Saturday, May 3, 2014

The Big Flatline

Jeff Rubin is the former chief economist at a major Canadian investment bank.  His book, The Big Flatline, gives readers an opportunity to see Peak Cheap Energy through the eyes of someone from the executive suites.  He spent 20 years flying around the world, hanging out with the rich and powerful, and this was a mind-altering experience.  In the process, he lost the rose-colored glasses that are mandatory in his field, and this cost him his job.
Rubin’s overview of the current geopolitical state of affairs is fascinating.  Energy costs far more than it did a decade ago.  Oil was $30 a barrel in 2004, and $147 in 2008 (crash!).  Since energy is the driving force behind the global economy, this sharp increase is a game changer.  When energy is cheap, we can grow like crazy, but triple-digit oil prices slam down on the brake pedal.
High energy prices are not a passing storm, they’re here to stay.  Perpetual growth is never a free lunch.  The inevitable approach of genuine scarcity guarantees rising prices.  In the world of geology, resources are the amount of oil in the ground, and reserves are the amount of oil that can economically be extracted.  For example, the Canadian tar sands contain 1.6 trillion barrels of oil resources, but only 170 billion barrels of reserves (11 percent of total).
As an economist, Rubin focuses on the price trends in energy, but the energy industry is paying close attention to EROEI (energy returned on energy invested).*  In the good old days of high-profit gushers, it was common to invest one calorie of energy to produce 100 calories of oil (100:1).  By 2010, typical EROEI was about 17:1, and some are predicting 5:1 by 2020. 
Rising prices enable the extraction of difficult and expensive non-conventional energy.  At some point, declining EROEI makes extraction pointless, regardless of market prices.  Consequently, most of the oil in Canadian tar sands will be left where it is.  (The EROEI of tar sands now in production is about 3:1, and 5:1 for shale deposits)
The world of coal is a similar story.  Coal resources are enormous, but coal reserves are far less than proclaimed by industry cheerleaders.  Anthracite is premium coal, and its production peaked in 1950.  Grade B bituminous coal peaked in 1990.  There is abundant grade C coal, lignite, which contains only a fifth of the energy in anthracite, and is especially filthy to burn.  Since grade C coal is so low in energy, it cannot be shipped long distances profitably.  The coal industry is also constrained by EROEI, and much of this resource will be left in the ground forever.
As we zoom toward a static no-growth economy, it would be intelligent to prepare for it, to make the transition less turbulent.  We aren’t.  The end of growth is intolerable, inconceivable, and unacceptable.  There is only one path forward, by any means necessary — a beautiful recovery followed by an eternity of perpetual growth and heavenly prosperity.  Rubin gives us a dope slap.  Recovery is impossible.  The era of wasteful excess is behind us.  Turn your brain to the ON position, pay attention, and prepare for a new reality.
Following the 2008 crash, governments borrowed vast sums of money bailing out pathologically reckless banks.  The trendy deregulation movement of the ’80s and ’90s dismantled prudent time-proven rules that prohibited bankers from behaving like spoiled two-year olds with other people’s money.  Bailouts created enormous strains for many nations.  As a consequence, “central banks are running printing presses almost nonstop to kickstart economic growth.”  As the value of the dollar declines, we’ll pay even more for energy, and dig a grave for growth.
Flooding the economy with new money will do nothing to encourage recovery, because it does not address the core problem, energy scarcity.  But it is creating catastrophic levels of debt that are guaranteed to inflate the misery down the road (beyond the next election cycle, hopefully).  Greece has a dim future, and Ireland, Portugal, Spain, and Italy are not far behind.  Debt-crippled economies will be helpless sitting ducks when the next recession strikes.
In the first half of the book, Rubin describes the global mess, as he understands it, and he does a great job.  It’s important information, and it’s coming from a lad close to the inner circle of the banking industry, not wild-eyed radical extremists from the Sierra Club, or crazy doomsters like Richard Heinberg.  It’s a triple-shot of full-strength reality, and it brings many issues into sharp focus.
In the second half, he makes a heroic effort to recommend strategies for responding to the mess.  His goal is a fairly smooth transition to a static economy, which he presents as a realistic possibility.  For readers who have not been making a serious effort to understand the complex challenges of the Earth Crisis, Rubin’s analysis will be soothing.  The future isn’t roaring with danger.  Everything will be mostly OK, sort of.
The magic of the marketplace will rescue us by continually raising the prices on our bad habits, forcing us to live slower and lighter.  If governments raise taxes on energy, we’ll use less.  We don’t need more regulations on corporations.  If governments do nothing, we’ll still use less, because of ever-growing energy costs.
Mature people should be mindful of climate change, because it is not a trivial problem, but our fear of climate disaster exceeds the actual threat.  The gloomy IPCC warnings are based on silly energy resource projections — in a hundred years, we will not be consuming more energy than today.  We’ll be forced to quit our addiction to hydrocarbon fuels before emissions have time to cause catastrophic problems.
Manufacturing jobs will come back home, as rising energy prices drive up the cost of moving products across long distances.  The benefits of cheap Asian labor will be lost to rising shipping costs.  Transportation costs will also encourage the recovery of localized economies.  The food we eat will travel far fewer miles.  Local farm labor needs will provide exciting new careers for folks abandoned by obsolete industries (i.e., investing, insurance, real estate, etc.).
Trained as an economist, Rubin has an outlook focused on cost trends in the here and now.  He doesn’t slam nuclear energy, because it produces respectable output numbers every day.  It doesn’t matter that we have yet to figure out a safe and permanent way of disposing the waste, which can remain extremely toxic for many thousands of years.  It doesn’t matter that deactivating reactors can cost as much as building them, because the bill is sent to taxpayers and unborn generations, not today’s stockholders.
Critical thinkers who are well informed about the complex challenges of the Earth Crisis are not likely to be soothed by Rubin’s vision of the future, but his discussion of the present is excellent.  This should not be the only book you ever read. 
Rubin concludes with wise advice: “As the boundaries of a finite world continue to close in on us, our challenge is to learn that making do with less is better than always wanting more.”
*For a great illustration of EROEI trends, see figure 5.12 on page 75 of Perfect Storm by Tim Morgan.
Rubin, Jeff, The Big Flatline: Oil and the No-growth Economy, Palgrave Macmillan, New York, 2012.  This book was first published in Canada as The End of Growth.  Here is a 27-minute video of Rubin talking about his book.

No comments: