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So, we’re all fairly sure that the current economic crisis is something to do with the banks lending money to people who couldn’t finance their debts. We’re reasonably sure of this because we’re quite certain that the American Sub-Prime mortgage market was where the problems started and that if they’d not lent money to those people then we’d all be fine now and would be enjoying the same level of economic growth as before. How true is all this ‘knowledge’ though?
Money is debt. The available pool of cash with which to do things comes from each of our promises to finance our debts. The money you paid for your house with almost certainly doesn’t physically exist anywhere. Unless you’re in the minute minority of people who paid for their house from their earnings, then you got out a mortgage, the majority of which would have been created ex-nihilo. It exists as a string of 1s and 0s on a computer. As you pay/paid your mortgage off most of the money you gave back disappeared. It had never truly existed in the first place. The only money which didn’t disappear was the interest and the reserve deposit equivalent. That is the amount they have which they can lend from. The ‘real’ money that allows them to make fake money out of nothing more than your promise to repay. Their reserve ratio could be as high as 24:1, they could be able to loan out 25 times the real money they have.
Okay, so the bank can lend out more money than it actually has, but this fake money it creates is destroyed as it’s repaid, leaving only the real money and the interest. At a reserve ratio of 9:1 (as I understand it, a fairly low, reasonably common rate) they can collect interest on a £10,000 loan while only having £1,111.12 of real money. The interest on that £10,000 loan is theirs to keep and they only need to recover £1,111.12 to get their initial investment back, the rest of the £10k will be destroyed once repaid anyway. Of course, that £10,000 loan will be deposited somewhere once the loan’s been used for whatever it was intended for. The £10,000 loan, once deposited, can be then used to make a further loan of £9,000. That £9,000 loan can then be used to make a further loan of £8,100, and so on until we’re approaching £100,000 of loans (and the interest payments on those loans) for a £1,111.12 initial deposit. If there were only one loan made then the bank could only collect on the £10,000 initial loan. However, with dozens of smaller loans after the initial large loan the bank can collect on £100,000. Lending to lots of people wanting smaller quantities makes the bank a lot of money from nothing.
So the banks can make the huge loans that large businesses want, then use those to make medium loans that medium businesses want, then use those to make loans that small businesses want, then use those to make loans that consumers want. All of the loans made with the same initial deposit by the central bank. And the interest collected on all of the loans can then be used to make more loans and collect more interest.
Of course, no bank would get the deposits from their own loan from every stage of this process, but since the banking system is a closed system, it effectively means that, since each bank gets some deposits from every other bank’s loans, it works out to the same thing in the end.
So, the total amount of money in the system and the total amount of interest the banks can ‘earn’ is entirely dependent on the demand for debt. If you can find a way to give money to everyone demanding debt in such a way that you can get your money back in some way, with some interest, then you will. Capitalist greed demands that we do everything possible to get that extra penny of profit. It doesn’t matter if your business model is that you lend money to people to buy houses, knowing they will probably be unable to pay, because you’re gambling that their house will be worth enough to cover that by the time you come to repossess it, you will do it, collect your profit and sleep sound at night. Ethical considerations are not part of a capitalist system.
That’s a lot of explaining to essentially say that the sub-prime market was good for the economy, until the housing market started to shrink instead of grow. Once houses were starting to lose value rather than gain it the system stopped working, the gamble turned sour. Our long, sustained growth period was thanks in no small part to the extra money generated by the sub-prime market. It’s just sad that the means we chose to fend off a small deflationary period will have the effect of causing a massive deflationary period. Cest la vie.
Growth isn’t sustainable. I’ve said it many times within the course of writing entries for this blog, but I feel the need to say it once again. Growth is not sustainable. No level of growth is sustainable. No level of depletion is sustainable. It’s logically obvious that both of these statements are necessarily true. Yet, our culture doesn’t accept that logic. It says that either the conclusion is wrong or that some form of technology will appear to allow us to defeat the conclusion. The amazing tech fix.
We have been lulled into believing in the tech fix because it’s worked for so long now that we can’t perceive a time when human innovation will not provide us with new and innovative ways to continue killing the planet. We even imagine such a situation – where we can’t think of a new way to continue business as usual – as horrific. It would be terrible if we had to deal with the Earth as a partner and not as a slave! Tech fixes have been possible because of easy access to cheap energy. If peak oil strips us of our easy access to cheap energy, will the tech fixes be possible? Probably not if we’ve not done wide scale, serious investment in the alternatives prior to the peak. If, as some people argue, the world has already peaked, then we’re too late. Time to ride the roller coaster.
I’ve just read David Waddell’s very wise words over on his blog about whether debt is good, bad or ugly. He makes a lot of very sensible points about micro scale economics. In his example of Bob and his new sofas, for example, he’s entirely right that if Bob saved, rather than got his sofa on credit every time, he’d be able to buy more sofas in the long run. Bob doesn’t do this and the economy doesn’t encourage him to because of the very nature of our entire society. The short term is more important than the long term. Governments look no further than the next election. Businesses look no further than the next profit report. Individuals look no further than the next pay slip. There are exceptions to those rules, but generally people live pay slip to pay slip, saving and then spending their savings, putting a tiny amount into a pension and then regretting it in the long run. Businesses may have what they call a ‘long term plan’, but they’re usually only very sketchy beyond 5 years, and 5 years isn’t the long term. Governments are seen as over-stepping their legitimacy if they make too many policy decisions which run for more than their term in office. Etc, etc, etc.
Also, Waddell seems to ignore the fact that our currency is now debt. It’s not linked to anything more tangible than the debt we owe to the banks. If we stop borrowing or they stop lending then we’re in serious problems (hey… spooky). Because we can no longer be paid on demand the sum of £5 in gold, and instead are paid the sum of £5 in £s, we now need banks to keep providing easy to obtain debt and consumers to keep taking out more debt than they can easily finance. Bob may be better off if he figures out that saving will enable him to get more, or more expensive, sofas in the future, but for that to work as Bob intends it to work there needs to be enough other people who don’t realise it so the system keeps working and Bob’s money is still worth enough to buy him a sofa by the time he wants one.
He also overlooks the fact that the interest paid on loans made by the banks becomes available for re-lending. So a sea of consumers taking out loans is a good thing for lending as it generates interest which the banks can then lend out to more customers. Since the banks are able to lend many times what they actually have in reserves, and since the interest is theirs to keep, they can get a lot of money for lending from lending money.
It’s a brilliantly subtle system while it’s working. People believe the money they trade for goods and services is a unit of value. They believe it is worth something, because of that belief it is. If that belief disappears then the money they trade actually has no value at all. They can’t trade in the money at a bank for a thing which has value as a tradeable item such as gold, they can only trade in the money for different money. If they don’t accept the value of that money, where does that leave them? It’s in their best interests that they accept that the 1s and 0s in the bank’s computer which represents their wealth has value as they have no other recourse if they don’t. Belief is what holds the entire economic system together. That and the legal system deems it to be acceptable if someone will only offer to repay a debt they owe to you in the legal currency of the country you’re in, whether or not you believe in that currency’s value any more.
Waddell has a good point when it comes to the three phenomena of self-certification, 6 x mortgages and over 100% mortgages. However, once one accepts that money is debt (rather than value) and that the banks hoover up the money supply through interest payments, it becomes obvious why such things started to happen. The system needs larger and larger debts to finance the interest payments on the debt already in circulation.
There is a finite limit on what credit-worthy people can finance and are willing to finance. So they introduce self-certification to allow those who aren’t credit worthy to get into debt. Since this debt is secured against their house, which is going up in value, it doesn’t matter if they finance the debt or default, the bank makes money, the interest gets paid and the loan has created the money it needed to create for the system to work.
The banks lend money to everyone, even those who on paper can’t pay it back, and that fuels further increases in property prices, which helps the banks out because the defaulters’ homes are worth repossessing. Now, the increase in price starts to mean that people who should be able to finance a house can’t. So the bank increases the amount they will lend, because more people buying houses is good for them, both in interest payments and in house price inflation for future repossessions.
When you’re moving house there is almost always something you want to change about the house you’re moving to. Some small or not so small detail which is wrong. Now, if you’re having to give the vast majority of your pay to the bank so they’ll give you a 70 or 80% mortgage then you can’t make that change right away and may never get around to it. Many such changes will increase the value of the home, such as an extension. The bank wants your house to be worth as much as possible and so starts giving out 100% mortgages, so you can spend that 20% you’d saved on your extensions and remodelling. Lovely. However, word gets around that the banks are now giving 100% mortgages, so people stop saving that 20% and just want their house. The banks still want the house to increase in value by the addition of extentions and remodelling, so they up the percent they will loan to the borrower in the hopes that the excess will be used to increase the value of their home or buy some other retrieveable goods. If the mortgage is financed the bank gets its share. If not then its gets its share by repossession. This works so long as the price of houses is going up.
The reality is so stupid that it seems almost impossible that it would be allowed to continue. A bank shouldn’t be allowed to loan out almost $100,000 on a starting capital of only $1111.12 (part two of Money As Debt), but in effect they can. They can have $1111.12 and collect interest on almost $100,000.
The current credit crunch (God I hate that it got called that) was obviously going to happen. The system makes it inevitable. If we have the fossil fuel energy reserves left to claw our way out of the huge hole we’re in then it will happen again, unless we change the way banks and loans operate. We wont change a thing though because we like the illusion of prosperity that the system creates. We like to buy things today that we can’t afford until next year/decade. We like to have businesses able to operate despite losing £75 million in one financial year. We like these things and these things are what the system provides. There is so little real incentive to change the system that it wont be changed. I can even imagine post-crash societies which still operate this type of credit system. We’re short term animals. We like the benefits today and don’t care if it hurts tomorrow. We like it even more when the benefits are today and the pain might not be felt until after we die (see the way we treat the environment, the problems looming with peak oil and the lack of action, etc).
The title of this post is a cunning question levelled by Richard Heinberg.
The population growth curve experienced in the last 150 years is similar to the growth curve of yeast as they consume the sugars in order to create alcoholic drinks for us to consume. The yeast then dies off because the liquid it has been living in has been polluted by alcohol which is poisonous to it. We’ve yet to cause a total die-off of the human life on the planet, but we are polluting and destroying the ecosystem we rely on. Are we smarter than yeast?
The growth in human population in the last 150 years has been fed by oil and fossil fuels in general. We have converted these fuels into energy and consumed it to feed the population explosion. In 1850, 65% of the work done in the US was done by non-human animals, 18% by human animals and 12% by machines powered by fossil fuels. Now the work in the US is almost exclusively (>99%) done by machines powered by fossil fuels. The US isn’t abnormal in this regard. The machine percent for the 1850’s might be a little on the high side, but we in the UK aren’t different with regards the modern day use, and neither are most industrialised nations.
A person, over the course of a day, can do approximately 625 Btu’s (British thermal units) worth of work. A gallon of petrol can do 125,000 Btu’s worth of work. If we were to try and replace the work done by fossil fuels by work done by people we’d have to pay the people doing the work around 1/2 a penny an hour for the costs to be relative. In this context it probably starts to make sense why companies which can mechanise look to developing nations for their workforce. If they can’t mechanise a particular job then it costs them over a thousand times more to employ someone in the UK to do the job than it would to get the energy slaves contained in petrol to do it for them. It’s more attractive to get someone who only wants fifty or sixty times the price the energy slaves would cost.
When you start to break into the energy/cost analysis of the comparison between the cost to work ratio of oil compared to the cost to work ratio of people the migration of companies over to developing nations starts to become more obvious. When people first see the migration it doesn’t make sense. Surely it should be more expensive for the company to employ someone over there and ship them over here than it would to employ someone over here and move the goods a shorter distance? Well, in my opinion it should, doing things like that should cost more, not only in fairer wages for the worker but also in massive taxes for the wasted fuel. However, it doesn’t at all. Oil, even at the current price, is insanely cheap for the work it does.
So, are we smarter than yeast? Civilisation’s stories would have us believe that this is a stupid question. Of course we are smarter than yeast, we are the smartest life-form ever, the peak of evolution. However, we are curretly living the life of yeast. We have exploded our population, we are at or close to the peak of our population, we are polluting and destroying the world all around us. Are we going to do the downwards die off too? I can’t see a way we could avoid it. The human population is so over-shot that there is almost no way we can avoid large scale death of humans and non-humans.
We will kick and we will scream. We will continue exploiting and find new ways to exploit. However, we will die and we will prove we are no smarter than yeast.
The following is based, to a large degree, on this website
Remember how I said I’d like to be wrong? Well I’ve been doing some reading, specifically from the people who use inverted commas for the phrase peak oil.
One of the more robust of the contradictory theories (most simply yell at and belittle people who feel that peak oil is a reality) is that there is no such thing as peak oil, because oil is a renewable resource. The theory goes that oil is made at high temperatures and pressures around the magma/crust boundary from rocks and is being made all the time.
It’s an intriguing theory. One which makes me sadder than it makes me happy. If this is the case then there will be more and more oil, which as I pointed out in my peak oil post is the catch 22. It’s the worst case scenario as it means business as usual. Peak oil provides a softer crash, from which it is easier for the survivors, and for all the non-human life on the planet, to continue. More oil means more carbon dioxide, which means worse climate change (if the abiotic oil theory is true then it means no end of carbon dioxide emissions, even after places like Bangladesh are consumed by rising sea levels). Catastrophic climate change is the hard crash, from which humans and non-humans will have the hardest time recovering.
If the West can continue drilling for and using oil, it will. Indefinitely. We are so addicted to the stuff for almost everything we do that without the stick of it running out there is no way we can wean ourselves off of it.
I would also like to put forward that the Iraq war makes a lot more sense if those in power believe that oil isn’t a fossil fuel, but instead an abiotic fuel. Using such vast amounts of oil and other things like lives to take and hold a dwindling resource never made much sense to me. Bush may look like a chimp. He may act like a chimp on TV. It may even be his highly successful election platform. However, I don’t believe he is as stupid as he makes out. I think he simply hit on a winning electoral strategy which fed the average US Joe’s need to feel superior to something. He gave them a presidential candidate which they could feel superior to and they lapped it up.
The term ‘renewable’ needs to be looked at as well. Many people believe that wood is a renewable resource, and it’s true to a certain point of use. If you use trees faster than they grow then it’s no longer a renewable resource as it will dwindle. If you use any resource faster than it is replaced then it’s not renewable any more. Claiming that oil is abiotic and thus continuous and renewable ignores the fact that if we use it faster than the Earth makes it then we will still reach the peak oil scenario. Empires have fallen throughout history because they reached peak wood, they exploited the trees around them at a faster rate than the trees could recover from, so they trees dwindled and their empire fell. We can do the same, even if oil is renewed through natural processes, even if they are fairly quick, in geological terms.
Another thing I picked up from reading about oil as an abiotic fuel was that the writer wanted to make me feel like billions of barrels were being generated every day. He used quite expansive phrases and was adamant on the point that peak oil is non-existent because the fuel isn’t a fossil fuel but instead a abiotic fuel, thus continuous. Funny use of the word, really. In my opinion one would only use the phrases ‘continuous’ if one wanted to place in the mind of the reader the impression that it is not only being made all the time, but in massive quantities. This raises a few questions for me:
- Why is there not more of it? I mean, why isn’t the entire planet ankle deep in the stuff? 4.5 billion years of being made at rates sufficient to match or exceed present day usage would surely mean the whole planet was oil by now?
- If it’s not being made at present day usage rates, then why do you claim that peak oil is a myth? The theory doesn’t rely on it being a fossil fuel, it relies on us using it faster than it’s being made.
- How do you explain the fact that the production of over 30 countries around the world has peaked? You site an example of a self filling oil well from the Gulf of Mexico called Eugene Island 330, but this is clearly a freak occurrence.
Focusing a little closer on Eugene Island 330, I’d accept the hypothesis that the field was incorrectly mapped, or had the majority of its volume at depths too deep to map accurately than that the area is spontaneously and suddenly starting to generate billions of barrels of oil. If the Gulf of Mexico isn’t just a black sludge of oil and crap (like plastic bags) then I think we can discount the theory that natural factors are causing billions of barrels of oil to be created. If natural factors were generating billions of barrels of oil in so short a time, why did they only just start? If they didn’t only just start then why is the Gulf not just a big pool of mostly oil? I feel it’s an important question to start off with, yet this guy, who speaks for pages and pages on the amazing nature of Eugene Island 330 doesn’t even once contemplate the reality of what he is suggesting. He suggests that the oil is being made deep in the ground and migrating up to the lake the oil drillers surveyed. I would suggest the oil was locked deep underground and is now able to force its way up because we have changed the pressures above it.
I would suggest that even though the field seems to be filling again, it will never exceed the 15,000 barrels per day (bpd) peak of production. I would even suggest that you wont see much more than the current 13,000 bpd it’s ‘currently’ making. This is due to the fact that I don’t accept that the oil is fresh generation, but hidden reserve. A lake of oil not detected, filling the empty space left by the lake of oil that was detected. Over-flowing into the sea as a result of instability caused by oil drillers.
The refilling oil well and the abiotic fuel theory in general doesn’t explain why America, as addicted to oil as it is, has not managed to make significant or sustained increases in its production since 1971. It doesn’t explain why there have been no new discoveries of any significance since the 1960’s. It doesn’t explain why so many countries, try as they might, can’t raise their production any more and are instead seeing it fall.
Now, I fully accept that DeBeers are suppressing the flow of diamonds (luxury, not essential) in order to increase the price of diamonds. I can accept that maybe Saudi Arabia might suppress the flow of its oil (globally essential product) in order to push up global prices. I can accept a few of these conspiracy theories. However, I can’t accept that every country in the world is in on it. There are only a few corporate oil giants, sure, but there are a lot of nationalised oil fields and national oil exploration. A few of them are even from oil-rich nations such as Venezuela who don’t like playing the normal game of oil-ball. I don’t accept that the thirty-year trend that we have been seeing is just down to corporations trying to squeeze that extra few million out of us.
America became a global super power on the back of insanely cheap oil and is losing a lot of ground due to the rising price of oil and its reluctance to pay that price. Many countries around the world want to be superpowers to protect themselves from America. Many of these countries have nationalised oil industries. Why wouldn’t they want to pump as much for themselves as they could, find as much for themselves as they could, and get on the fast-track for economic dominion? If American corporations have just decided that the American model of growth is no longer for them, why does this mean other countries are doing the same?
No, the abiotic fuel model might explain why there is so much oil in reserve, but it doesn’t allow for a business as usual approach and it certainly doesn’t debunk peak oil. It doesn’t matter if it’s fossil or abiotic, it’s running out and it’s going to be a long and bumpy road down the other side of the peak, more than enough to parallel the smooth and sleek ride up this side of the slope.
Some reading for those not familiar with the concept of ‘Peak Oil’: Wikipedia’s Peak Oil Page.
As with so many things in the world today, the USA is leading the way on modeling what happens to a countries oil demand after the easy to access oil it uses from its own fields starts to let it down.
As the national production of oil declined the US didn’t start to think of new products to replace oil, it just started to buy it from other countries. The reason Americans complain about $3 (approx. £1.50 or 33 pence a litre) a gallon prices is because they are used to much, much cheaper prices from their own fields. The US peaked in 1971, so the old, cheap petrol is still very much in the memories of a lot of motorists who are much more used to a dollar a gallon or less. While those in the US complained about their $3 a gallon, in the UK we were paying $8 a gallon.
If anyone has tried to push their car for any sort of distance they will understand what petrol provides us. As Richard Heinberg points out in this short clip, a gallon of petrol can push a standard car 20 miles (more efficient cars will get more, less efficient will get lesss). If you’re going to try to push your car 20 miles you’d better be exceptionally fit. But a gallon of petrol does that work and is exceptionally cheap for the work it does. Imagine trying to find someone or a group of people to push your car 20 miles. It’d cost you a lot more than £4.50. I doubt you could regularly find people willing to do it for less than a few hundred pounds. This is just an illustration of what petrol provides us with and why it’s so insanely cheap.
Here’s another Richard Heinberg clip which I think is interesting and on-topic.
As the graph above nicely demonstrates, we can demonise China all we like for their use of oil, but the US is still head and shoulders above them. The crown of world energy user is still firmly in the West.
The amount of oil an OPEC nation is allowed to drill and sell is directly proportionate to the amount of reserves that country has. A measure designed to stop the market getting flooded with cheap oil and so keep prices at a level that makes insane profits for a few massive companies. As you can imagine, this means that OPEC member states have a big impetus to lie about their reserves. The years after this rule was adopted most OPEC members revised the size of most of their oil fields upwards quite sharply so they could pump more oil and earn more money. This makes the information on this Wikipedia page doubly dubious, but it gives an indication that the largest oil fields in the world are starting to or have already peaked.
This problem isn’t one that might see fruition, maybe, possibly. It’s a fact, a certainty. From the instant the first drop of oil, the first flake of coal, the first whiff of natural gas was extracted and burnt to provide energy it was inevitable that one day we would be here. This is because of the simple fact that coal, natural gas and oil all take millions of years to form and are finite. We know this, it’s a fact we have known for a long time.
Yet the answers to peak oil have been electric cars (powered by electricity generated by fossil fuels), hydrogen fuel cells (created using electricity generated by fossil fuels), and bio-fuels (grown on fields which use a lot of petro-chemicals[1] in order to make their yield higher and harvested by machines using fossil fuels). The point I’m making is that the solutions to the peak oil problem is invariably using other fossil fuels or the oil in a less efficient way. Insanity.
Then there are the people who say we can run our cars on electricity generated by nuclear power. Forgetting, perhaps by accident, perhaps on purpose, that nuclear power doesn’t just appear from nowhere by magic and that uranium is also finite and a lot more scarce. Estimates are that the Earth has about enough for the use of humans for 12 years. A real good alternative, I think you’ll agree.
Maybe we could make enough renewable energy sources, such as wind, tidal, hydroelectric, solar, etc, to run our cars in the future. Since these sources, especially the sun, will be with us for as long as we can live on the Earth, they are a good alternative to be thinking about. Yet NIMBYs are allowed to stop the production of these simply because they don’t like the look of them! Oh, also many of the materials needed for their production come form oil so we’re still screwed as it’s another short term fix. Once we’re out of oil we wont be able to make any more of them and wont be able to repair the ones we’ve made already.
Finally, the catch-22? The worst possible outcome is that we find large reserves of oil to exploit. Allowing our current business as normal to continue. Allowing the exploitation and destruction of natural environments to continue. Allowing the release of yet more carbon dioxide. Allowing the further pollution of our planet. Allowing the further increase of our population and further population overshoot to happen.
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[1] The ratio of calories out in the form of food and calories in in the form of fossil fuels for many agricultural methods is in the region of 1:25, or 25 times more energy used than produced. Sometimes this can be as bad as 1:150, if the food is air-freighted. Interesting reading about how food is oil.
Possibly an odd thing for me to say here, but I would love to be wrong.
I would love for everything I am about to write in the days/months to come to be total crap. I’d love for someone to post a point of view which was well supported with both reason and evidence which showed that oil was not finite, or that it was not filling so many roles which we aren’t even looking for something else to fill, or that we are working on sensible, workable solutions for the peak oil situation. Hydrogen fuel-cells are not a replacement for oil, since there are no hydrogen lakes. Hydrogen is an energy carrier, not an energy source. As such it can’t replace oil. No one even bother suggesting nuclear, the argument there is too easy to bother with.
I would love for someone to show that we are not deforesting the planet. That, year on year, we are not losing anchient forests and jungle and rainforest. Anchient is the key modifier there. New growth is meaningless. A new growth forest contains only a fraction of the bio-diversity of an anchient forest. A new growth forest often only contains one species of tree also, which makes matters even worse.
If someone could come along and prove that we are not spewing so many greenhouse gasses into the atmosphere that there is no other inevitable result than widespread climate change that would be great. If you could even prove that Mark Lynas (Six Degrees: Our Future on a Hotter Planet) is wrong, that global climate change is not going to reach six degrees (or over) if we make it reach three degrees, or that if the global climate does reach six degrees that this would be inconsequential for non-human life on the planet then that would be something.
Maybe you would even be so good as to disprove the assertion that we are responsible for the destruction and extinction of over 200 species a day.
No, I would love to be wrong. I would love it if business as usual was an option. It would mean I was in the minority of crazies instead of being in the minority of sane people.
