the web of lies - part 1

ENERGY & ECONOMICS


The bloodbath of my beliefs started about seven months back and if you remember as I have recollected in the first post it started with my concern over increasing levels of complexity that surrounds us. Complexity in my opinion has become a problem because it does not seem to be solving more problems than it is creating.

Dawn was already breaking when we decided to go to sleep, after that first exchange of thoughts on this subject with Kunal. But, sleep I no longer could. The rest as they say is now history. Curiosity killed the Sudeep that everyone knew.


THE ENERGY CRISIS
Soon I found myself sitting on the computer invoking the God of Google. The search string I don’t remember, what I cannot forget and possibly will never be able to was the term ‘Peak Oil’. It was the fourth or fifth result. It glared at mi (later I realized that it was not really glaring at mi, it was written in bold letters) and I clicked. The site that opened was ‘Life After The Oil Crash’ more commonly known as LATOC by Matt Savinar. I read it and my first reaction was one of disdain, I completely ignored it and went back to my original search almost chuckling thinking, another conspiracy theory, lol.

Then I came across, ‘The Thirty Thesis’. There was a particular thesis that really shook mi up titled, Complexity Ensures Collapse and it more or less echoed my thoughts. As I leafed through the collection of thesis I again stumbled across ‘Peak Oil’. Now I was really curious and I invoked Google once again. This time I searched for ‘Peak Oil’. There came a deluge of information I went through some of the results. Now it started making more sense.

But how could this be possible? I used to consider myself well read and aware of the world around mi, how could I have missed such a topic? It was evening by the time I went to sleep. What I remember is a sense of disbelief mixed with a growing level of anxiety.

Peak Oil quickly transformed into Energy Crisis when I learned that it was not only crude oil in short supply but we also seem to be running out of natural gas and quality reserves of coal.

Most of the so called renewable energy sources have their own peculiar problems making them incapable of replacing the, what I like to call ‘Big Three’, crude oil, natural gas and coal.


THE ECONOMIC CRISIS
Next came into the picture these, soothsayer like warnings of impending doom of the financial system of the world. A lot of people have been predicting for years now that the financial system of the world led by the Americans has become hollow and that there will soon come a day of reckoning.

After the sub-prime debacle started last year these so called hair-brained gypsy fortunetellers started drooling and saying, things like, “it has started” and “this is it”. Nobody obviously believed them and even I was having a tough time believing. That was after having understood the basics and after agreeing with them. Well that was seven months back… Today I don’t have to believe them neither do you, the facts speak for themselves. The financial systems as we knew it is going through a period that anthropologist call an Extinction Level Event (ELE).



What is the basic problem with our financial world?

Nobody realized that money should represent a unit of energy. An economic system cannot be expected to function forever when there is no correlation between the money that you pay for getting an amount of work done and the energy that was used in doing that work. Particularly when the energy that powers our world comes from non-renewable resources, crude oil, natural gas and coal. And we live in a closed system, i.e. there is no crude-oil coming from the planet CrudeOil in a galaxy far far away.

We were living in an era of cheap, abundant and ever increasing supply of energy, namely, the big three; crude oil, natural gas and coal.


So? What is the connection?

Ok, the whole economic system runs on the principles called debt financing and equity financing. If I don’t have money to buy a car today I will go to a bank and borrow money at a rate of interest. Say I borrow Rs.10,00,000 at a rate of 8% p.a. for one year. It means after 1 year I have to return the bank Rs.10,80,000. But what is not stated over here is the cost of energy at which this transaction was made, say, $ 20 per barrel. I know this is a very simple example; generally these things are more complex and the debtor ends up paying much more.


Scenario 1 : Cost of energy goes up to $ 40 per barrel.
Everything that I buy, food, water, home, electricity, etc. becomes costlier, I have lesser money left with mi to return the loan, I will extend the period of the loan and in the process increase the amount I have to repay.


Scenario 2 : Cost of energy goes up to $ 80 per barrel.
My company which was also running on debt financing, defaulted because its customers, people like mi could not afford to buy the dream vacations that we sell, because like mi they were finding it difficult to buy food, water, pay their home loans, etc. the company filed for bankruptcy and hence I lost my job. Now I am a so-called liability to the society because my government pays mi to buy food and petrol and keep looking for a job. This happens in two ways; in the west they call it unemployment benefits in places like India it is done through farmer loan waiver, seed / pesticide / fertilizer / other subsidy, petrol / diesel / LPG subsidy, water subsidy and so on...

If I am an American I default on my loan and the bank takes away my car, my precious car… an Indian farmer’s crop fails he commits suicide.


Scenario 3 : Availability of energy is under threat.
Oh my God! I hear that Mexico and North Sea have run out of oil. I did not know the fertilizer was made from natural gas and it takes enormous amounts of energy to make pesticides and to water the food crops. It takes enormous amounts of energy to harvest, store, process, pack, market and keep it on the counters of the nearest shop. After all that I have to spend more energy to get to it, to bring it home and cook it and eat it. Oh my God! I did not know that my country does not have the oil reserves to do all of this and now I might have to join the army and fight for oil in some place called Iraq, so that my family and countrymen can continue living this insanely glorified lifestyle.


Every time you take a loan you are betting that there will be more energy in the system in the future than there is when the loan was taken.

• If there is a surplus of energy, that surplus energy is used so as to generate a monetary surplus i.e. saving which is used to repay the loan.

• If the cost of energy goes up the cost of everything goes up and your savings diminish.

• If there is no excess of energy over existing levels there is no way one could generate a saving and begin to repay the loan.

The point being, if there is an increasing, cheap supply of energy the phenomenon of debt financing can work. You take away that basic assumption the financial system would have to crash because nobody will be able to repay their loans, like it has.


This covers debt financing, I will get to equity financing in a later post.


How bad is it?

The countries of the G7 are either are in recession or are headed towards it and every few days they keep extending the time frame for its so-called eventual recovery.


POUND PLUNGES AFTER MERVYN KING WARNS OF RECESSION
The value of the pound has plunged, suffering its sharpest drop in 16 years, after the Governor of the Bank of England warned that Britain is entering a recession.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3239283/Pound-plunges-after-Mervyn-King-warns-of-recession.html


Companies are going bankrupt and merging left, right and centre and this is just the start. I shudder to imagine the jobless numbers by the end of this financial year, even worse for the next one.

Countries are going bankrupt like Iceland who were ranked 4th last year in terms of Gross Domestic Product (GDP) per capita and the top ranked county in terms of Human Development Index (HDI)


WHICH COUNTRY WILL SLITHER DOWN THE SLIPPERY SLOPE NEXT?
The threat of a worldwide recession leaves many other countries fearing for their future financial and economic strength. Simon Evans, Mark Leftly and Jesse Loncraine assess the health of 16 states on the 'at risk' list
http://www.independent.co.uk/news/business/analysis-and-features/which-country-will-slither-down-the-slippery-slope-next-965956.html


As the title suggests this is the first part of the web of lies there is more to come… I am intentionally not doing an exhaustive sector by sector reporting because it is just too vast. I am just trying to give a summary of the state of affairs, a general view of the surroundings the human race finds itself at the pinnacle of technology and progress.


For the purpose of attribution and suggested further reading I am giving a list of websites / blogs / forums / documentaries…


The Oil Drum
Energy Bulletin
Life After The Oil Crash
Die Off
The Automatic Earth
From The Wilderness
A Crude Awakening : The Oil Crash
The End of Suburbia : Oil Depletion and the Collapse of the American Dream


Also those on the list of Essential Readings at the top of the column on the right...