Singapore Peak Oil

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:
http://www.youtube.com/watch?v=XjFQLGVIJak
http://www.youtube.com/watch?v=EQqDS9wGsxQ

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

Economic growth is all about production and consumption. Economists and politicians love a growing population of consumers because it adds to economic growth. A greying population would slow our growth and so the current 4.6 million on this island is not enough, we need 6.5 million in the coming decades. Now this cycle of growth is vicious and self-perpetuating. In 2030, the government will say 6.5 million of us is not enough, we need 9 million on this island to keep the economy growing. Wash, rinse, repeat.

Spend, spend, spend. Consume, consume, consume. Grow, grow, grow. I remember reading in ChannelNewsAsia last year where SM Goh Chok Tong was encouraging Singaporeans to spend to starve off a recession:

"If all of us go into a power save mode, then the economy will really go into a recession! This is what economists called the Paradox of Thrift. If you have sufficient savings and can afford to spend, you should continue to spend on life's little pleasures.

"Take your family to the movies, shop, dine out at restaurants and hawker centres, go for your regular foot massage, indulge yourself at a spa, take a taxi, donate to charity and so on."

Here's the twist: what are the limits, if any, as to how much we can spend and grow before we turn into an incurable cancerous tumour on this planet? The New Scientist article below addresses this question and our leaders and policymakers would do well to pay attention to this for a truly sustainable Singapore - not the pseudo-sustainable-growth-economy that Mah Bow Tan keeps talking about.

New Scientist
07 August 2009

...According to leading ecologists...few of us realise that the main cause of the current environmental crisis is human nature.

...All we're doing is what all other creatures have ever done to survive, expanding into whatever territory is available and using up whatever resources are available, just like a bacterial culture growing in a Petri dish till all the nutrients are used up. What happens then, of course, is that the bugs then die in a sea of their own waste.

...Epidemiologist Warren Hern of the University of Colorado at Boulder, even likened the expansion of human cities to the growth and spread of cancer, predicting "death" of the Earth in about 2025. He points out that like the accelerated growth of a cancer, the human population has quadrupled in the past 100 years, and at this rate will reach a size in 2025 that leads to global collapse and catastrophe...

...The problem..is that it fails to recognise that the physical resources to fuel this growth are finite. "We're still driven by growing and expanding, so we will use up all the oil, we will use up all the coal, and we will keep going till we fill the Petri dish and pollute ourselves out of existence,"

Full Article: Consumerism is 'eating the future'

A brilliant article which explains how and why the dominant economic paradigm is rooted in unreality and fantasy. The financial "wizards" and economic "high priests" of today rightly deserve to be castigated not only for the current worldwide credit crunch but also for our environmental woes. Our current model of relentless economic growth and accumulation of goods and capital is a recipe for ecological failure on a global scale. The economy is a subset of the ecosystem and not the other way round. Without a hospitable living environment, there can be no economy; hence, ecology precedes economy. I urge you to read the article in its entirety.

LINK: http://www.monthlyreview.org/090501-york-clark-foster.php

An essay mentioned in the article,“Economics Needs a Scientific Revolution,” can be found here: LINK

An email that I sent recently....

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Dear MND and MEWR,

As a concerned Singaporean, I am alarmed to read the following in a speech by Minister Mah Bow Tan:

Cities have to ensure that economic growth is not stunted by infrastructure bottlenecks and that growth does not come at the expense of clean air, clean water and a liveable environment. http://www.mnd.gov.sg/newsroom/Speeches/speeches_2009_M_24042009.htm

I urge the Minister to reconsider that statement because research done by the authors of the "Limits to Growth", ecological economists and scientists have proven that "there is a fundamental conflict between economic growth and environmental protection, including conservation of biodiversity, clean air and water, and atmospheric stability. This conflict is due to natural laws (thermodynamics and ecological structures) - it is simply a result of the way the world works. Mounting evidence of this conflict demonstrates the limits to growth."

A cursory reading of the daily news reports will tell us that we are loosing biodiversity, fresh water, top soil, and clean air at an unprecedented rate and all of this is due to human economic expansion.

I plead with you to read the following articles and re-examine the growth paradigm which has guided us for at least the last 50 years and come to an understanding that this cannot go on forever. At some point, probably now, we will clash with the earth's ecological limits to sustain itself and Nature always wins. This means that societal collapse and die-offs are inevitable unless we take steps now to descend the growth ladder in a controlled manner, or else massive social dislocation is likely to ensue in the years ahead.

A sustainable Singapore requires a new non-growth paradigm to guide us, not the current one that has left the earth devastated and poorer for future generations.

Revisiting the Limits to Growth After Peak Oil
http://www.esf.edu/efb/hall/2009-05Hall0327.pdf

Economics in a Full World
http://www.publicpolicy.umd.edu/faculty/daly/sciam-Daly5%20copy%201.pdf

Prosperity Without Growth
http://www.sd-commission.org.uk/publications/downloads/prosperity_without_growth_report.pdf

Why our Economy is Killing the Planet
http://www.scribd.com/doc/13482709/Ecological-Economics-Beyond-Growth-Why-Our-Economy-is-Killing-the-Planet-New-Scientist-18-Oct-2008

Irish Times
By John Gibbons

Growth and the pursuit of growth is the secular religion of the western world, and its dogma is infecting every society.

BRIAN COWEN and Enda Kenny suffer from this. So does Gordon Brown and at least nine in 10 other world leaders. All are labouring under the same crippling psychosis. This is their shared conviction that, whatever the problem, the solution lies in economic growth.

So deeply ingrained has the notion of relentless, limitless growth become that to suggest that it may be the cause of, rather than the solution to, our greatest challenges borders on heresy.

Growth and the pursuit of growth is the secular religion of the western world, and its dogma is gradually infecting every society on Earth via globalisation. Every cult needs its clergy, and the high priests of growth are our economists. Purporting to understand such magic as the "hidden hand of the marketplace", economists have been feted by presidents and parliaments as the new alchemists, with their dazzling theories suffused with the promise of technological transubstantiation that will somehow lift us beyond the mortal limits of our fragile blue planet.

These sorcerers have led politicians and populations alike to believe that they alone understood and could tame the raging marketplace, while extracting from it an infinity of goods to sate our ever-expanding appetites.

Perhaps their greatest sleight of hand has been in selling the notion of infinite growth within a finite - and sharply declining - ecosystem. Take Robert Solow, a Nobel Prize-winning US economist. "The world can, in effect, get along without natural resources," was his breathtakingly myopic analysis.

Ask an economist to value a forest, and he'll tell you how much timber sells by the tonne. The Amazon releases 20 billion tonnes of water into the atmosphere every day, free of charge. Forests control floods, purify water, protect biodiversity and keep the planet habitable, but what does this matter to a hedge fund manager? Another trick, called temporal discounting, allows economists to sell our children's future down the heavily polluted river in favour of short-term profit.

Yet this analytical vacuity is the norm, not the exception, among the economic elite. Alan Greenspan, former chairman of the US Federal Reserve, dressed up political ideology and passed it off as rational economics, while cheerfully choreographing the world's greatest financial crisis since the 1930s. None of this has dented the collective self-confidence of the ruling cabal of economists, nor cooled the media's love affair with them.

Tune in to RTÉ or Today FM any day of the week to hear the very economists who sold us the poison during the boom years; now they are peddling their repackaged "cures" in the form of the latest economic elixirs of growth. Heavy drinkers will be familiar with this logic: it's called the hair of the dog.

In nature, growth is a phase, leading to the equilibrium of maturity. An adult that continues growing can only do so by becoming obese. Within the body, cells that multiply exponentially in an otherwise stable organism are more commonly known as a cancerous growth or tumour. The World Wildlife Fund's Living Planet Index has tracked the ecological health of the world since 1970. Its 2008 report found that total planetary resources have been permanently depleted by 30 per cent in well under four decades.

"The possibility of financial recession pales in comparison to the looming ecological crunch," said the fund. The report found that three in four people live in countries that have exceeded their own ecological limits. Ireland is well up the debtor list. We consume resources requiring three times the amount of land actually available globally per person. We are ecologically as well as economically in hock. You really wouldn't want to be around when this debt is called in.

For now, we continue propping up our house of cards by rapidly running down the ecological capital of other countries to maintain our astonishing bubble of affluence. In famine times, this was called eating the seed corn. When our political elite, guided by their hierarchy of economics believe they can cure the recession by "jump-starting" the consumption-driven economy and so plunge us deeper into ecological debt, you see just how the cancer cult of growth economics has metastasised throughout the body politic.

Capitalism, in the words of John Maynard Keynes, an economist now back in vogue having been deemed passé by the seeming triumph of right-wing political ideology, "is the astounding belief that the most wickedest of men will do the most wickedest of things for the good of everybody".

Many people who live in man-made environments like cities may wonder what ecology has got to do with them. Put simply, our environment is to human survival and wellbeing what water is to a fish. If growth is toxic, what about the alternatives? In 1972, a group called the Club of Rome published its prescient book, The Limits to Growth .

Reaching what they call equilibrium would require hard choices. We would have to trade some freedoms, such as the right to have unlimited population growth and resource consumption, "for other freedoms, such as relief from pollution and crowding and the threat of collapse of the world system".

In the 36 years since its publication, Earth now bends under the burden of an additional 3.3 billion people. As we fret about declining property prices, philosopher Henry David Thoreau's observation was never truer: "What good is a house, if you haven't got a tolerable planet to put it on?"

Our world now faces challenging ecological and environmental problems (peak oil, climate change, energy security, food inflation, loss of biodiversity, wildlife extinctions, overpopulation). From what I have been reading, our government's solutions to these problems are more growth: 1) allow the population to increase to keep us economically competitive; 2) keep the economy growing and strong so that we become richer, and with our riches we can solve these problems.

Excerpts from a speech by PM Lee Hsien Loong at NTUC May Day Rally, 1 May 2008:

http://app.sprinter.gov.sg/data/pr/20080501991.htm

So, this is the way to grow our economy, create more jobs and more opportunities and improve the lives of all our workers and when I say all our workers, that means all of them. Not just the highly qualified and educated ones, but all collars, from cleaners and security guards, to technical and professional staff. Not just young workers but all ages, from new job entrants to mid-career and mature workers and not just local workers but all nationalities, from Singaporeans to others who are here, to work here and to help us reach our goals for Singapore.

There are challenges ahead -- the US economy, higher food prices, cost of living, low wage workers and so on -- and there will be more challenges to come. But our approach is working, so we have to persevere and press on, because we are heading in the right direction. Build our tripartite partnerships, educate and train our people, help our industries to innovate, upgrade, build social safety nets to assist needy Singaporeans. Then, however choppy the waters, we can maintain a steady course, sail ahead and secure a brighter future and a better life for all of you and us. Thank you.

I think this is a big mistake. Our leaders don't understand our limits to growth. They do not understand that the neoclassical economic growth model assumptions that we have embraced cannot be sustained with peak oil and a burgeoning world population. If we continue with this growth model, the system will collapse under its own weight.

There is one word that describes our government policies: insane. Insanity is doing the same thing over and over again and expecting different results. Why do I say their policies are insane? Because the cause of our current problems is overgrowth: overpopulation, over-consumption of resources, over-exploitation of planet earth. Will more economic growth solve our problems? If overgrowth is indeed the root cause, then why does the Singapore government continue to insist that "more growth" is the answer to our problems?

Our government needs to consider alternative solutions, and Singaporeans have the right to be aware of such alternatives. The alternative to consider is a Steady State Economy (SSE). I urge our policymakers to consider the SSE as an alternative to a growth economy.

What is a Steady-state economy? It is an economy viewed as a subsystem in dynamic equilibrium with the parent ecosystem/biosphere that sustains it. Quantitative growth is replaced with qualitative development or improvement as the basic goal. (Ecological Economics: Principles and Applications).

This synopsis by Herman Daly is a good explanation of why we need a SSE and how we can go about implementing it. You can read it in full here: http://www.theoildrum.com/node/3941

A failed growth economy and a steady-state economy are not the same thing; they are the very different alternatives we face. The Earth as a whole is approximately a steady state. Neither the surface nor the mass of the earth is growing or shrinking; the inflow of radiant energy to the Earth is equal to the outflow; and material imports from space are roughly equal to exports (both negligible). None of this means that the earth is static—a great deal of qualitative change can happen inside a steady state, and certainly has happened on Earth. The most important change in recent times has been the enormous growth of one subsystem of the Earth, namely the economy, relative to the total system, the ecosphere. This huge shift from an “empty” to a “full” world is truly “something new under the sun” as historian J. R. McNeil calls it in his book of that title. The closer the economy approaches the scale of the whole Earth the more it will have to conform to the physical behavior mode of the Earth. That behavior mode is a steady state—a system that permits qualitative development but not aggregate quantitative growth. Growth is more of the same stuff; development is the same amount of better stuff (or at least different stuff). The remaining natural world no longer is able to provide the sources and sinks for the metabolic throughput necessary to sustain the existing oversized economy—much less a growing one.

Economists have focused too much on the economy’s circulatory system and have neglected to study its digestive tract. Throughput growth means pushing more of the same food through an ever larger digestive tract; development means eating better food and digesting it more thoroughly. Clearly the economy must conform to the rules of a steady state—seek qualitative development, but stop aggregate quantitative growth. GDP increase conflates these two very different things.

We have lived for 200 years in a growth economy. That makes it hard to imagine what a steady-state economy (SSE) would be like, even though for most of our history mankind has lived in an economy in which annual growth was negligible. Some think a SSE would mean freezing in the dark under communist tyranny. Some say that huge improvements in technology (energy efficiency, recycling) are so easy that it will make the adjustment both profitable and fun.

Regardless of whether it will be hard or easy we have to attempt a SSE because we cannot continue growing, and in fact so-called “economic” growth already has become uneconomic. The growth economy is failing. In other words, the quantitative expansion of the economic subsystem increases environmental and social costs faster than production benefits, making us poorer not richer, at least in high consumption countries. Given the laws of diminishing marginal utility and increasing marginal costs this should not have been unexpected. And even new technology sometimes makes it worse. For example, tetraethyl lead provided the benefit of reducing engine knock, but at the cost spreading a toxic heavy metal into the biosphere; chlorofluorocarbons gave us the benefit of a nontoxic propellant and refrigerant, but at the cost of creating a hole in the ozone layer and a resulting increase in ultraviolet radiation. It is hard to know for sure that growth now increases costs faster than benefits since we do not bother to separate costs from benefits in our national accounts. Instead we lump them together as “activity” in the calculation of GDP.

Full article