Thursday, November 10, 2011

Eurozone = Toast, Economists puzzled.

I listen a lot to NPR and BBB World Service.  Of course I hear over and over about the debt crisis in Greece, Italy, Ireland, Portugal, etc.  I keep hearing about hopes for fixing financial houses and "returning to growth".  With increasingly expensive petroleum, that seems unlikely.  Gail Tverberg's overview explains that as oil gets more expensive, debt burdens of governments are likely to increase.  In Europe, it seems it's reaching the level that will drive some countries into default, which will lead to the dismembering of the Euro as a common currency.  Chris Skrebowski explains that the advanced economies can't tolerate expensive oil and still grow.  He estimates U.S tolerance limit for a growing economy is $90/barrel.  He estimates China can tolerate at least $110/barrel.

In my last post, I talked about the stress that $100/barrel oil puts on our economy.  I also expressed my puzzlement over economists' apparent inability to perceive a link between expensive oil and a stressed economy.  In a recent guest article in The Oil Drum, ecological economist David Stern sheds light on my conundrum.  He explains that when energy, i.e. oil, became very cheap in the 20th Century, economists began using mathematical models that ignored energy because it was such a small cost.  For 60 years, economists have used those models and been trained to discount the role of energy in a developed economy.

This realization led me to realize that the most important piece of planning for a future of more expensive and scarcer hydrocarbon energy is the paradigm shift.  Average citizens and the experts who are interviewed for news and analysis need to think about the world differently.  Until that occurs, they can't think rationally about the rest.

Saturday, August 13, 2011

Recessions and Paradigms

Long time, no post, I know.  I had other concerns.

Presumably you've noticed we might be on the verge of another recession?  Notice too that economists and financial folks want to cast the situation in terms they think they understand?  But perhaps there's another factor that should be considered.  In the Peak OIl Task Force's analysis in their 2010 report (http://peakoiltaskforce.net/) they claim that the data on the U.S. economy over time shows that when our energy (oil) costs hit 4% of U.S. GDP, a recession follows.  In other words, energy costs drag on the economy until a tipping point is reached and there's an adjustment.  Other people have other estimates of what percentage we must hit before triggering a recession ranging up to 6%.  James Hamilton, an economist at UC San Diego, details a long history of economic downturns following oil "price shocks".

Let's do a bit of back-of-the-envelope calculation.  We consume roughly 20,0000,000 barrels of oil per day.  In 2010 our GDP was over 14 trillion dollars.  In February, oil at the New York Mercantile Exchange (http://www.nyse.tv/crude-oil-price-history.htm) broke the $100/ barrel mark for the first time since the last recession, when it topped out at $147/barrel.  Prices recently dipped back under $100, but not by much.  Using the nice round number of 100, assuming our economy hasn't grown much since 2010 and assuming there are 365 days in a year, oil energy costs work out to about 5% of our GDP.

At the very least, $100/barrel oil has to be a significant drag on the economy as that turns into higher costs for fuels and the raw materials for plastics and petrochemicals (fertilizer, for example).  We been reading about the effects of $4 gas.  Some of you know that I expect the U.S. and other economies to go through a series of recessions as the world demand bumps maximum oil production capacity, prices soar, and recession follows. Economies shrink, demand drops, price falls.  This pattern continues until production from the big oil reserves really starts to drop, as opposed to the plateau it's on currently, forcing continuous uncontrolled shrinkage.  Alternatively, economists and governments get past denial and develop aggressive control mechanisms to support a more graceful and predictable decline phase for the oil age.

 The United States Congress went into gridlock over raising the debt ceiling, some more European nations are looking shaky, so we have some possible triggers.  So will our economies just stagnate, or will there be full scale recession?  Any bets on how many recession cycles it takes before the paradigm shift occurs and there's a reanalysis of economic history and theory based on energy costs?  It occurs to me this is like what happened in my core fields of science when I was in college in the 1970s.  Geologists admitted plate tectonics was real and there was a drastic reinterpretation of geologic and evolutionary history based on the new paradigm.

Care for a paradigm shift?