses. But these are all normal symptoms of recession. Our real vulnerability is a highly complex and global financial system that might resist rescue and revival. The Great Depression resulted from the mix of a weak economy and perverse government policies. If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedly misleading.”
Some contrarians have been calling the Bailout a thinly veiled attempt to save wealthy political contributors, or at the very least, the same organizations that created the crisis in the first place. Many advocate direct support of homeowners, or direct support of smaller, local banks nationwide instead of saving only the biggest players. But as Samuelson points up above, the government is not trying to save the largest institutions; it is trying to save the entire system, and the only way to do that is by saving the biggest players. So while it may seem justified to save the small homeowners and investors who depended on the government and the big financial companies for their homes or retirement plans, bailing them out will not save the system, and without the system, everybody would suffer.
Does the system need overhauling, and more intelligent regulation and oversight created? Absolutely. The best way to do that, using Ms. Orman’s analogy, is reviving the moribund patient, and then putting him on a strict health regimen.
Monday, July 6, 2009
Friday, December 26, 2008
Peak Oil and Puerto Rico
Crude Awakening: The Effects of “Peak Oil”
By Monica Perez Nevarez
November 2008
“My grandfather rode on a camel, my father rode in a car, I ride in a jet, my children will ride in cars, and my grandchildren will ride on camels.” Sheik Rashid bin Saeed Al Maktoum, Prime Minister of the United Arab Emirates and Emir of Dubai 1912-1990.
Don’t think that just because gas prices have been inching down recently, that oil will ever be cheap again. We may be at the peak of world oil production, and that has some startling repercussions.
Fossil fuels in general and petroleum in particular have been one of the most important stimuli of economic growth and prosperity in history, allowing humans to live comfortably, but beyond their environmental means. Since oil is a finite resource, when oil production decreases, modern technological society will be forced to change drastically in order to adapt to its new reality. Or at least to the reality of the early 20th century, before oil became the premier source of energy. And that is precisely what a small cadre of geophysicists, scientists and academics have been saying will happen for decades.
“There is no comprehensive substitute for oil in its high-energy density, ease of handling, myriad end-uses, and in the volumes in which we now use it. The peak of world oil production and then its irreversible decline will be a turning point in Earth history with worldwide impact beyond anything previously seen. And that event will surely occur within the lifetimes of most people living today.” Youngquist, 2004
[sidebar]
Decades of Whispers
That the world is running out of oil is not commonly known. But scientists have grappled with the problem for decades. The consequences of running out of oil to industrial society was envisioned by historian Henry Adams in 1893, quantified by architect Frederick Ackerman in 1932, and graphed by geophysicist King Hubbert in 1949.
Henry Adams, Historian (1838-1918) and great grandson of the second President of the United States, defined energy broadly to include not only steam engines or electricity but also any force capable of organizing and directing people. Adams concluded that electrification was part of a larger process of historical acceleration, which would lead to an inevitable social decline. He predicted that the ultimate result of exploiting new energy systems would be the apocalyptic end of history. (David E. Nye, Electrifying America. 1990)
Frederick Lee Ackerman, Architect (1878-1950): In 1919, Ackerman was a founding member of the Technical Alliance. The group consisted of a broad spectrum of eminent professionals. In 1932 Ackerman published his seminal paper “The Technologist Looks at the Depression”, wherein he observed that new energies were accelerating social change.
He reasoned this way: from about 4000 B.C.E. to 1750 C.E., the common welfare was limited to the work that man could do with his hands and a few crude tools. Social change, he concluded, involves a change in the techniques people use to live and work. A “social steady state” is any society in which the quantity of energy expended per capita shows no appreciable change as a function of time, whereas a society where the average quantity of energy expended per capita undergoes appreciable change exhibits “social change.” So the energy per capita equals the total amount of energy expended divided by the population. (Ackerman, 1932)
Hubbert’s Peak
In 1949 geophysicist M. King Hubbert, noted that world energy consumption per capita, after historically rising very gradually from about 2,000 to 10,000 kilogram calories per day, then increased to a much higher level in the 19th century. Further, he believed it possible for global society to maintain a high level of energy consumption indefinitely (later he labeled this “Course I”), which a decade later he refuted. He also realized that society could permanently collapse back to “the agrarian level of existence” (“Course III”).
[graph here]
A Peak Oil bell curve showing cumulative (past) production in blue and proven reserves in green. The red line delineates the future exhaustion of the resource.
The historical data through 2003 now rules out Hubbert’s most optimistic Course I. This leaves global society with only two feasible futures: Course II (an orderly decline of energy consumption to a medium steady state) and Course III (collapse to the agrarian level of existence).
After many revisions, Hubbert’s “Peak Oil” theory predicted that United States oil production would hit its highest point between 1965 and 1970. According to Hubbert, the production rate of a limited resource follows a roughly symmetrical bell-shaped curve based on the limits of exploitability and market pressures. His model has since been used by many others to predict the peak petroleum production of the whole world. To his credit, worldwide oil discoveries have been less than annual production since 1980, and no new “light sweet crude” fields have been found since the 1960’s even though billions of dollars have been spent by petroleum corporations in looking for them.
[graphic here]
US oil production (crude oil only) and the Hubbert high estimate (in blue).
[end of sidebar]
Back from the Future? The Olduvai Theory
In 1976 Richard C. Duncan, Ph.D., posited a theory that when fossil fuels run out society would slide into a post-industrial Stone Age which he named the Olduvai Theory. He concluded then that the “life expectancy of Industrial Civilization is horribly short and measured in world energy-use per person” (see a copy here http://postindustrialcivilization.blogspot.com/ ). He based his theory on the facts that fossil fuel reserves were finite and that as population increased, energy demand increased. He named his theory Olduvai (also known as the Transient Pulse Theory) as a metaphor to suggest an impending return to an agrarian society when we run out of fossil fuels because some of the earliest human fossil remains have been found in the Olduvai Gorge in Tanzania. The “Transient Pulse” second name explains that because there is only a finite amount of fossil fuels on earth, their lifecycle is discovered, exploited, and then experiences a sharp drop off as the reserves are exhausted. Therefore the “Pulse” is transient, not recurring.
[graphic here]
The three phases of the Olduvai Decline. Source: WolfAtTheDoor.
In October 1989 Duncan gave a speech at the American Society of Engineering Educators Conference in New York, titled "Evolution, Technology, and the Natural Environment: A Unified Theory of Human History", in which he concluded that the broad sweep of human history can be divided into three phases: The first, or pre-industrial phase was a very long period of equilibrium when economic growth was limited by simple tools and weak machines.
The second or industrial phase was a very short period of non-equilibrium that ignited with explosive force when powerful new machines temporarily lifted all limits to growth.
The third, or de-industrial phase lies immediately after the second phase, during which industrial economies will decline toward a new period of equilibrium, limited by the exhaustion of non-renewable resources and continuing deterioration of the natural environment.
It wasn’t until 1993 that Duncan was able to test his theory with actual population numbers from the United Nations and British Petroleum which showed there had been a peak in 1978 and a steady decline after that.
[graphic here]
Actual numbers: United States oil production (red) peaked in 1970. By 2005 imports (blue) were twice the local production. http://en.wikipedia.org/wiki/Image:US_Oil_Production_and_Imports_1920_to_2005.png
Although all primary sources of energy are important, the Olduvai theory postulates that electricity is the essence of the Industrial Civilization, and currently demand can only be satisfied by fossil fuels. World energy production per capita increased strongly from 1945 to its all-time peak in 1979. Then from 1979 to 1999 - for the first time in history - it decreased at a rate of 0.33% per year (the Olduvai 'slope'). From 2000 to 2011, according to the Olduvai theory, world energy production per capita will decrease by about 0.70% per year (the 'slide') and may create unprecedented unemployment, economic hardship, and homelessness. Then around the year 2012 the theory posits there will be a worldwide rash of electrical blackouts. These blackouts, along with other factors, will cause energy production per capita by 2030 to fall to the same value it had in 1930, the year petroleum became society’s cheapest source of energy. The rate of decline from 2012 to 2030 is 5.44% a year (the Olduvai 'cliff'). Thus, by definition, the duration of Industrial Civilization is about 100 years.
Repercussions
The impact of Peak Oil will depend on the rate of decline, use of other fossil fuels to take up the slack, developing stringent conservation measures and adopting effective alternative sources of energy (algae oil, wind, solar, water, fourth-generation nuclear). If alternatives are not found, the products produced with oil such as fertilizers, detergents, solvents, adhesives, and most plastics, would become scarce and expensive, not to mention the direct uses for oil such as transportation and generating electricity.
This rise in the cost of petroleum will lower living standards, and in the worst case scenario could lead to worldwide economic collapse, particularly in light of its effect on food production. With increased tension between countries over dwindling oil supplies, political situations may change dramatically and inequalities between countries and regions may be exacerbated, posing a national security threat to many countries.
As if that were not enough, the use of other fossil fuels to generate power, in particular coal, will have a much more deleterious effect on the environment than petroleum, with some scientists such as Dr. James Hanson, from NASA’s Goddard Space Center, going as far as saying that all coal fired electricity plants that cannot capture CO2 emissions should be bulldozed to the ground because they will damage the environment much more than petroleum ever will.
[graphic here]
Together the Conventional Fossil Fuels are set to peak before 2020 describing a single cycle. Sources: Jean Laherrère [pdf!] for Natural Gas, Energy Watch Group for Coal and The Oil Drum for Oil. http://www.theoildrum.com/files/Olduvai2007_PeakFossilFuels.png
“Where mainstream forecasts showed output rising steadily each year in a great upward curve that kept up with global demand, Dr. Sadad Al-Husseini’s calculations showed [oil] output leveling off, starting as early as 2004. Just as alarming, this production plateau would last 15 years at best, after which the output of conventional oil would begin a gradual but irreversible decline.” Tapped Out by Paul Roberts, National Geographic, June 2008
Timing the Peak
So when is Peak Oil going to happen? Predictions of the timing of peak oil include the possibilities that it has recently occurred, that it will occur shortly, or that a plateau of oil production will supply world demand for several more decades. None of these predictions dispute the peaking of oil production, and disagree only on when it will occur. But the fact is that there’s plenty of evidence that oil production has already peaked, and growing demand from developing giants like China and India may skew these results even further.
Mathew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, and CEO of the largest energy investment house in the US, said in a recent Youtube video that "...peaking is one of these fuzzy events that you only know clearly when you see it through a rear view mirror, and by then an alternate resolution is generally too late." According to his calculations, oil production peaked in May 2005.
Kenneth s. Deffeyes argues that world oil production peaked on December 16, 2005. Data from the US Energy Information Administration show that world production leveled out in 2004, and reached a peak in the third quarter of 2006, and an October 2007 retrospective report by the Energy Watch Group concluded that this was the peak of conventional oil production. Sadad Al Husseini, former head of Saudi Aramco’s production and exploration department, stated in an October 29, 2007 television interview that oil production had likely already reached its peak in 2006, and that assumptions by the International Energy Agency and Energy Information Administration of production increases by OPEC are "quite unrealistic."
“All the easy oil and gas in the world has pretty much been found. Now it’s time for the harder work of finding and producing oil from more challenging environments and work areas.” William J. Cummings, major oil-company spokesman, December 2005
New Perspectives
Texas oilman T. Boone Pickens, CEO of British Petroleum, stated in 2005 that worldwide conventional oil production was very close to peaking, and in August 2008 issued a challenge to America to convert to alternate sources of energy through the “Pickens Plan” (http://www.pickensplan.com/theplan/) . Pickens knows that a nation holding less than 3% of the world’s oil reserves while guzzling 20% of the world’s production will never be able to drill its way out of its dependency on foreign oil. He also considers it absolute madness — financially and in terms of national security — to be spending $700 billion every year on imported oil produced in volatile and in some cases hostile countries.
His answer is to develop wind power in states with steady, forceful winds (like Texas) and use it instead of natural gas to produce electricity (natural gas now generates about one-fifth of the power in the United States). He would then use the natural gas saved to fuel cars and trucks. He predicts that oil imports would drop by 40% and the country would save $300 billion a year. It is not clear whether natural gas is the right choice for Puerto Rico.
On a macro scale, it is possible that one large intra-island railway and an efficient metropolitan mass transit system may open the door for electric cars as personal transportation options, and the added expense of changing to natural gas could be avoided. Currently there are electric cars being produced for all sectors of the economy: from “daily commute” vehicles to load bearing trucks, to luxury sedans, to expensive” exotics”. Another possibility is developing the technology top harvest oil from algae to power our electricial generators and cars.
As for the dollars sent overseas, Puerto Rico spends $4 billion dollars a year at current prices; but what is even more disconcerting, one out of every seven kilowatt/hours of electricity produced is “lost”, or a loss of revenue of $602 million in 2007, and a cumulative $2.5 billion over the last six years.
Studies from around the world show that the Great Plains states of the US are home to the greatest wind energy potential in the world. The Department of Energy reports that 20% of America's electricity can come from wind, and North Dakota alone has the potential to provide power for more than a quarter of the country. The Department of Energy has pinpointed the best sites for wind generation in Puerto Rico as being off the coast of Ponce, off the coast of Arecibo, and off the southern coast of Vieques. On land, placing wind turbines on mountain ridges or in Fajardo are the only other places where efficient wind production can occur.
There are, Pickens concedes, obstacles. The country would need to rebuild the power grid to transmit wind energy from the Great Plains to consumers in the big population centers. It would need lots of service stations capable of selling natural gas. And automakers would need to produce cars that run on natural gas. There are about 8 million such vehicles in the world, but only 142,000 in the United States. These obsatacles are magnified when placed in Puerto Rico.
Mr. Pickens is putting his money where his ideas are, and in Texas he has begun assembling the pieces of a huge wind farm. He estimates the cost at $6 billion to $10 billion (his Mesa Power is the lead investor). He confidently forecasts that this wind farm and others like it will not only reduce the demand for oil but create thousands of construction and operating jobs in the US.
In Puerto Rico, a debate has been raging over a wind farm that was recently given permission to proceed on the southwest coast of the island. While wind power in general is a no-brainer as an alternative source of energy for Puerto Rico, placing the wind farm next to a migratory bird sanctuary was an unfortunate choice, as well as its leeward location on the island, which does not make the most efficient use of the Trade winds that constantly bathe the windward coast (the northeast edge) of the island. Business Puerto Rico tried unsuccessfully to communicate with its developer, Victor Gonzalez.
The Cost of Change
The problem is that most people don’t really understand the total cost of implementation that wind generation constitutes, ie., the direct costs to the electricity grid. Without electricity, nothing can be produced, and the investment required to maintain what already exists today is staggering. Richard Duncan thinks that “permanent blackouts are coming and sooner or later the power grids will go down and never come back up.”
Why? The International Energy Agency (IEA, 2004) estimates that the cumulative worldwide energy investment funds required from 2003 to 2030 would be about $15.32 trillion. Thus the IEA projects that the worldwide investment funds essential for electricity will be 3.7 times the amount needed for oil alone, and more than all of that required for oil, gas, and coal combined.
The already debt-ridden nations, cities, and corporations will not be able to raise the investment funds required by 2030 for world energy. (Not to mention the vastly greater investment funds required for agriculture, roads, streets, schools, railroads, water resources, sewer systems, and so forth.) And going after offshore or shale sands petrleum will only be a stop-gap solution that lengthens the use of fossil fuels by a few years, and is not a long-term solution.
[graphic here]
Unconventional oil reserves are several times as big as conventional ones, but are more expensive to produce and will not solve the ultimate problem: fossil fuels are still a finite resource. Source: Wikipedia
The ramifications of Peak Oil are legion, because it is the basis of so many businesses, so many products, and is such a large part of everyday life. It affects all individuals, all companies, all nations, all foreign policy, the balance of power between nations, all industrial food production and the global economy in ways too numerous to be obvious to the individual consumer.
Richard Holbrook, former US Ambassador, recently interviewed on Fareed Zakarias’s CNN show, Global Public Square (GPS) summarized it this way: “Every single day, $2.2 Billion dollars flow to oil producing countries from oil consuming countries; $1.3 billion comes from the US alone. Venezuela rakes in $250 to $300 million dollars a day, which President Chavez spends by investing five times as much on Latin American Aid as the US does, in that way shoring up their support, as well as buying $50 billion dollar’s worth of military weapons from Russia last year, and in that way potentially destabilizing relations with the US. There is a huge transfer of wealth to countries that are at odds with US interests, and the petrodollars are changing the balance of power in this hemisphere. Petro power is no doubt changing the world. The problem is that economic decline weakens the US more than war.” Putting that into a local perspective, Puerto Rico may become the refuge of last resort for the rest of the poorer nations in the Caribbean.
“We need to mobilize for [an energy] war. It’s time to get going. It’s a matter of personal responsibility.” James Woolsey, former Director of the CIA, who owns a self-sufficient solar-powered home and a hybrid car, speaking about Peak Oil. We Were Warned: Running out of Gas, CNN Special investigations Unit, August 2008
“Solar powered homes are a hedge against Peak oil.” We Were Warned: Running out of Gas, CNN Special investigations Unit, August 2008
[graphic here]
OPEC Crude Oil Production 2002-2006. Source: Middle East Economic Survey http://en.wikipedia.org/wiki/Image:MEESchart.png
To further exacerbate the situation, oil producers will tend to keep a little more for themselves rather than selling it on the open market. One study, the Export Land Model, shows that the amount of oil available internationally drops much faster than production in exporting countries because the exporting countries maintain set-asides for their internal growth in demand and therefore deprive the global market of that amount of oil.
Peak oil would leave many people unable to afford petroleum-based fuel for their cars, and force them to move to cities or higher density areas, where walking and public transportation are more viable options. People will have to choose between their jobs in the city, and their homes and lifestyles in the suburbs. One theory being bandied about is that everyone will move into ten or twenty mega-cities. Who knows? Suburbia may become the slums of the future.
There are solutions: mass-transit, long-distance trains and bullet trains, new pedestrian areas within cities, “smart growth” and “New Urbanism”, but they all entail planning, financing, and change. Inevitably, the hardest hit sector of the population will be the commuters. Unless suburbs can be transformed to include commercial, services and manufacturing companies within a ten mile radius of where people live, those communities will be too isolated to make them useful living spaces.
[graphic here]
World Crude Oil Production 1960-2004. Sources: DOE/EIA, IEA http://en.wikipedia.org/wiki/Image:Crude_NGPL_IEAtotal_1960-2004.png
"The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking." US Department of Energy, Hirsh Report, Peaking of World Oil Production: Impacts, Mitigation, & Risk Management, 2005
Peak Oil, Industrial Agriculture and Food Scarcity
Since the 1940s, agriculture has dramatically increased its productivity, due largely to the use of petrochemical derived pesticides, fertilizers, and increased mechanization (the so-called “Green Revolution”, when industrial farming was born).
This has allowed world population to more than double over the last 50 years. However, every “energy unit” delivered in food grown using modern industrial techniques requires over ten energy units to produce and deliver, which is unsustainable.
Many agriculture, petroleum, sociology, and ecology experts have warned that the ever decreasing supply of oil will inflict major damage to the modern industrial agriculture system causing a collapse in food production ability and food shortages. One problem stems from the fact that a field that has been doused with petrochemicals takes years, sometimes decades, to become productive again, so once the petrochemicals are gone, all the land currently under industrial farming practices will be unusable for organic farming: the land will be inert, and could turn to desert. This situation has given new impulse to the “local food” movement, which originally was an offshoot of organic farming, and now is fast becoming the only intelligent alternative to growing food.
Another example of the chain reactions which could be caused by Peak Oil involves growing biofuels; the problems caused by farmers raising corn, sugar and soy for inefficient energy production has lowered food production and caused food prices to rise. This “food versus fuel” issue will be exacerbated as demand for ethanol and biofuel increases. In Puerto Rico, farmers desperate to make a profit have decided to try anything in order to keep working, even if it means growing crops that have succeeded in other countries (sugar in Brazil), but are contraindicated for Puerto Rico considering the island must be food-secure, and every inch of land spent on ethanol will take away land that can be used for growing edible goods.
One clear solution would be algae farming, which is done exclusively on non-agricultural land, and can produce one hundred times as much oil in one acre as can corn, cane or soy.
In the absence of an overall plan for the economic development of the island, farmers have to keep their income stream flowing. This makes the publication of the Land Use Plan and a cogent Transition Plan back to sustainable agrarian methods important first steps towards a stable future.
One positive effect of oil shortages might be a full return to organic farming in order to satisfy the sustainability requirement of food production. In light of Peak Oil concerns, organic methods can be maintained indefinitely and they use no petroleum-based pesticides, herbicides, or fertilizers.
Some farmers using modern organic-farming methods have reported yields as high as those available from conventional farming. Industrial farming may have to evolve back into smaller, family owned plots near their markets. Organic farming is more labor-intensive and would require a shift of a work force from urban to rural areas, and distribution may be limited to a couple of hundred miles away from the end-user, making local farms a small business opportunity for the future.
Conclusion
Based on finite fossil fuel resources, energy per capita is indeed headed towards a cliff, and this may lead mankind back to an agrarian society if action is not taken to address this problem. The journey back to Olduvai is basically unavoidable once the fossil fuels are used up. The only chance civilization has is deciding whether it wants to change in a managed and orderly form to sustainable practices or change abruptly and violently while blindly holding on to an ever decreasing resource.
Local experts think it is within our capacity to build a new energy gathering infrastructure to substitute for the decline in conventional fossil fuels; Puerto Rico certainly has the talent and the natural resources. By combining energy efficiency measures with the simultaneous expansion of alternate energy sources, we can secure a civilized transition into the XXI century.
A tremendous opportunity exists to build a more sustainable energy future and building this future will provide vast opportunity for economic growth and prosperity. But it will take dedication to sustainable methods of living and working, consensus from all sectors on a shared vision of the future, and a little sacrifice from everyone: individuals that must learn to conserve and use resources wisely, as well as businesses that must learn new ways of doing business, and a government that frames the business environment and the natural environment in ways that allow both to grow and thrive. Amassing great wealth in fewer and fewer hands will become harder to do; spreading the wealth may end up saving a company, as counter-intuitive as that may sound.
This generation faces the most daunting challenge ever faced by humanity: the effects of Peak Oil and Climate Change. Both have about a ten year window before catastrophic consequences permanently derail civilization’s progress. There can be no doubt that just as the Global Economy has shaken up our economic way of life, these two other factors need serious attention immediately, and any viable solution will have to respect all three world-wide trends.
“It’s hard to get a man to understand something when his income depends on him not understanding it.” -Upton Sinclair
Ultimately, what this situation calls for is letting go of preconceived ideas: how people “ought” to live, how much they “should” spend or consume, where they “must” work. The opportunity presents itself to visualize a totally different future than what we had expected; and that may not be a bad thing.
By Monica Perez Nevarez
November 2008
“My grandfather rode on a camel, my father rode in a car, I ride in a jet, my children will ride in cars, and my grandchildren will ride on camels.” Sheik Rashid bin Saeed Al Maktoum, Prime Minister of the United Arab Emirates and Emir of Dubai 1912-1990.
Don’t think that just because gas prices have been inching down recently, that oil will ever be cheap again. We may be at the peak of world oil production, and that has some startling repercussions.
Fossil fuels in general and petroleum in particular have been one of the most important stimuli of economic growth and prosperity in history, allowing humans to live comfortably, but beyond their environmental means. Since oil is a finite resource, when oil production decreases, modern technological society will be forced to change drastically in order to adapt to its new reality. Or at least to the reality of the early 20th century, before oil became the premier source of energy. And that is precisely what a small cadre of geophysicists, scientists and academics have been saying will happen for decades.
“There is no comprehensive substitute for oil in its high-energy density, ease of handling, myriad end-uses, and in the volumes in which we now use it. The peak of world oil production and then its irreversible decline will be a turning point in Earth history with worldwide impact beyond anything previously seen. And that event will surely occur within the lifetimes of most people living today.” Youngquist, 2004
[sidebar]
Decades of Whispers
That the world is running out of oil is not commonly known. But scientists have grappled with the problem for decades. The consequences of running out of oil to industrial society was envisioned by historian Henry Adams in 1893, quantified by architect Frederick Ackerman in 1932, and graphed by geophysicist King Hubbert in 1949.
Henry Adams, Historian (1838-1918) and great grandson of the second President of the United States, defined energy broadly to include not only steam engines or electricity but also any force capable of organizing and directing people. Adams concluded that electrification was part of a larger process of historical acceleration, which would lead to an inevitable social decline. He predicted that the ultimate result of exploiting new energy systems would be the apocalyptic end of history. (David E. Nye, Electrifying America. 1990)
Frederick Lee Ackerman, Architect (1878-1950): In 1919, Ackerman was a founding member of the Technical Alliance. The group consisted of a broad spectrum of eminent professionals. In 1932 Ackerman published his seminal paper “The Technologist Looks at the Depression”, wherein he observed that new energies were accelerating social change.
He reasoned this way: from about 4000 B.C.E. to 1750 C.E., the common welfare was limited to the work that man could do with his hands and a few crude tools. Social change, he concluded, involves a change in the techniques people use to live and work. A “social steady state” is any society in which the quantity of energy expended per capita shows no appreciable change as a function of time, whereas a society where the average quantity of energy expended per capita undergoes appreciable change exhibits “social change.” So the energy per capita equals the total amount of energy expended divided by the population. (Ackerman, 1932)
Hubbert’s Peak
In 1949 geophysicist M. King Hubbert, noted that world energy consumption per capita, after historically rising very gradually from about 2,000 to 10,000 kilogram calories per day, then increased to a much higher level in the 19th century. Further, he believed it possible for global society to maintain a high level of energy consumption indefinitely (later he labeled this “Course I”), which a decade later he refuted. He also realized that society could permanently collapse back to “the agrarian level of existence” (“Course III”).
[graph here]
A Peak Oil bell curve showing cumulative (past) production in blue and proven reserves in green. The red line delineates the future exhaustion of the resource.
The historical data through 2003 now rules out Hubbert’s most optimistic Course I. This leaves global society with only two feasible futures: Course II (an orderly decline of energy consumption to a medium steady state) and Course III (collapse to the agrarian level of existence).
After many revisions, Hubbert’s “Peak Oil” theory predicted that United States oil production would hit its highest point between 1965 and 1970. According to Hubbert, the production rate of a limited resource follows a roughly symmetrical bell-shaped curve based on the limits of exploitability and market pressures. His model has since been used by many others to predict the peak petroleum production of the whole world. To his credit, worldwide oil discoveries have been less than annual production since 1980, and no new “light sweet crude” fields have been found since the 1960’s even though billions of dollars have been spent by petroleum corporations in looking for them.
[graphic here]
US oil production (crude oil only) and the Hubbert high estimate (in blue).
[end of sidebar]
Back from the Future? The Olduvai Theory
In 1976 Richard C. Duncan, Ph.D., posited a theory that when fossil fuels run out society would slide into a post-industrial Stone Age which he named the Olduvai Theory. He concluded then that the “life expectancy of Industrial Civilization is horribly short and measured in world energy-use per person” (see a copy here http://postindustrialcivilization.blogspot.com/ ). He based his theory on the facts that fossil fuel reserves were finite and that as population increased, energy demand increased. He named his theory Olduvai (also known as the Transient Pulse Theory) as a metaphor to suggest an impending return to an agrarian society when we run out of fossil fuels because some of the earliest human fossil remains have been found in the Olduvai Gorge in Tanzania. The “Transient Pulse” second name explains that because there is only a finite amount of fossil fuels on earth, their lifecycle is discovered, exploited, and then experiences a sharp drop off as the reserves are exhausted. Therefore the “Pulse” is transient, not recurring.
[graphic here]
The three phases of the Olduvai Decline. Source: WolfAtTheDoor.
In October 1989 Duncan gave a speech at the American Society of Engineering Educators Conference in New York, titled "Evolution, Technology, and the Natural Environment: A Unified Theory of Human History", in which he concluded that the broad sweep of human history can be divided into three phases: The first, or pre-industrial phase was a very long period of equilibrium when economic growth was limited by simple tools and weak machines.
The second or industrial phase was a very short period of non-equilibrium that ignited with explosive force when powerful new machines temporarily lifted all limits to growth.
The third, or de-industrial phase lies immediately after the second phase, during which industrial economies will decline toward a new period of equilibrium, limited by the exhaustion of non-renewable resources and continuing deterioration of the natural environment.
It wasn’t until 1993 that Duncan was able to test his theory with actual population numbers from the United Nations and British Petroleum which showed there had been a peak in 1978 and a steady decline after that.
[graphic here]
Actual numbers: United States oil production (red) peaked in 1970. By 2005 imports (blue) were twice the local production. http://en.wikipedia.org/wiki/Image:US_Oil_Production_and_Imports_1920_to_2005.png
Although all primary sources of energy are important, the Olduvai theory postulates that electricity is the essence of the Industrial Civilization, and currently demand can only be satisfied by fossil fuels. World energy production per capita increased strongly from 1945 to its all-time peak in 1979. Then from 1979 to 1999 - for the first time in history - it decreased at a rate of 0.33% per year (the Olduvai 'slope'). From 2000 to 2011, according to the Olduvai theory, world energy production per capita will decrease by about 0.70% per year (the 'slide') and may create unprecedented unemployment, economic hardship, and homelessness. Then around the year 2012 the theory posits there will be a worldwide rash of electrical blackouts. These blackouts, along with other factors, will cause energy production per capita by 2030 to fall to the same value it had in 1930, the year petroleum became society’s cheapest source of energy. The rate of decline from 2012 to 2030 is 5.44% a year (the Olduvai 'cliff'). Thus, by definition, the duration of Industrial Civilization is about 100 years.
Repercussions
The impact of Peak Oil will depend on the rate of decline, use of other fossil fuels to take up the slack, developing stringent conservation measures and adopting effective alternative sources of energy (algae oil, wind, solar, water, fourth-generation nuclear). If alternatives are not found, the products produced with oil such as fertilizers, detergents, solvents, adhesives, and most plastics, would become scarce and expensive, not to mention the direct uses for oil such as transportation and generating electricity.
This rise in the cost of petroleum will lower living standards, and in the worst case scenario could lead to worldwide economic collapse, particularly in light of its effect on food production. With increased tension between countries over dwindling oil supplies, political situations may change dramatically and inequalities between countries and regions may be exacerbated, posing a national security threat to many countries.
As if that were not enough, the use of other fossil fuels to generate power, in particular coal, will have a much more deleterious effect on the environment than petroleum, with some scientists such as Dr. James Hanson, from NASA’s Goddard Space Center, going as far as saying that all coal fired electricity plants that cannot capture CO2 emissions should be bulldozed to the ground because they will damage the environment much more than petroleum ever will.
[graphic here]
Together the Conventional Fossil Fuels are set to peak before 2020 describing a single cycle. Sources: Jean Laherrère [pdf!] for Natural Gas, Energy Watch Group for Coal and The Oil Drum for Oil. http://www.theoildrum.com/files/Olduvai2007_PeakFossilFuels.png
“Where mainstream forecasts showed output rising steadily each year in a great upward curve that kept up with global demand, Dr. Sadad Al-Husseini’s calculations showed [oil] output leveling off, starting as early as 2004. Just as alarming, this production plateau would last 15 years at best, after which the output of conventional oil would begin a gradual but irreversible decline.” Tapped Out by Paul Roberts, National Geographic, June 2008
Timing the Peak
So when is Peak Oil going to happen? Predictions of the timing of peak oil include the possibilities that it has recently occurred, that it will occur shortly, or that a plateau of oil production will supply world demand for several more decades. None of these predictions dispute the peaking of oil production, and disagree only on when it will occur. But the fact is that there’s plenty of evidence that oil production has already peaked, and growing demand from developing giants like China and India may skew these results even further.
Mathew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, and CEO of the largest energy investment house in the US, said in a recent Youtube video that "...peaking is one of these fuzzy events that you only know clearly when you see it through a rear view mirror, and by then an alternate resolution is generally too late." According to his calculations, oil production peaked in May 2005.
Kenneth s. Deffeyes argues that world oil production peaked on December 16, 2005. Data from the US Energy Information Administration show that world production leveled out in 2004, and reached a peak in the third quarter of 2006, and an October 2007 retrospective report by the Energy Watch Group concluded that this was the peak of conventional oil production. Sadad Al Husseini, former head of Saudi Aramco’s production and exploration department, stated in an October 29, 2007 television interview that oil production had likely already reached its peak in 2006, and that assumptions by the International Energy Agency and Energy Information Administration of production increases by OPEC are "quite unrealistic."
“All the easy oil and gas in the world has pretty much been found. Now it’s time for the harder work of finding and producing oil from more challenging environments and work areas.” William J. Cummings, major oil-company spokesman, December 2005
New Perspectives
Texas oilman T. Boone Pickens, CEO of British Petroleum, stated in 2005 that worldwide conventional oil production was very close to peaking, and in August 2008 issued a challenge to America to convert to alternate sources of energy through the “Pickens Plan” (http://www.pickensplan.com/theplan/) . Pickens knows that a nation holding less than 3% of the world’s oil reserves while guzzling 20% of the world’s production will never be able to drill its way out of its dependency on foreign oil. He also considers it absolute madness — financially and in terms of national security — to be spending $700 billion every year on imported oil produced in volatile and in some cases hostile countries.
His answer is to develop wind power in states with steady, forceful winds (like Texas) and use it instead of natural gas to produce electricity (natural gas now generates about one-fifth of the power in the United States). He would then use the natural gas saved to fuel cars and trucks. He predicts that oil imports would drop by 40% and the country would save $300 billion a year. It is not clear whether natural gas is the right choice for Puerto Rico.
On a macro scale, it is possible that one large intra-island railway and an efficient metropolitan mass transit system may open the door for electric cars as personal transportation options, and the added expense of changing to natural gas could be avoided. Currently there are electric cars being produced for all sectors of the economy: from “daily commute” vehicles to load bearing trucks, to luxury sedans, to expensive” exotics”. Another possibility is developing the technology top harvest oil from algae to power our electricial generators and cars.
As for the dollars sent overseas, Puerto Rico spends $4 billion dollars a year at current prices; but what is even more disconcerting, one out of every seven kilowatt/hours of electricity produced is “lost”, or a loss of revenue of $602 million in 2007, and a cumulative $2.5 billion over the last six years.
Studies from around the world show that the Great Plains states of the US are home to the greatest wind energy potential in the world. The Department of Energy reports that 20% of America's electricity can come from wind, and North Dakota alone has the potential to provide power for more than a quarter of the country. The Department of Energy has pinpointed the best sites for wind generation in Puerto Rico as being off the coast of Ponce, off the coast of Arecibo, and off the southern coast of Vieques. On land, placing wind turbines on mountain ridges or in Fajardo are the only other places where efficient wind production can occur.
There are, Pickens concedes, obstacles. The country would need to rebuild the power grid to transmit wind energy from the Great Plains to consumers in the big population centers. It would need lots of service stations capable of selling natural gas. And automakers would need to produce cars that run on natural gas. There are about 8 million such vehicles in the world, but only 142,000 in the United States. These obsatacles are magnified when placed in Puerto Rico.
Mr. Pickens is putting his money where his ideas are, and in Texas he has begun assembling the pieces of a huge wind farm. He estimates the cost at $6 billion to $10 billion (his Mesa Power is the lead investor). He confidently forecasts that this wind farm and others like it will not only reduce the demand for oil but create thousands of construction and operating jobs in the US.
In Puerto Rico, a debate has been raging over a wind farm that was recently given permission to proceed on the southwest coast of the island. While wind power in general is a no-brainer as an alternative source of energy for Puerto Rico, placing the wind farm next to a migratory bird sanctuary was an unfortunate choice, as well as its leeward location on the island, which does not make the most efficient use of the Trade winds that constantly bathe the windward coast (the northeast edge) of the island. Business Puerto Rico tried unsuccessfully to communicate with its developer, Victor Gonzalez.
The Cost of Change
The problem is that most people don’t really understand the total cost of implementation that wind generation constitutes, ie., the direct costs to the electricity grid. Without electricity, nothing can be produced, and the investment required to maintain what already exists today is staggering. Richard Duncan thinks that “permanent blackouts are coming and sooner or later the power grids will go down and never come back up.”
Why? The International Energy Agency (IEA, 2004) estimates that the cumulative worldwide energy investment funds required from 2003 to 2030 would be about $15.32 trillion. Thus the IEA projects that the worldwide investment funds essential for electricity will be 3.7 times the amount needed for oil alone, and more than all of that required for oil, gas, and coal combined.
The already debt-ridden nations, cities, and corporations will not be able to raise the investment funds required by 2030 for world energy. (Not to mention the vastly greater investment funds required for agriculture, roads, streets, schools, railroads, water resources, sewer systems, and so forth.) And going after offshore or shale sands petrleum will only be a stop-gap solution that lengthens the use of fossil fuels by a few years, and is not a long-term solution.
[graphic here]
Unconventional oil reserves are several times as big as conventional ones, but are more expensive to produce and will not solve the ultimate problem: fossil fuels are still a finite resource. Source: Wikipedia
The ramifications of Peak Oil are legion, because it is the basis of so many businesses, so many products, and is such a large part of everyday life. It affects all individuals, all companies, all nations, all foreign policy, the balance of power between nations, all industrial food production and the global economy in ways too numerous to be obvious to the individual consumer.
Richard Holbrook, former US Ambassador, recently interviewed on Fareed Zakarias’s CNN show, Global Public Square (GPS) summarized it this way: “Every single day, $2.2 Billion dollars flow to oil producing countries from oil consuming countries; $1.3 billion comes from the US alone. Venezuela rakes in $250 to $300 million dollars a day, which President Chavez spends by investing five times as much on Latin American Aid as the US does, in that way shoring up their support, as well as buying $50 billion dollar’s worth of military weapons from Russia last year, and in that way potentially destabilizing relations with the US. There is a huge transfer of wealth to countries that are at odds with US interests, and the petrodollars are changing the balance of power in this hemisphere. Petro power is no doubt changing the world. The problem is that economic decline weakens the US more than war.” Putting that into a local perspective, Puerto Rico may become the refuge of last resort for the rest of the poorer nations in the Caribbean.
“We need to mobilize for [an energy] war. It’s time to get going. It’s a matter of personal responsibility.” James Woolsey, former Director of the CIA, who owns a self-sufficient solar-powered home and a hybrid car, speaking about Peak Oil. We Were Warned: Running out of Gas, CNN Special investigations Unit, August 2008
“Solar powered homes are a hedge against Peak oil.” We Were Warned: Running out of Gas, CNN Special investigations Unit, August 2008
[graphic here]
OPEC Crude Oil Production 2002-2006. Source: Middle East Economic Survey http://en.wikipedia.org/wiki/Image:MEESchart.png
To further exacerbate the situation, oil producers will tend to keep a little more for themselves rather than selling it on the open market. One study, the Export Land Model, shows that the amount of oil available internationally drops much faster than production in exporting countries because the exporting countries maintain set-asides for their internal growth in demand and therefore deprive the global market of that amount of oil.
Peak oil would leave many people unable to afford petroleum-based fuel for their cars, and force them to move to cities or higher density areas, where walking and public transportation are more viable options. People will have to choose between their jobs in the city, and their homes and lifestyles in the suburbs. One theory being bandied about is that everyone will move into ten or twenty mega-cities. Who knows? Suburbia may become the slums of the future.
There are solutions: mass-transit, long-distance trains and bullet trains, new pedestrian areas within cities, “smart growth” and “New Urbanism”, but they all entail planning, financing, and change. Inevitably, the hardest hit sector of the population will be the commuters. Unless suburbs can be transformed to include commercial, services and manufacturing companies within a ten mile radius of where people live, those communities will be too isolated to make them useful living spaces.
[graphic here]
World Crude Oil Production 1960-2004. Sources: DOE/EIA, IEA http://en.wikipedia.org/wiki/Image:Crude_NGPL_IEAtotal_1960-2004.png
"The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking." US Department of Energy, Hirsh Report, Peaking of World Oil Production: Impacts, Mitigation, & Risk Management, 2005
Peak Oil, Industrial Agriculture and Food Scarcity
Since the 1940s, agriculture has dramatically increased its productivity, due largely to the use of petrochemical derived pesticides, fertilizers, and increased mechanization (the so-called “Green Revolution”, when industrial farming was born).
This has allowed world population to more than double over the last 50 years. However, every “energy unit” delivered in food grown using modern industrial techniques requires over ten energy units to produce and deliver, which is unsustainable.
Many agriculture, petroleum, sociology, and ecology experts have warned that the ever decreasing supply of oil will inflict major damage to the modern industrial agriculture system causing a collapse in food production ability and food shortages. One problem stems from the fact that a field that has been doused with petrochemicals takes years, sometimes decades, to become productive again, so once the petrochemicals are gone, all the land currently under industrial farming practices will be unusable for organic farming: the land will be inert, and could turn to desert. This situation has given new impulse to the “local food” movement, which originally was an offshoot of organic farming, and now is fast becoming the only intelligent alternative to growing food.
Another example of the chain reactions which could be caused by Peak Oil involves growing biofuels; the problems caused by farmers raising corn, sugar and soy for inefficient energy production has lowered food production and caused food prices to rise. This “food versus fuel” issue will be exacerbated as demand for ethanol and biofuel increases. In Puerto Rico, farmers desperate to make a profit have decided to try anything in order to keep working, even if it means growing crops that have succeeded in other countries (sugar in Brazil), but are contraindicated for Puerto Rico considering the island must be food-secure, and every inch of land spent on ethanol will take away land that can be used for growing edible goods.
One clear solution would be algae farming, which is done exclusively on non-agricultural land, and can produce one hundred times as much oil in one acre as can corn, cane or soy.
In the absence of an overall plan for the economic development of the island, farmers have to keep their income stream flowing. This makes the publication of the Land Use Plan and a cogent Transition Plan back to sustainable agrarian methods important first steps towards a stable future.
One positive effect of oil shortages might be a full return to organic farming in order to satisfy the sustainability requirement of food production. In light of Peak Oil concerns, organic methods can be maintained indefinitely and they use no petroleum-based pesticides, herbicides, or fertilizers.
Some farmers using modern organic-farming methods have reported yields as high as those available from conventional farming. Industrial farming may have to evolve back into smaller, family owned plots near their markets. Organic farming is more labor-intensive and would require a shift of a work force from urban to rural areas, and distribution may be limited to a couple of hundred miles away from the end-user, making local farms a small business opportunity for the future.
Conclusion
Based on finite fossil fuel resources, energy per capita is indeed headed towards a cliff, and this may lead mankind back to an agrarian society if action is not taken to address this problem. The journey back to Olduvai is basically unavoidable once the fossil fuels are used up. The only chance civilization has is deciding whether it wants to change in a managed and orderly form to sustainable practices or change abruptly and violently while blindly holding on to an ever decreasing resource.
Local experts think it is within our capacity to build a new energy gathering infrastructure to substitute for the decline in conventional fossil fuels; Puerto Rico certainly has the talent and the natural resources. By combining energy efficiency measures with the simultaneous expansion of alternate energy sources, we can secure a civilized transition into the XXI century.
A tremendous opportunity exists to build a more sustainable energy future and building this future will provide vast opportunity for economic growth and prosperity. But it will take dedication to sustainable methods of living and working, consensus from all sectors on a shared vision of the future, and a little sacrifice from everyone: individuals that must learn to conserve and use resources wisely, as well as businesses that must learn new ways of doing business, and a government that frames the business environment and the natural environment in ways that allow both to grow and thrive. Amassing great wealth in fewer and fewer hands will become harder to do; spreading the wealth may end up saving a company, as counter-intuitive as that may sound.
This generation faces the most daunting challenge ever faced by humanity: the effects of Peak Oil and Climate Change. Both have about a ten year window before catastrophic consequences permanently derail civilization’s progress. There can be no doubt that just as the Global Economy has shaken up our economic way of life, these two other factors need serious attention immediately, and any viable solution will have to respect all three world-wide trends.
“It’s hard to get a man to understand something when his income depends on him not understanding it.” -Upton Sinclair
Ultimately, what this situation calls for is letting go of preconceived ideas: how people “ought” to live, how much they “should” spend or consume, where they “must” work. The opportunity presents itself to visualize a totally different future than what we had expected; and that may not be a bad thing.
Thursday, November 6, 2008
Right Action
WE SHOULD ACT LIKE THE ANIMALS WE ARE
Jo Marchant of New Scientist interviews David Suzuki
By Jo Marchant
Is anything more important than the environment?
I can't imagine anything more important than air, water, soil, energy and biodiversity. These are the things that keep us alive.
So why do we put the economy first, and use it to define progress?
You would have thought that our first priority would be to ask what the ecologists are finding out; because we have to live within the conditions and principles they define. Instead, we've elevated the economy above ecology. After all, ecology and economics have the same root -- "eco", from the Greek oikos, for "home". Ecology is the study of home, economics is the management of home, and of course, our home is the biosphere.
How do the economists answer you?
They believe humans are so creative and productive that the sky's the limit, that if we run out of resources, we'll find substitutes. If the substitutes run out, we'll go to the moon, mine asteroids or harvest sunlight in space and microwave it to Earth. They think the whole universe is there as a potential resource.
Isn't space a potential resource?
The option of going into space allows you to pretend that technology will get our asses out of any problem so we don't have to worry, which is just not true. Limitless resources are a fool's dream that we can never achieve. The reality is we are biological beings dependent on the biosphere. What kind of intelligent creature, knowing that these are our crucial limitations, would act as if we can use Earth as a garbage can and not pay a price for that?
Has any human society ever lived sustainably?
When we were hunter-gatherers we had a very small ecological footprint because all we had was what we could carry from one place to another. But as technology increased, we began to live in large aggregates of villages, and people started to use more than the surroundings could supply. As a result, civilizations collapsed again and again, as Jared Diamond described in Collapse. In the past, though, when conditions got more difficult, people were able to move. That's why we spread out from Africa. Well, we filled the world up. Now we're the most numerous mammals on the planet and causing an unprecedented extinction crisis.
Our future is very much at stake. So what can we do now?
We can't go back to scrounging a living off the land -- we wouldn't be able to do it. Also, the land wouldn't be able to tolerate that kind of assault from so many people. For example, 85 per cent of Canadians live in large cities. We're stuck with those urban places, so they have to be made much more benign in terms of energy and resource throughput. We've never had to do this in our history.
Will we need to lower our standard of living?
Yes, if you determine your standard of living by how much money you've got or what material goods you have. But if you judge standard of living by quality of life, by your relationships with other people and your community, then I say that truly sustainable communities offer a far preferable way to live.
What would a sustainable society look like to you?
First, we must acknowledge that we are animals. If you give a speech to children in North America and say: "Don't forget that we're animals," their parents get very angry and reply: "Don't call my daughter an animal, we're human beings." We like to think of ourselves as elevated above other creatures. But the human body evolved to be active, so denying we are biological creatures has taken us in the opposite direction: we stuff ourselves with more than we need, sit on our asses and drive 10 blocks instead of walking! Sustainable living would be much healthier: we would go out and walk around because there would be shops, musicians and people out on the street that we'd want to meet. That's what community is all about.
Plus we have to stop this crazy stuff where cell phones are turning over every six to eight months, where people rush to get the latest iPod, and then it all goes into landfill.
What about population growth?
We're way overpopulated. But it's not just a function of numbers; it also has to do with per capita consumption. The industrialized world has only 20 per cent of Earth's population but uses more than 80 per cent of the resources and produces more than 80 per cent of the toxic waste. I asked a top ecologist at Harvard University how many humans Earth could sustainably support, and he said 200 million if you want to live like North Americans. Even if you only look at industrialized countries, there are way too many of us. When I say this, people get angry. They say the stores are filled with food, we're living longer than ever, we're better off. Well, the reason we have the illusion that everything is OK is because we're using up what our children and grandchildren should expect to inherit.
How do you hope to persuade governments and businesses to make fundamental changes?
When you talk to politicians, they're just focused on the next election. When you talk to business people, they're just focused on the next quarterly report. At the Suzuki Foundation we say to them, let's look ahead a generation. Let's imagine a Canada where the air is clean, and fewer than 15 per cent of kids develop asthma. Let's imagine a Canada covered in forest we can log forever because we're doing it the right way; a Canada where you can drink water from any river or lake, or catch a fish and eat it without worrying about what chemicals are in it. When you define a vision for the future that way, everybody agrees. That's very powerful because you've done two things: we're no longer fighting because we're all on the same side, and we've got a target.
Can you achieve that target?
We have divided foundation activities into nine areas, such as energy, waste, water and food, with targets we believe are achievable in 25 years. We call it "sustainability within a generation". And our parliament just passed a bill mandating that government activities be filtered through the lens of sustainability within a generation. I'm very proud of that.
We also ought to be pulling back on taxes on good things that we want to encourage, and tax the hell out of bad things. We pay CAN$99 a tonne to put garbage into a landfill but we don't pay to put pollutants into the air! Our corporate community screams and yells at the very suggestion of a carbon tax but I'm sure one is coming, it's only a matter of time.
You're clearly very passionate about this.
I have grandchildren. Anybody that's not passionate about this doesn't give a shit about their grandchildren. I'm 72. I would love to be retired and doing some painting and the other things that I've left off doing all these years, but I don't ever want my grandchild to look at me and say: "Grandpa, you could have done more."
==============
David Suzuki received a PhD in zoology from the University of Chicago. He hosts CBC's long-running science show The Nature of Things, syndicated in more than 40 countries. He co-founded the David Suzuki Foundation in 1990, to work "to find ways for society to live in balance with the natural world that sustains us". Visit www.davidsuzuki.org.
Jo Marchant of New Scientist interviews David Suzuki
By Jo Marchant
Is anything more important than the environment?
I can't imagine anything more important than air, water, soil, energy and biodiversity. These are the things that keep us alive.
So why do we put the economy first, and use it to define progress?
You would have thought that our first priority would be to ask what the ecologists are finding out; because we have to live within the conditions and principles they define. Instead, we've elevated the economy above ecology. After all, ecology and economics have the same root -- "eco", from the Greek oikos, for "home". Ecology is the study of home, economics is the management of home, and of course, our home is the biosphere.
How do the economists answer you?
They believe humans are so creative and productive that the sky's the limit, that if we run out of resources, we'll find substitutes. If the substitutes run out, we'll go to the moon, mine asteroids or harvest sunlight in space and microwave it to Earth. They think the whole universe is there as a potential resource.
Isn't space a potential resource?
The option of going into space allows you to pretend that technology will get our asses out of any problem so we don't have to worry, which is just not true. Limitless resources are a fool's dream that we can never achieve. The reality is we are biological beings dependent on the biosphere. What kind of intelligent creature, knowing that these are our crucial limitations, would act as if we can use Earth as a garbage can and not pay a price for that?
Has any human society ever lived sustainably?
When we were hunter-gatherers we had a very small ecological footprint because all we had was what we could carry from one place to another. But as technology increased, we began to live in large aggregates of villages, and people started to use more than the surroundings could supply. As a result, civilizations collapsed again and again, as Jared Diamond described in Collapse. In the past, though, when conditions got more difficult, people were able to move. That's why we spread out from Africa. Well, we filled the world up. Now we're the most numerous mammals on the planet and causing an unprecedented extinction crisis.
Our future is very much at stake. So what can we do now?
We can't go back to scrounging a living off the land -- we wouldn't be able to do it. Also, the land wouldn't be able to tolerate that kind of assault from so many people. For example, 85 per cent of Canadians live in large cities. We're stuck with those urban places, so they have to be made much more benign in terms of energy and resource throughput. We've never had to do this in our history.
Will we need to lower our standard of living?
Yes, if you determine your standard of living by how much money you've got or what material goods you have. But if you judge standard of living by quality of life, by your relationships with other people and your community, then I say that truly sustainable communities offer a far preferable way to live.
What would a sustainable society look like to you?
First, we must acknowledge that we are animals. If you give a speech to children in North America and say: "Don't forget that we're animals," their parents get very angry and reply: "Don't call my daughter an animal, we're human beings." We like to think of ourselves as elevated above other creatures. But the human body evolved to be active, so denying we are biological creatures has taken us in the opposite direction: we stuff ourselves with more than we need, sit on our asses and drive 10 blocks instead of walking! Sustainable living would be much healthier: we would go out and walk around because there would be shops, musicians and people out on the street that we'd want to meet. That's what community is all about.
Plus we have to stop this crazy stuff where cell phones are turning over every six to eight months, where people rush to get the latest iPod, and then it all goes into landfill.
What about population growth?
We're way overpopulated. But it's not just a function of numbers; it also has to do with per capita consumption. The industrialized world has only 20 per cent of Earth's population but uses more than 80 per cent of the resources and produces more than 80 per cent of the toxic waste. I asked a top ecologist at Harvard University how many humans Earth could sustainably support, and he said 200 million if you want to live like North Americans. Even if you only look at industrialized countries, there are way too many of us. When I say this, people get angry. They say the stores are filled with food, we're living longer than ever, we're better off. Well, the reason we have the illusion that everything is OK is because we're using up what our children and grandchildren should expect to inherit.
How do you hope to persuade governments and businesses to make fundamental changes?
When you talk to politicians, they're just focused on the next election. When you talk to business people, they're just focused on the next quarterly report. At the Suzuki Foundation we say to them, let's look ahead a generation. Let's imagine a Canada where the air is clean, and fewer than 15 per cent of kids develop asthma. Let's imagine a Canada covered in forest we can log forever because we're doing it the right way; a Canada where you can drink water from any river or lake, or catch a fish and eat it without worrying about what chemicals are in it. When you define a vision for the future that way, everybody agrees. That's very powerful because you've done two things: we're no longer fighting because we're all on the same side, and we've got a target.
Can you achieve that target?
We have divided foundation activities into nine areas, such as energy, waste, water and food, with targets we believe are achievable in 25 years. We call it "sustainability within a generation". And our parliament just passed a bill mandating that government activities be filtered through the lens of sustainability within a generation. I'm very proud of that.
We also ought to be pulling back on taxes on good things that we want to encourage, and tax the hell out of bad things. We pay CAN$99 a tonne to put garbage into a landfill but we don't pay to put pollutants into the air! Our corporate community screams and yells at the very suggestion of a carbon tax but I'm sure one is coming, it's only a matter of time.
You're clearly very passionate about this.
I have grandchildren. Anybody that's not passionate about this doesn't give a shit about their grandchildren. I'm 72. I would love to be retired and doing some painting and the other things that I've left off doing all these years, but I don't ever want my grandchild to look at me and say: "Grandpa, you could have done more."
==============
David Suzuki received a PhD in zoology from the University of Chicago. He hosts CBC's long-running science show The Nature of Things, syndicated in more than 40 countries. He co-founded the David Suzuki Foundation in 1990, to work "to find ways for society to live in balance with the natural world that sustains us". Visit www.davidsuzuki.org.
Real Conservation
WHAT POLITICIANS DARE NOT SAY
By Tim Jackson
Scratch the surface of free-market capitalism and you discover something close to visceral fear. Recent events provide a good example: the US treasury's extraordinary $800 billion rescue package was an enormous comfort blanket designed to restore confidence in the ailing financial markets. By forcing the taxpayer to pick up the "toxic debts" that plunged the system into crisis, it aims to protect our ability to go on behaving similarly in the future. This is a short-term and deeply regressive solution, but economic growth must be protected at all costs.
As economics commissioner on the UK's Sustainable Development Commission, I found this response depressingly familiar. At the launch last year of our "Redefining Prosperity" project (which attempts to instill some environmental and social caution into the relentless pursuit of economic growth), a UK treasury official stood up and accused my colleagues and I of wanting to "go back and live in caves".
After a recent meeting convened to explore how the UK treasury's financial policies might be made more sustainable, a high-ranking official was heard to mutter: "Well, that is all very interesting, perhaps now we can get back to the real job of growing the economy."
The message from all this is clear: any alternative to growth remains unthinkable, even 40 years after the American ecologists Paul Ehrlich and John Holdren made some blindingly obvious points about the arithmetic of relentless consumption.
The Ehrlich equation, I = PAT, says simply that the impact (I) of human activity on the planet is the product of three factors: the size of the population (P), its level of affluence (A) expressed as income per person, and a technology factor (T), which is a measure of the impact on the planet associated with each dollar we spend.
Take climate change, for example. The global population is just under 7 billion and the average level of affluence is around $8000 per person. The T factor is just over 0.5 tonnes of carbon dioxide per thousand dollars of GDP -- in other words, every $1000 worth of goods and services produced using today's technology releases 0.5 tonnes of CO2 into the atmosphere. So today's global CO2 emissions work out at 7 billion × 8 × 0.5 = 28 billion tonnes per year. [One tonne = 2200 pounds.]
The Intergovernmental Panel on Climate Change (IPCC) has stated that to stabilize greenhouse gas levels in the atmosphere at a relatively safe 450 parts per million, we need to reduce annual global CO2 emissions to less than 5 billion tonnes by 2050. With a global population of 9 billion thought inevitable by the middle of this century, that works out at an average carbon footprint of less than 0.6 tonnes per person -- considerably lower than in India today. The conventional view is that we will achieve this by increasing energy efficiency and developing green technology without economic growth taking a serious hit. Can this really work?
With today's global income, achieving the necessary carbon footprint would mean getting the T factor for CO2 down to 0.1 tonnes of CO2 per thousand US dollars -- a fivefold improvement. While that is no walk in the park, it is probably doable with state-of-the-art technology and a robust policy commitment. There is one big thing missing from this picture, however: economic growth. Factor it in, and the idea that technological ingenuity can save us from climate disaster looks an awful lot more challenging.
First, let us suppose that the world economy carries on as usual. GDP per capita will grow at a steady 2 or 3 per cent per year in developed countries, while the rest of the world tries to catch up -- China and India leaping ahead at 5 to 10 per cent per year, at least for a while, with Africa languishing in the doldrums for decades to come. In this (deeply inequitable) world, to meet the IPCC target we would have to push the carbon content of consumption down to less than 0.03 tonnes for every thousand US dollars spent -- a daunting 11-fold reduction on the current western European average.
Now, let's suppose we are serious about eradicating global poverty. Imagine a world whose 9 billion people can all aspire to a level of income compatible with a 2.5 per cent growth in European income between now and 2050. In this scenario, the carbon content of economic output must be reduced to just 2 per cent of the best currently achieved anywhere in the European Union.
In short, if we insist on growing the economy, then we will have to reduce the carbon intensity of our spending to a tiny fraction of what it is now. If growth is to continue beyond 2050, so must improvements in efficiency. Growth at 2.5 per cent per year from 2050 to the end of the century would more than triple the global economy beyond the 2050 level, requiring almost complete decarbonisation of every last dollar.
The potential for technological improvements, renewable energy, carbon sequestration and, ultimately perhaps, a hydrogen-based economy has not been exhausted. But what politicians will not admit is that we have no idea if such a radical transformation is even possible, or if so what it would look like. Where will the investment and resources come from? Where will the wastes and the emissions go? What might it feel like to live in a world with 10 times as much economic activity as we have today?
Instead, they bombard us with advertisements cajoling us to insulate our homes, turn down our thermostats, drive a little less, walk a little more. The one piece of advice you will not see on a government list is "buy less stuff". Buying an energy-efficient TV is to be applauded; not buying one at all is a crime against society.
Agreeing reluctantly to advertising standards is the sign of a mature society; banning advertising altogether (even to children) is condemned as "culture jamming". Consuming less may be the single biggest thing you can do to save carbon emissions, and yet no one dares to mention it. Because if we did, it would threaten economic growth, the very thing that is causing the problem in the first place.
Visceral fear is not without foundation. If we do not go out shopping, then factories stop producing, and if factories stop producing people get laid off. If people get laid off, they do not have any money. And if they don't have any money they cannot go shopping. A falling economy has no money in the public purse and no way to service public debt. It struggles to maintain competitiveness and it puts people's jobs at risk. A government that fails to respond appropriately will soon find itself out of office.
This is the logic of free-market capitalism: the economy must grow continuously or face an unpalatable collapse. With the environmental situation reaching crisis point, however, it is time to stop pretending that mindlessly chasing economic growth is compatible with sustainability. We need something more robust than a comfort blanket to protect us from the damage we are wreaking on the planet. Figuring out an alternative to this doomed model is now a priority before a global recession, an unstable climate, or a combination of the two forces itself upon us.
==============
Tim Jackson is professor of Sustainable Development at the University of Surrey, UK. His research focuses on understanding the social, psychological and structural dimensions of sustainable living. He is also a member of the Sustainable Development Commission, which advises the UK government.
By Tim Jackson
Scratch the surface of free-market capitalism and you discover something close to visceral fear. Recent events provide a good example: the US treasury's extraordinary $800 billion rescue package was an enormous comfort blanket designed to restore confidence in the ailing financial markets. By forcing the taxpayer to pick up the "toxic debts" that plunged the system into crisis, it aims to protect our ability to go on behaving similarly in the future. This is a short-term and deeply regressive solution, but economic growth must be protected at all costs.
As economics commissioner on the UK's Sustainable Development Commission, I found this response depressingly familiar. At the launch last year of our "Redefining Prosperity" project (which attempts to instill some environmental and social caution into the relentless pursuit of economic growth), a UK treasury official stood up and accused my colleagues and I of wanting to "go back and live in caves".
After a recent meeting convened to explore how the UK treasury's financial policies might be made more sustainable, a high-ranking official was heard to mutter: "Well, that is all very interesting, perhaps now we can get back to the real job of growing the economy."
The message from all this is clear: any alternative to growth remains unthinkable, even 40 years after the American ecologists Paul Ehrlich and John Holdren made some blindingly obvious points about the arithmetic of relentless consumption.
The Ehrlich equation, I = PAT, says simply that the impact (I) of human activity on the planet is the product of three factors: the size of the population (P), its level of affluence (A) expressed as income per person, and a technology factor (T), which is a measure of the impact on the planet associated with each dollar we spend.
Take climate change, for example. The global population is just under 7 billion and the average level of affluence is around $8000 per person. The T factor is just over 0.5 tonnes of carbon dioxide per thousand dollars of GDP -- in other words, every $1000 worth of goods and services produced using today's technology releases 0.5 tonnes of CO2 into the atmosphere. So today's global CO2 emissions work out at 7 billion × 8 × 0.5 = 28 billion tonnes per year. [One tonne = 2200 pounds.]
The Intergovernmental Panel on Climate Change (IPCC) has stated that to stabilize greenhouse gas levels in the atmosphere at a relatively safe 450 parts per million, we need to reduce annual global CO2 emissions to less than 5 billion tonnes by 2050. With a global population of 9 billion thought inevitable by the middle of this century, that works out at an average carbon footprint of less than 0.6 tonnes per person -- considerably lower than in India today. The conventional view is that we will achieve this by increasing energy efficiency and developing green technology without economic growth taking a serious hit. Can this really work?
With today's global income, achieving the necessary carbon footprint would mean getting the T factor for CO2 down to 0.1 tonnes of CO2 per thousand US dollars -- a fivefold improvement. While that is no walk in the park, it is probably doable with state-of-the-art technology and a robust policy commitment. There is one big thing missing from this picture, however: economic growth. Factor it in, and the idea that technological ingenuity can save us from climate disaster looks an awful lot more challenging.
First, let us suppose that the world economy carries on as usual. GDP per capita will grow at a steady 2 or 3 per cent per year in developed countries, while the rest of the world tries to catch up -- China and India leaping ahead at 5 to 10 per cent per year, at least for a while, with Africa languishing in the doldrums for decades to come. In this (deeply inequitable) world, to meet the IPCC target we would have to push the carbon content of consumption down to less than 0.03 tonnes for every thousand US dollars spent -- a daunting 11-fold reduction on the current western European average.
Now, let's suppose we are serious about eradicating global poverty. Imagine a world whose 9 billion people can all aspire to a level of income compatible with a 2.5 per cent growth in European income between now and 2050. In this scenario, the carbon content of economic output must be reduced to just 2 per cent of the best currently achieved anywhere in the European Union.
In short, if we insist on growing the economy, then we will have to reduce the carbon intensity of our spending to a tiny fraction of what it is now. If growth is to continue beyond 2050, so must improvements in efficiency. Growth at 2.5 per cent per year from 2050 to the end of the century would more than triple the global economy beyond the 2050 level, requiring almost complete decarbonisation of every last dollar.
The potential for technological improvements, renewable energy, carbon sequestration and, ultimately perhaps, a hydrogen-based economy has not been exhausted. But what politicians will not admit is that we have no idea if such a radical transformation is even possible, or if so what it would look like. Where will the investment and resources come from? Where will the wastes and the emissions go? What might it feel like to live in a world with 10 times as much economic activity as we have today?
Instead, they bombard us with advertisements cajoling us to insulate our homes, turn down our thermostats, drive a little less, walk a little more. The one piece of advice you will not see on a government list is "buy less stuff". Buying an energy-efficient TV is to be applauded; not buying one at all is a crime against society.
Agreeing reluctantly to advertising standards is the sign of a mature society; banning advertising altogether (even to children) is condemned as "culture jamming". Consuming less may be the single biggest thing you can do to save carbon emissions, and yet no one dares to mention it. Because if we did, it would threaten economic growth, the very thing that is causing the problem in the first place.
Visceral fear is not without foundation. If we do not go out shopping, then factories stop producing, and if factories stop producing people get laid off. If people get laid off, they do not have any money. And if they don't have any money they cannot go shopping. A falling economy has no money in the public purse and no way to service public debt. It struggles to maintain competitiveness and it puts people's jobs at risk. A government that fails to respond appropriately will soon find itself out of office.
This is the logic of free-market capitalism: the economy must grow continuously or face an unpalatable collapse. With the environmental situation reaching crisis point, however, it is time to stop pretending that mindlessly chasing economic growth is compatible with sustainability. We need something more robust than a comfort blanket to protect us from the damage we are wreaking on the planet. Figuring out an alternative to this doomed model is now a priority before a global recession, an unstable climate, or a combination of the two forces itself upon us.
==============
Tim Jackson is professor of Sustainable Development at the University of Surrey, UK. His research focuses on understanding the social, psychological and structural dimensions of sustainable living. He is also a member of the Sustainable Development Commission, which advises the UK government.
Future Green Jobs
U.S. CONFERENCE OF MAYORS and GLOBAL INSIGHT Study GREEN JOBS
Dwindling natural resources, growing global demand for energy, climate change – these issues are irrevocably altering our global economy. In their report, the U.S. Conference of Mayors and Global Insight have examined the economic benefits of the 'Green Economy' - that part of economic activity which is devoted to the reduction of fossil fuels, the increase of energy efficiency, and the curtailment of greenhouse gas emissions. The greening of the U.S. economy, of the global economy, is not a dismantling of the past, but a new step forward – the next step in a continuous process of economic growth and transformation that began with industrialization and led us through the high-tech revolution.
The economic advantages of the Green Economy include the macroeconomic benefits of investment in new technologies, greater productivity, improvements in the US balance of trade, and increased real disposable income across the nation. They also include the microeconomic benefits of lower costs of doing business and reduced household energy expenditures. These advantages are manifested in job growth, income growth, and of course, a cleaner environment.
OIL AND GAS CONSUMPTION
As is well known, the United States has a thirst for oil that well exceeds its production. In 1970, when domestic oil production peaked, net imports of foreign oil supplied 21% of total consumption in the United States. By 2007, that figure had risen to 59%, and Global Insight forecasts the import share of consumption to rise to 65% by 2030, unless measures are taken to decrease America's dependence on foreign sources of oil. [For Puerto Rico, 98% of all electricity produced on the island is based on coal or petroleum products, and all of them are imported.]
The primary driver behind our ever-increasing demand for foreign oil is the transportation sector, namely cars and trucks. According to the Energy Information Administration (EIA) the transportation sector consumed 69% of total petroleum products in 2007. Global Insight estimates that the transportation sector consumed a combined 179 billion gallons of petroleum-based fuels in 2007, and demand for all petroleum products is forecast to grow 7.7% by 2030. That increased demand, combined with lower domestic production, is expected to result in a 27% increase in daily petroleum imports by 2030 over 2007 levels. The transportation sector also accounted for 33% of CO2 emissions in 2007. [Puerto Rico buys $4 billion dollars worth of foreign fossil fuels a year, or just about 30% of our GDP.]
Our increased reliance on foreign oil has led to significant debate on topics such as energy security, foreign policy, and financial stability related to the widening trade deficit. Combining Global Insight’s oil import forecast with our expectations for crude oil prices, we are currently forecasting an average outflow of $240 billion per year, measured in 2006 dollars, to pay for imported oil through the year 2030.2 That $240 billion dollars, or 2.3% of Gross Domestic Product, acts very much as a tax on the U.S. economy. Indeed, it is worse than a tax - for the money flows out of the country, not to be re-invested in areas such as health care, education, or infrastructure.
ELECTRICITY DEMAND
Energy demand outside of the transportation sector is also growing, as the population increases and energy-dependent appliances continue to be ever more integrated into homes and businesses. The residential and commercial construction sectors, which use energy for heating and cooling buildings and homes, and electricity for lighting and appliances, are major sources of consumption.
Global Insight projects that by 2030, more than 36 million new homes and 20 billion square feet of commercial building space will be constructed to accommodate new demand and replace older structures. This new construction will generate net additional demand of 790 billion kilowatt hours of electricity by 2030, equivalent to 465 million barrels of oil. Electricity expenditures in 2030 for those net additions are expected to be $120 billion.
Electricity generation can also have a negative effect on health conditions. Pollution caused by "dirty" power plants (namely, coal-generated utilities), car and truck congestion, and energy-intensive manufacturing plants, all have adverse health effects on the population.
A GREENER ECONOMY
Scientists have almost universally accepted that global climate change is a reality. As a result, many nations are making concerted efforts to reduce the buildup of carbon dioxide CO2) and other GHG emissions either by reducing the use of fossil fuels or by finding ways to prevent emissions from entering the atmosphere. While the United States accounts for only 5% of the world's population, it accounts for 20% of worldwide energy usage and 20% of global CO2 emissions. Becoming a greener economy will enable the U.S. to transition to a lower carbon economy, a step in the direction of preventing the adverse effects of global warming as well as improving public health and stabilizing energy expenditures. It will also create a significant number of new jobs.
Global Insight has calculated the current total number of Green Jobs in the U.S. across several broad industries. These are industries that have high growth potential as the U.S. becomes a greener economy. We have also calculated potential growth under assumptions for the future of renewable electricity generation, increased energy efficiency for residential and commercial buildings, and increased usage of renewable fuels by the transportation sector.
This data has been broken out at both the national and the metro level. Metropolitan economies are the engines of U.S. economic growth; if investment in green industries is to successfully transform the U.S. economy, it must happen at the metropolitan and local level. This investment is critical to our competitiveness in the global economy, to our living standards, indeed, to our future. These investments carry macroeconomic benefits as well – they create jobs, increase productivity, and generate income that creates further jobs. It is a virtuous cycle, an investment that has real returns for both the short and the long term.
We estimate that as of 2006 there were just more than 750,000 Green Jobs in the U.S. economy. More than half of existing jobs were in Engineering, Legal, Research and Consulting, revealing the importance of these indirect jobs to the Green Economy. The second largest category was Renewable Power Generation, with more than 127,000 jobs. Agriculture and Forestry provided a significant contribution of 57,500 jobs.
Green Jobs by Major Category
Renewable Power Generation 127,246
Agriculture and Forestry 57,546
Construction & Systems Installation 8,741
Manufacturing 60,699
Equipment Dealers & Wholesalers 6,205
Engineering, Legal, Research & Consulting 418,715
Government Administration 71,900
Total 751,051
See the full report here:http://www.usmayors.org/pressreleases/uploads/GreenJobsReport.pdf
Monday, November 3, 2008
Grading the Politicians by Environmental Standards
¡Las EcoNotas!
Lunes 3 de noviembre, 2008
San Juan, Puerto Rico
Contacto: Ricardo de Soto (787) 996-0888
El Comité Evaluador de la Legislación Ambiental (CELA) emitió esta tarde las EcoNotas, donde como ya es tradición, se evalúa la actuación Ambiental de la legislatura.
El CELA mantiene esta gestión de escudriñar el record legislativo para informar al pueblo sobte la actuación de su legislatura. ¿Fué a favor o en detrimento de la integridad del medio ambiente.? Otorgándoles una nota (A<>F) de acuerdo a su gestión legislativa, esperamos alertar al público al respecto. “La conspiración por parte de la industria del desastrollo para corromper al gobierno de Puerto Rico hasta ahora ha sido sumamente efectiva. Ha llegado a las más altas esferas. Lo demuestra claramente el caso de Castro Font y las irregularidades en torno a la decisión del Supremo en Paseo Caribe, así como la inacción de Justicia sobre todos los otros angulos de este caso. Se pretende entre otros males, privatizar los bienes de dominio público. Los bienes que no son de nadie porque son de todos. De facto existen dos poderes en la política el dinero los votos: Vox populi… Vox Dei.” Expresó Ricardo de Soto, GuardaMar de Puerto Rico.
A Continuación Las EcoNotas:
A+
Maria de Lourdes Santiago Negrón PIP SENADO A +
Orlando Parga,Hijo PNP SENADO A +
A
Victor García San Inocencio PIP Camara de Representantes A
José Luis Rivera Guerra PNP Camara de representantes A
Eudaldo Baez Galib PPD SENADO A
A-
B+
Cirilo Tirado,Hijo PPD SENADO B +
B
B-
Carlos Vizcarrondo Irrizarry PPD Camara de Representantes B menos
Johnny Méndez Nuñez PNP Camara de Representantes B menos
Norma Burgos PNP SENADO B menos
Antonio Silva Delgado PNP Camara de Representantes B menos
Javier A. Rivera Aquino PNP Camara de Representantes B menos
Luis Vega Ramos PDP Cámara de Representantes B menos
C+
Luz Z. Arce Ferrer PNP Senado C +
Lornna Soto PNP SENADO C +
C
Héctor Ferre Rios PPD Camara de Representantes C
Liza Fernández PNP Camara de Representantes C
Jorge Navarro Suárez PNP Camara de Representantes C
Nelson Del Valle PNP Camara de Representantes C
Héctor Torres PNP Camara de Representantes C
Gabriel Rodríguez Aguiló PNP Camara de Representantes C
Carlos Molina PNP Camara de Representantes C
José E. Concepción Hernández PNP Camara de Representantes C
Sergio Ortiz Quiñones PPD Camara de Representantes C
Carlos M. Hernández López PPD Camara de Representantes C
Norman Rámirez Rivera PNP Camara de Representantes C
Lydia Méndez Silva PPD Camara de Representantes C
Roberto Cruz Rodríguez PPD Camara de Representantes C
Ramón A. Reyes PPD Camara de Representante C
José L. Jiménez Negrón PNP Camara de Representante C
Carmen I González González PPD Camara de Representantes C
Pedro I. Cintrón González PNP Camara de Representantes C
Jorge L. Ramos Peña PNP Camara de Representantes C
Sylvia Rodríguez Aponte de Corujo PPD Camara de Representantes C
José M. Varela Fernández PPD Camara de Representantes C
Angel R. Peña Rosa PNP Camara de representantes C
Cristóbal Colón Ruiz PNP Camara de Representantes C
Joel Rosario Hernández PPD Camara de representantes C
Pedro Rodríguez González PPD Camara de Representantes C
Epifanio Jiménez Cruz PNP Camara de Representantes C
Migdalia Padilla Alvelo PNP SENADO C
José Emilio Gonzalez PNP SENADO C
Modesto L. Agosto Alicea PPD SENADO C
Juan Eugenio Hernández Mayoral PPD SENADO C
Rafael A. García Colón PPD Camara de Representantes C
C-
Luis Raúl Torres Cruz PPD Camara de Representantes C menos
Angel Pérez Otero PNP Camara de Representantes C menos
Bernardo Márquez García PNP Camara de Representantes C menos
Roberto Rivera Ruiz de Porra PPD Camara de Representantes C menos
Carmelo Rios PNP SENADO C menos
D+
Pedro Rosselló González PNP SENADO D +
D
Iris M. Ruiz Class PNP Camara de Representante D
Maria de Lourdes Ramos Rivera PNP Camara de Representantes D
Rolando Crespo Arroyo PNP Camara de Representantes D
Francisco González Rodríguez PNP Camara de Representantes D
Alba I. Rivera Rámirez PNP Camara de Representantes D
Luis Pérez Ortiz PNP Camara de Representantes D
Tomás Bonilla feliciano PNP Camara de Representantes D
Angel Bulerín Ramos PNP Camara de Representantes D
Hector Martinez PNP SENADO D
Luis Daniel Muñiz Cortez PNP SENADO D
Carlos Pagán PNP SENADO D
Bruno A. Ramos Olivera PNP SENADO D
Margarita Nolasco Santiago PNP SENADO D
Sixto Hernandez Serrano PPD SENADO D
José J. García Cabán PPD Camara de Representantes D
D-
José Chico Vega PNP Camara de Representantes D menos
Jorge Colberg Toro PPD Camara de Representantes D menos
José Luis Dalmau Santiago PPD SENADO D menos
Antonio J. Faz Alzamorra PPD SENADO D menos
F
Jennifer Gonzalez Colón PNP Camara de Representantes F
Ferdinand Pérez Román PPD Camara de Representantes F
Roberto Arango PNP SENADO F
Sila Mari González Calderón PPD SENADO F
F-
José Aponte Hernández PNP Cámara de Representantes F menos
Carlos Diaz PNP SENADO F menos
Jorge De Castro Font PNP SENADO F menos
José Garriga Pico PNP SENADO F menos
Kenneth McClintock Hernández PNP SENADO F menos
Enemigos del medioambiente::
€ Jorge de Castro Font
€ Carlos Diaz
€ Kenneth McClintock
€ José Aponte
€ José Garriga Pico
Paladínes del medioambiente y la eco-logía social:
* Orlando Parga*
* Maria de Lourdes Santiago Negrón *
Friday, October 31, 2008
Deconstructing the Financial Meltdown
Deconstructing the Financial Meltdown
By Monica Perez Nevarez
The history of the financial markets is one of continuous booms and busts, and some experts categorize the current situation as but one more “correction” in a long line of recurring cycles. Unfortunately, this one is amplified by unseen hyper-inflation, fever-pitch greed happening within a globalized economy, in financial markets that are inextricably linked together, with a residue of astronomical numbers from the convoluted alchemy of derivatives trading.
History Repeats
Eighty years ago, when the pace of life was considerably slower, the Florida real estate crash of 1927 was an important factor in triggering the Stock Market crash of 1929, a harbinger of the Great Depression. After the crash, a public outcry for stiffer regulation in order to prevent future crashes ensued. In 1933, Congress passed the Glass-Steagall Act, which established the Federal Deposit Insurance Corporation (FDIC) and included banking reforms to control speculation. Under this law, banks, brokerages and insurance companies were barred from entering each others' industries, and investment banking and commercial banking were separated.
Five decades later the banking industry began to successfully lobby the government to roll back what they considered to be a legislative straightjacket and an outmoded residue of Franklin Roosevelt’s New Deal. The Depository Institutions Deregulation and Monetary Control Act of 1980 and the Gramm-Leach-Bliley Act of 1999 repealed the precautionary provisions contained within Glass-Steagall and opened the floodgates of financial cross-pollination and mergers.
Bank Holding Companies could now own a portfolio of financial businesses under one roof which included commercial banking, insurance, mortgage houses and investment banks. Along with modernizing the banking laws, Gramm-Leach-Bliley also stipulated oversight from Congress, which was subsequently ignored by one and all.
Without the constraints of the Glass Steagall Act, and little or no actual oversight, the deregulated banking industry bloomed and the economy grew. The demise of Barings Bank, founded in 1762 and the oldest merchant bank in London until its collapse in 1995, should have been a wake-up call extolling the downside of derivative trading, but was seen as a mere cautionary tale in the larger euphoria of an expanding economy.
In the broader world, the new millennium saw globalization interconnect the economies of all nations; telecommunications brought the farthest reaches of the planet into the office or living room instantly; and a slew of nascent tech companies primed for their Initial Public Offerings (IPO’s). Unseen, there was one more element in the mix. According to Robert Prechter, President of Elliott Wave International (www.elliottwave.com), the first decade also saw the rise of a silent predator: inflation. In a recent video (seen here http://www.youtube.com/watch?v=SjS60TaD_J8 ), he explains that if stocks today were priced in real money, that is to say, in gold, we would have seen a substantial decline in stock values in the last ten years.
“It’s been a silent crash because of the increase in the amount of credit and the drop in the value of dollar. The same thing happens with oil; its price in dollars has gone up, but priced in gold, it’s priced about where it was seven years ago, so it reflects the amount of inflation we have been enduring in the last decade which we did not see.” Robert Prechter
These forces, along with an insatiable and seemingly unstoppable financial sector, became the foundation of the Tech Bubble of the early 2000’s.
Greed, inflation and the fear of being left behind in the biggest boom in recent history infected other sectors of the economy. Beginning in 2001, the implosions of Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom, attest to that fact. The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act, regulated publicly traded corporate accounting practices, but did little to derail the banking juggernaut, which quickly began to look for other places to invest in.
Connecting the Financial Dots
Before the globalization era, problems in the economy caused problems in the financial markets when economically strapped consumers and businesses had trouble repaying their loans, but the consequences were usually limited to a specific segment of the banking industry. This time, the viral malaise in the mortgage sector infected the stock market, the loans sector, hedge funds and investment houses, heralding a domino effect throughout the American economy, and therefore, the world economy, that according to Henry Paulson, Secretary of the US Treasury, threatens to collapse the entire global financial system.
Ironically, Paulson, Ben Bernanke of the Federal Reserve and President Bush had been publicly touting a ‘strong’ economy for over a year before the dominoes started to topple, hoping that their words alone would bolster consumer confidence to steady the financial ship, in response to a small cadre of analysts and experts that were predicting a looming crash in the financial markets during that time.
To make matters worse, the financial downturn had the makings of a political and national security issue, as China and other foreign investors hold most of the US government’s outstanding debt, which has also spiraled out of control. On September 30, 2008, the total U.S. federal debt passed the $10 trillion mark, or $32,895 per U.S. resident. Adding unfunded Medicaid, Medicare, Social Security, and similar obligations, the debt rises to a total of $59 trillion, or $516,348 per household. And of course, there’s the almost one trillion dollars being spent on the wars in the Middle East, which put further pressure on the system.
Current GDP (a measure of national income) is $13 trillion dollars, and the CIA ranks the US debt load as a percentage of GDP in 26th place when comparing it to other national debt ratios. To put these numbers in perspective, it’s like a man with a thirteen thousand dollar yearly salary assuming debts of almost sixty thousand dollars: depending on interest rates and inflation, the payments could eat up more than half of his monthly income, leaving scant resources to pay the regular bills that due to inflation have increased substantially. Same thing with the government. How can they pay their normal services of education and healthcare if the military budget is eating up over half of the budget, and now a $700 billion dollar financial markets bailout too?
After the dot.com bust, there were millions of dollars looking for investment and nowhere to place them except real estate. Add a dash of governmental incentive in the form of a congressional housing initiative, and what had started as a conservative strategy to get more people into homes snowballed into the irrational exuberance equivalent of “day trading” in real estate.
Coincidentally, a large percentage of Baby Boomers found themselves nearing retirement age with fewer savings than what they expected to be able to live on. They saw the opportunity to invest in real estate as a safe and quick way to bolster their retirement portfolios. The combination of low interest rates, no-money-down mortgages and ever-increasing home prices fueled a bubble the likes of which, in absolute numbers, had never been seen before. At its height, annual home appreciation rates of 25% to 30% in hot markets were common.
To paraphrase a recent article in Time magazine: in the fall of 2006, real estate was booming and the world was awash in cheap money after three years of unprecedented growth. There was no fear of buying a house with nothing down, because housing prices were only going up. And there was no fear of making half-baked mortgage loans, because "house-price appreciation" would increase the value of the collateral if borrowers couldn't pay. The idea that there could be depreciation was never considered. For businesses, there was money available to buy other corporations, but since manufacturing jobs were migrating to Asia in droves, real estate was an attractive option.
Then Wall Street expanded on a novel idea that had cropped up in the nineties: securitize the mortgage loans. The thinking was that everything was safe, because by chopping up the mortgages into small pieces, they were spreading the risk around the globe. Little did they know that precisely because they were spreading toxic risk, they were also spreading the subprime virus that is now consuming the world markets (subprime is a banking term for junk mortgages that do not conform to traditional due diligence parameters).
Enter the Dragon
During the first half of this decade, financial companies had noticed that growth in world wealth had stabilized, but profits from derivatives trading had skyrocketed since 2003. Derivatives are complex instruments devised as a form of insurance, to transfer risk among parties based on their willingness to assume additional risk, or hedge against it. Their value depends on the value of other underlying financial instruments, as opposed to a tangible product or service. The main types of derivatives are futures, forwards, options and swaps. For quick profit junkies, these are the drug of choice.
See Total world derivatives from 1998-2007 compared to total world wealth in the year 2000, http://en.wikipedia.org/wiki/Derivative_(finance)
There is a wide range of derivatives contracts available to be traded in the market, based on different types of assets such as commodities, equities, stocks, residential mortgages, commercial real estate loans, credit, bonds, interest rates, exchange rates or indexes. There are even derivatives contracts on an index of weather conditions. These are far removed from the original purpose of derivatives, and much more convoluted.
“Derivatives are weapons of financial mass destruction”
Warren Buffett, 2003
Initially, derivatives were used as a tool to transfer risk by taking the opposite position in the underlying asset. For example, a corn farmer and a tortilla producer could enter into a futures contract to exchange cash for corn in the future. Both parties reduced a future risk: for the farmer, the uncertainty of the future price was mitigated, and for the tortilla maker, the availability of corn was assured. But once financiers realized that almost anything can be securitized (made into a tradable commodity), derivatives became a whole new avenue in which to make money. BIG money.
The Opening Salvos
Here is how leverage works: when things go well, a company is immensely profitable; if they go against you, things can go down the tubes in a hurry. This is where the greed comes in. Since you can invest in derivatives with only a small percentage of the value down (5-10%), if you choose right, the upside is huge. For example, if you borrow 35 times your capital and those investments rise only 1%, you've made 35% on your money. If, however, the market moves against you — as they did with Lehman Brothers during the summer — a 1% or 2% drop in the value of your assets puts the entire company’s economic future in doubt.
When there was a slight downturn in the economy, Lehman began to rely on investments in derivatives to produce profits, increasing its exposure while trying to overcome its losses, very much in the same vein as Nick Leeson did by speculating on futures contracts for Barings Bank. Lehman ultimately could not overcome its losses, so it went bankrupt. And that is what can happen to countless other financial institutions that are still equally over-leveraged in derivatives across the entire economy.
Even though loan officers on the ground knew that deregulated mortgages were an obvious risk since 2005 when the market began to heat up, the enormity of the consequences would not be apparent to the general public until companies began asking the government for bailouts, after it was clear that many of those loans would not be paid.
Falling Dominoes
In the nine months beginning in June 2007, Bear Stearns rescued one of its struggling subprime-linked hedge funds for $3.2 billion; Goldman Sachs was bailed out for $3 billion; an $80 billion structured-investment vehicle (SIV) fund for short-term debt was created; Citigroup Inc. had its $58 billion SIV bailout; the Federal Reserve created the $20 billion Term Auction Facility; President Bush signed a $100 billion “Economic Stimulus” bill; and JP Morgan bought Bear Stearns for $29 billion. If all these well-funded multinational corporations were susceptible, what could be expected to happen to all the smaller players in the financial markets?
Then in one extraordinary week last September, the Federal Government bailed out Fannie Mae and Freddie Mac, the two largest mortgage companies in the US, and dumped more than $5 trillion dollars of the firms' debt onto taxpayers, nearly doubling the federal debt. Lehman Brothers declared bankruptcy, and Merrill Lynch wooed white knight Bank of America in order to avoid a similar fate. Then, the US Treasury and the Federal Reserve rescued American International Group (AIG), a $1 trillion insurance company, to the tune of $85 billion for 80% equity, citing that “the firm was too large to let fail, and that it was an exceptionally good deal to make”.
Within two weeks, the government had funneled $35 billion more dollars for a total of $120 billion into AIG, after new valuations on their assets were performed. The stock market went haywire.
To the US Treasury, which has a list of over 90 banks holding worthless mortgages or mortgage securities that are potential future bankruptcies, the sound of falling dominoes brought home the realization that the entire financial system could fall apart, and an immediate infusion of cash into the system was the only way to stop the hemorrhage. Paulson and Bernanke pushed hard for a Congressional bailout package of $700 billion, which was rejected on its first pass through Capitol Hill, but was signed into law after an additional $140 billion of pork was added to it. This measure is seen by all as the first in a series of measures that will be needed to stem the economic meltdown in the next twelve to eighteen months. See it in its entirety here: http://senateconservatives.files.wordpress.com/2008/10/bailouttext.pdf
The Root of the Problems
The downside of financial internationalization is that many of the mortgages and mortgage securities owned or guaranteed by Fannie Mae and Freddie Mac were bought by foreign central banks. The Federal Reserve and US Treasury felt compelled to bail out Fannie and Freddie because if they didn't, foreigners wouldn't continue funding US trade and federal-budget deficits. So what had begun as a financial problem was becoming a political and national security problem that had to be dealt with. Meanwhile, Paulson and Bernanke kept saying that a $13 trillion U.S. economy and a $54 trillion world economy would survive a “correction” of a couple of trillion dollars.
The government felt it was imperative to save AIG because as the largest insurer in the world it had sold credit-default swaps (CDS’s, or securities that insure against a company defaulting on its obligations) to thousands of other companies. For example, if ABC Inc. bought $10 million in XYZ Company bonds, for instance, they would also hedge their bet by buying a $10 million CDS from AIG where AIG agreed to pay the $10 million if XYZ defaulted on its obligations.
These transactions need collateral, and that collateral has to be paid up front. Unfortunately for AIG, the amount of collateral depends on a company’s credit rating. So if a company’s credit is downgraded, say, after rating agencies revalued the subprime mortgages and mortgage securities they hold — as happened with AIG — they have to post more collateral immediately. When Standard & Poor and Moody’s downgraded AIG’s credit rating, they had to post $14 billion overnight, which it did not have. And if it did not post it immediately, the next week AIG would have had to come up with $250 billion. That is the downside of derivative trading: the numbers are huge both coming up and going down.
What scared the government was not the loss of one of the biggest companies in the world; it was what that loss would mean to all the companies it had insured. AIG has $1 trillion in assets, more than 70 million customers and many of the world’s biggest and most important financial firms as clients. If AIG went bankrupt, all its customers who thought they had hedged their bets would suddenly have "unbalanced books", which could lead to their own potential demise, which could lead to still more companies failing, and eventually to what economists call "systemic failure." In other words, a financial meltdown.
The derivatives markets dwarf the stock market in size. The Financial Times has published estimates that the size of the derivatives markets is currently estimated to be 450 trillion dollars and the notional value of credit default swaps is 62 trillion. And these staggering sums do not include government and corporate bond markets or the commercial paper markets, which are also huge. The ratio between global GDP and global debt is reaching a point where it is becoming harder to afford the payments; the instability of the market and the desperate bets on derivatives make the situation even more precarious. These numbers also point to the fact that more and more of the world’s wealth is created from speculation, and not from producing tangible goods. It stands to reason that at some point that is going to come back to haunt the market.
Black September
There is another downside to globalization in the financial markets: interconnectedness. By the time the opening bell rang in the New York Stock Exchange Monday Sept. 29, $1.2 trillion had already vanished from the US stock market, and all of it had happened elsewhere. Here is a brief timeline.
Shortly before 6 p.m. New York time on Sunday, Sept. 28, Belgium, the Netherlands and Luxembourg agreed to rescue the failing Fortis Bank for $16 billion. A few hours later, the German government pledged $43 billion to save Hypo Real Estate, a commercial property lender. Both rescue packages were refused and the government had to go back to the drawing table to settle the deals. At 2:50 am, news came that the British Treasury had seized lender Bradford & Bingley and quickly sold the bulk of it to Banco Santander of Spain. The German DAX was off 256 points, or 4.2 percent, and stocks had tumbled throughout Europe. In Tokyo, where stocks had opened higher in early trading on Monday, traders faced reports suggesting the financial crisis was taking a toll on the global economy and began to sell off. Markets across Asia followed suit. In Tokyo, the Nikkei 225 sank 1.5 percent. In India, stocks fell nearly 4 percent. In Hong Kong, HSBC bank raised key lending rates because of the credit market turmoil, so the Hang Seng tumbled nearly 4.3 percent. The stock market is like a herd of wild deer: one sniff of far-away smoke, and they stampede blindly away from it for safety.
As investors in New York were waking up, the credit markets were flashing red as banks reported higher borrowing costs. Investors continued to seek safety in Treasuries. The yield on one-year Treasury bills, for instance, fell to almost zero, meaning investors were willing to accept no return just for the assurance that they would get their money back.
What had started 24 hours earlier, with a modest sell-off in stock markets in Asia, had turned into Wall Street’s blackest day since the 1987 crash. The broad market, as measured by the Standard & Poor’s 500-stock index, plunged almost 9 percent, its third-biggest decline since World War II. The Dow Jones industrial average (DJIA) fell nearly 778 points, or 6.98 percent, to 10,365; a week later it had fallen to 8,144, and lost nearly 47% off of its 2007 high of over 14,000.
While the European financial markets have different regulations than the US, they do not have one ‘supranational’ organization that can monitor and control the markets like the US Treasury and the Federal Reserve. Each nation has to fight this meltdown independently. But in an unprecedented move on October 8, the European central banks joined the US, Canada, Australia, China, Switzerland and various other countries’ central banks in unilaterally cutting their lending rates to 1.5%, in the hopes that this would calm the markets. Unfortunately, the stock market responded by continuing to go down, showing the government that easier credit was not what they were looking for. It seems the market was saying: what we need is cash, not more credit!"
Are we Facing a Depression?
Suze Orman recently stated on CNN’s Anderson Cooper 360 show that the economy is like a patient that is in intensive care, and will likely stay in intensive care for another year or year and a half. Then the patient will need to be in the hospital for another similar length of time, after which the patient will need outpatient therapy for another year or two. So while she did not think this was going to turn into a Depression, she did think that the situation was a delicate one that would last five to six years. Her prediction for the stock market bottom was a DJIA of around 8,200 was prescient, explaining that we still have some ground to lose before we can recover. Two days later the stock market hit 8,144.
Fareed Zakaria of CNN’s Global Public Square Oct 5 show put the possibility of a Depression into perspective: “In 1929 the stock market saw a 40% loss of value with the DJIA dropping from 381 to 229, ending in 198 at the end of the month, and $30 billion lost in one week. In 1987 the stock market lost 22% of its value, or $500 billion dollars, when the DJIA dropped 508 points from 2247 to 1739 in one day. Last week we saw the DJIA lose 7%, or more than $1 trillion dollars in one day. In terms of percentage it’s not as large as the 1929 crash, but it is a very large, very worrisome situation that will have serious repercussions for a long time to come. But it is not as bad as the crash of ’29.” A week later, when the NYSE hit bottom, it had come close to matching the 1929 percentage loss. Lou Dobbs was even more forceful: “We are not going to be in a depression!” he said emphatically on his Oct. 8 show. hopefully the pundits will be right, and we will only have a severe recession.
Robert J. Samuelson summed the comparison up in his Oct. 5 Washington Post column, http://www.washingtonpost.com/wp-dyn/content/article/2008/10/05/AR2008100501251.html thusly:
“There have been 10 previous postwar bear markets, defined as declines of at least 20 percent in the Standard & Poor's 500-stock index. The average decline was 31.5 percent; those of 1973-74 and 2000-02 were nearly 50 percent. By contrast, the S&P's low point so far [Friday Oct.3] was 30 percent below the peak reached in October 2007.”
“The Great Depression that followed the stock market's collapse in October 1929 was a different beast. By the low point in July 1932, stocks had dropped almost 90 percent from their peak. The accompanying devastation -- bankruptcies, foreclosures, bread lines -- lasted a decade. Even in 1940, unemployment was almost 15 percent. Unlike postwar recessions, the Depression submitted neither to self-correcting market mechanisms nor government policies. Why?”
“Capitalism's inherent instabilities were blamed -- fairly, up to a point. Over-borrowing, over-investment and speculation chronically govern business cycles. But the real culprit in causing the Depression's depth and duration was the Federal Reserve. It unwittingly transformed an ordinary, if harsh, recession into a calamity by permitting a banking collapse and a disastrous drop in the money supply.”
“From 1929 to 1933, two-fifths of the nation's banks failed; depositor runs were endemic; the money supply (basically, cash plus bank deposits) declined by more than a third. People lost bank accounts; credit for companies and consumers shriveled. Economic retrenchment fed on itself and overwhelmed the normal mechanisms of recovery. These channels included: surplus inventories being sold, so companies could reorder; strong firms expanding as weak competitors disappeared; high debts being repaid so borrowers could resume normal spending.”
“What's occurring now is a frantic effort to prevent a modern financial disintegration that deepens the economic downturn. It's said that the $700 billion bailout will rescue banks and other financial institutions by having the Treasury buy their suspect mortgage-backed securities. In reality, the Treasury is also bailing out the Fed, which has already -- through various actions -- lent financial institutions roughly $1 trillion against myriad securities. The increase in federal deposit insurance from $100,000 to $250,000 aims to discourage panicky bank withdrawals. In Europe, governments have taken similar steps; Ireland and Germany have guaranteed their banks' deposits. Fed Chairman Ben Bernanke, a scholar of the Depression, understands the error [of acting timidly]. The Fed's lending and the bailout aim to avoid a ruinous credit contraction.”
“The economy will get worse. The housing glut endures. Cautious consumers have curbed spending. Banks and other financial institutions will suffer more losses. But these are all normal symptoms of recession. Our real vulnerability is a highly complex and global financial system that might resist rescue and revival. The Great Depression resulted from the mix of a weak economy and perverse government policies. If we can avoid a comparable blunder, the great drama of these recent weeks may prove blessedly misleading.”
Some contrarians have been calling the Bailout a thinly veiled attempt to save wealthy political contributors, or at the very least, the same organizations that created the crisis in the first place. Many advocate direct support of homeowners, or direct support of smaller, local banks nationwide instead of saving only the biggest players. But as Samuelson points up above, the government is not trying to save the largest institutions; it is trying to save the entire system, and the only way to do that is by saving the biggest players. So while it may seem justified to save the small homeowners and investors who depended on the government and the big financial companies for their homes or retirement plans, bailing them out will not save the system, and without the system, everybody would suffer.
Does the system need overhauling, and more intelligent regulation and oversight created? Absolutely. On that everyone agrees. The best way to do that, using Ms. Orman’s analogy, is saving the patient, and then putting him on a healthy regimen.
So tighten up your belts, everybody, like Bette Davis said in All about Eve , because "it's going to be a bumpy ride".
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