06 November 2011

ClubOrlov: Hubbert's Third Prophecy

1st Prophecy: US oil peak would be sometime between 1969 and 1971. It peaked in 1970.

2nd Prophecy: Hubbert predicted the world oil peak to happen about 1998. However he DID say that if OPEC were to restrict the supply, then the peak would be delayed by 10-15 years which would put it at 2008-2013

3rd Prophecy: A cultural crisis (Arab Spring and Occupy Wall Street); we have evolved a culture so heavily dependent upon the continuance of exponential growth for its stability that it is incapable of reckoning with problems of non-growth...

17 October 2011

The Government of Singapore Investment Corporation (GIC) invested 11 billion Swiss Francs in UBS in Dec 2007 (LINK) and USD$6.88 billion in Citigroup in Jan 2008 (LINK). GIC plans to hold on to these banks for a long time or, in Tony Tan's words, "many years":

We look to continue to hold on to our stakes in UBS and Citigroup for many years to come. - Tony Tan, GIC's former executive director (Bloomberg)
But our investment thesis for Citi and UBS was based on our assessment of their long term business potential. - Ng Kok Song, GIC Chief Investment Officer (Reuters)

These two banks have weathered the crisis; the worst is behind them. Both banks have returned to profitability over the last two quarters. We're long term investors, so we're quite prepared to stay with them. - Ng Kok Song (The Business Times)
How long is "long term"? What is meant by "many years"? The GIC website offers an answer:
As a long-term investor, GIC’s performance should be measured over a suitably long time horizon...A 20-year period is appropriate as it spans several business cycles and hence encompasses a number of market peaks and troughs. Thus our investment horizon of 20 years is matched by the 20-year annualised real rate of return metric, which is the key focus for GIC. (Page 8 of GIC's 2010/11 Portfolio Report)
GIC invested those billions in 2007/08. If they hold on to these two banks for 20 years, what will be the returns in 2028? Most likely a significant negative return; in fact, I got a strong feeling they might loose all the billions that they have put into these two banks.

Why? Simply because Peak oil, which we are at now, means the end of future economic growth. Peak oil entails declining economic activity. Declining economic activity means businesses don't make more money, or instead they lose money. You don't expect the banks' shares to rise in this kind of situation. I believe global economic activity is going to contract permanently. The flat world is going to be smaller and rounder again. Energy is the master resource and oil is the most important energy source today in the industrial world. There are no viable energy substitutes for oil which can match its net energy returns, energy density and versatility.

The break-even oil price for Saudi Arabia is USD$83-$88 per barrel in 2011. Their break even oil price was USD$30 in 2003. So it has almost tripled in the last 8 years. Welcome to the age of expensive oil. If the world's economy does recover, high oil prices will be there to bring it down again. With the end of cheap oil now, it is expensive and hard to do business. Little wonder it was reported that GIC says the investment climate is challenging.
The Government of Singapore Investment Corp., the city’s sovereign wealth fund, said the investment environment remains “challenging” as inflation risks increase and the recovery of developed nations falter.
“The sustainable recovery of the developed economies remains uncertain, while the emerging economies face challenges in restraining inflationary pressure and currency appreciation,” Chief Investment Officer Ng Kok Song said in an e-mailed statement today that accompanied the report. “GIC will continue to respond nimbly to this challenging environment.”  (Bloomberg)
If you disagree that future oil supplies cannot match world demand, or if you think alternative energy sources can be easily ramped-up and substituted for oil, I strongly urge you to read A Guide for the Perplexed Energy Policymaker by Kurt Cobb.

So why did GIC invest in UBS and Citigroup? Fundamentally, I believe GIC has failed to anticipate or understand the paradigm shift in our economies as it relates to net energy returns (EROI), peak oil and the environment. It is no longer "business as usual" for the next 20 years. To quote scientist Chris Martenson, The Next 20 Years Are Going To Be Completely Unlike The Last 20 Years. Whatever dreams of the 5 Cs and secure savings for retirement that you had are going to be just that, dreams alone and not reality.

No amount of monetary stimulus, quantitative easing and interest rate tweaking by central bankers is going to promote real economic growth for any extended number of years because it is going to be kept in check by resource depletion and a finite environment. The "Limits to Growth" book as it was first written in the early 1970s by MIT scientists is going to gain credibility in future years.

I have no idea what the directors in GIC were thinking when they made the plunge into UBS and Citigroup, but one thing I can be sure of is that they were thinking mainly in monetary terms. What do I mean? If you look at GIC's Board of Directors, most if not all of them have (not surprisingly), a background in economics, business and finance. Duh, what did I expect?

Well, here is an axiom for you which is not taught in mainstream economics: the human economy/market is a subset of the ecosystem. This is the foundation of Ecological and Biophysical Economics. Think about all the natural resources that Man extracts from the environment and transforms for his consumption and use. Think about all the energy that we consume that is central to all economic activity. Without energy, there is nothing. Without natural resources, there is nothing. And yet, there is no one on the GIC Board who is a natural scientist and probably not one who applies the natural sciences to economics to advise them on the limits of physical growth. We cannot separate economics and finance from the natural world!!! While the economists and bankers in the GIC Board think of their investments in dollars, scientists are trained to think about the energy inputs needed to make things work and their ecological impacts.

Many mainstream economists attribute the current financial crisis to the US housing bubble, excessive lending, high debt levels and a lack of government regulation as root causes. But ecological and biophysical economists (those who apply the natural sciences to economics) see things differently; they attribute it to the scarcity of natural resources and its inability to keep pace with financial assets and debt as the cause of our present troubles (see Herman Daly).

The environment, energy and economy are inextricably linked. A sustainable future requires not only green and efficient buildings, technologies and machines, but also an overhaul of the financial system and our perception of wealth, work and leisure.

But unfortunately, bankers, economists and financiers run (or should I say rule) the world through the current financial system of Fractional Reserve Banking through which money is created. Thus they have a vested interest in maintaining the status quo of perpetual economic expansion which is necessary to keep this money system afloat, in order that interest-bearing debts may be repaid. Greed and money are their gods. However, growth in the current monetary system and growth in the physical world are incompatible. The originator of the Peak Oil model, M. King Hubbert, had this to say:
For various reasons, it is impossible for the matter-energy system to sustain exponential growth for more than a few tens of doublings, and this phase is by now almost over. The monetary system has no such constraints, and, according to one of its most fundamental rules, it must continue to grow by compound interest. This disparity between a monetary system which continues to grow exponentially and a physical system which is unable to do so leads to an increase with time in the ratio of money to the output of the physical system. This manifests itself as price inflation. A monetary alternative corresponding to a zero physical growth rate would be a zero interest rate. The result in either case would be large-scale financial instability. (Source)
Thus I say, as a layperson, to GIC and also to Temasek Holdings and MAS, reexamine your beliefs in the free market and reconsider your basic assumptions about perpetual economic growth because there is going to be an upheaval in the current monetary system. Whatever hundreds of billions that we have in Singapore's reserves may very well end up as toilet paper because of ecological destruction and resource depletion. Real wealth is found in nature which provides all the goods (metals, energy, soil, air, water) and services (air/water purification, pollinators, recyclers, decomposers) that we need. Mankind is killing the golden goose because of greed. We should rely less on international trade and work towards self-sufficiency and the localization for our economy. There is no way the industrial world with its prodigious use of oil inputs is going to continue for long.

Further Reading: http://www.postcarbon.org/article/178709-the-end-of-growth

End of Growth Videos:

I leave you with this research nugget about peak oil and its impact on the economy by two scientists who conclude the following:
For the economy of the U.S. and any other growth-based economy, the prospects for future, oil-based economic growth are bleak. Taken together, it seems clear that the economic growth of the past 40 years will not continue for the next 40 years unless there is some remarkable change in how we manage our economy. (source: Google Docs)
Adjusting the Economy to the New Energy Realities of the Second Half of the Age of Oil

11 October 2011

With the recent flooding situation in Thailand (Link), the price of rice is going to increase. This is only the beginning of a multi-decade long increase in the price of food as climate change, peak oil and a growing population make it increasingly difficult to feed everyone satisfactorily (850 million people are chronically hungry according to FAO). Mr Lee KY thinks that it is no problem because we can pay for it if our economic growth is strong.

Lee Kuan Yew in TODAYONLINE:

Student: In the next 20 to 30 years time, what if global demand for food outstrips supply, then what will be of our food security plan?

Mr Lee: It doesn't matter whether you grow your own food or you buy your food. The question is the price. If there is a food shortage worldwide, the price of food, produce will go up. And the answer for a country like Singapore is to make sure that our incomes rise, our total GDP rises faster than the food prices.
It does not matter whether you grow your own food or you buy your food. The question is the price? Really, Mr. Lee? Let's go back a few years in history and consider the following news headlines from 2008:

Brazil May Curb Rice Exports to Boost Inventory

Vietnam to cut rice exports to curb inflation

Cambodia Halts Rice Exports to Curb Rising Domestic Prices

India introduces rice export ban

And also from 2011

Myanmar Puts Lid on Its Rice Exports

Egypt says rice export ban to Oct 2011

It is often said that money makes the world go round, but when times are desperate and push comes to shove, governments around the world are going to restrict their food exports to protect their domestic supplies and to calm any local food unrest. When that happens, it does not matter how rich you are because no country is going to sell any food to you. Your dollars and cents will just be worthless pieces of paper or electronic entries in a bank's vault or computer database.

It was fortunate that Thailand did not ban any rice exports in 2008:

Thailand will not ban rice exports (2008)

With the recent catastrophic floods in Thailand and Vietnam (AFP Link), there is a huge chance that their governments might just introduce curbs or restrictions on the amount of rice that they export.

Now consider this plausible scenario a few years from now: 1. Extreme weather patterns destroy the production of all the major rice exporting nations; 2. Oil production in the Middle East plummets due to Peak Oil and political unrest. Results? Food prices soar and every major food exporting nation bans food exports completely to protect their domestic markets. What becomes of Singapore's food supply? Are you going to chew your paper Singapore dollars? In light of this, is it not important to grow your own food, Mr Lee?

Also, some intelligent responses from a reader in that TODAYONLINE report:

When there is global food shortage, it is no longer a matter of price. We may not be able to get any food, or enough food, at any price.

Even if Singapore owns the farm overseas, the foreign government (where the farm is located) may not allow the farm produce to be exported. Even if the foreign government allows the farm produce to be sold to Singapore, the workers at the farms or trucking firms or dockyards may sieze the produce to feed their own families first. Do you think they care about Singapore's survival or the rule of law?

It may not be sexy or wonderful for our economic numbers to produce our own food, but it is time that Singapore placed more importance to food security.
What was wrong with Lee Kuan Yew's reasoning? His typical, mainstream economic way of counting everything in dollars and cents and his strong belief in the free market system. Some comments that I left on Gerald Giam's blog are worth repeating here:
The way I see it, the main problem is that mainstream economists have a wrong set of units for accounting. They reduce everything to dollars and cents which are nothing more than abstractions divorced from the material world. Oil prices hit a low in 1999 at $17/barrel but the price did not tell us what was left in the ground for us to extract. All it did was to create the temporary illusion that oil was plentiful, and that alternative sources of energy were therefore uneconomic and unnecessary – in dollar terms – according to the self-deluded economists.

Had they learned to calculate the economic inputs/outputs of a nation in terms of energetic units (Watts, BTUs, etc.), biocapacity and ecological footprint, they would have realized that our entire growth-centric-consumerist economic paradigm is one giant energy sink and resource blackhole that is squandering away at unsustainable rates the earth’s natural capital and natural resources that have taken eons to form.

23 April 2011

But on the supply side, it is not all pessimistic news. There is hope for new sources of supply. Time and again experts have warned that oil and gas deposits will soon be depleted and they calculate the year beyond which mankind will be out of oil and gas. But such talk of peak oil has been proven wrong many times in the past. And they may yet proved mistaken again because each time you think you have run out, oil companies have consistently discovered not just new reserves but also developed new ways of extracting reserves that previously could not be taped. Drilling in deeper waters, innovations like drilling tight shale rock formations to get that unconventional gas, better management techniques on oil fields so that you get out not just one-third of the oil which is there but even two-thirds of the oil which is there, which can make a tremendous difference. And in any case, whatever the prospects with oil and gas, as far as coal is concerned the supplies are sufficient to last mankind for centuries. Speech LINK
I was very surprised to read those comments by PM Lee concerning Peak Oil. It is not about running out of oil. Even geologists and peak oilers admit that there will still be oil left in the ground centuries from now, but it's just going to be prohibitively expensive to extract. Heck, astronomers have found more hydrocarbon liquids on the planet Saturn's moon Titan than all the known oil and gas reserves on Earth. Gee, we just need to construct a pipeline 1.2 billion km in length - problem solved. Hello PM Lee? It's all about CHEAP and AFFORDABLE oil which is the lifeblood of the economy. Do you think businesses and individuals can survive if they have to pay more for energy every subsequent year?

In years to come, those dubious statements of his will make him look ignorant and silly. There are enough evidence and historical records on the internet and major oil publications to show that some of the former major oil producing nations like the USA, Mexico, UK and Norway have peaked out and started falling precipitously in terms of oil production. There have not been any major oil discoveries in those places and neither is there any proven technology that could halt, offset or reverse their oil production downtrend. It is an established fact that these four countries are currently producing much less oil than before. When the rest of the world such as the Middle East and Russia peak for geological or political reasons and begin their slide in oil production, we can kiss our economic growth models and current standards of living goodbye

See http://mazamascience.com/OilExport/ to view each country/region's oil statistics.

I don't know why PM Lee made those statements. The 2010 Singapore Economic Strategies Committee had earlier identified peak oil as a challenge (see LINK), but PM Lee now says Peak Oil has been proven wrong? It's puzzling and alarming. The OilDrum website listed several possible reasons as to why governments would deny or be silent on peak oil:

1. They don't "get it".
2. Overly commited to neoclassical economics or "grow forever" economic models
3. Cognitive Biases
4. Misled by EIA and IEA
5. Blame on media (Not a word about peak oil in The Straits Times)
6. They can't talk openly about it
7. They want to avoid talking about it
8. They are doing something but don't want to alarm the public

Source: http://www.theoildrum.com/node/6100

I believe it's all of the above in Singapore's case.