I'm currently reading Richard Heinberg's new book "The End of Growth", which can only be described as the most topical book on sale. I've just finished James Howard Kunstler's "The Long Emergency", which although written in 2004, predicted with frightening accuracy the financial crisis of the last four years. Both books point to burgeoning household and government debt as well as depleting oil supplies as major factors in determining a sea change in how we live our lives over the next few decades, and as I watch the daily news bulletins, it's clear that most politicians have either not read them or are failing to grasp the message.
Although global in context, both books, written by American authors, naturally concentrate on the impact on the US, with Kunstler highlighting how alarming dependent the US has allowed itself to become on oil, and on regimes which produce it now the country's own stocks are depleting.
Critics of peak oil say there is still a lot of oil around and alternatives will be found once the market drives up the price of oil, and there is some truth in this. The problem is not so much a shortage of oil in the short term, but more the fact that the era of cheap oil is now past, and this itself has profound consequences, not least in the debates over deep water drilling and the derivation of oil from tar sands and shale. The fact that these debates are taking place is a testament to the argument that the easiest, and therefore the cheapest, resources are no longer available. Future energy supply will also use more energy to extract, some of it not being worth the energy required, whatever the market value. After all, if there is a lot more oil to be extracted, why has nobody been building new refineries for decades?
It is, however, the combination of this and the spiralling debt problem which gives Heinberg's arguments such force. Debt is not a problem in itself. The UK for example, has one of the lowest debt to GDP ratios in its history. The problem is the amount you have to pay to service it; this is influenced by the deficit (i.e. the annual increase in debt) and the interest rate charged (hence the fixation on credit ratings). A further problem is that although banks are allowed to create debt from nothing, ultimately that debt needs to be destroyed and often the traditional way of doing that is to default - not, as most would suspect, by paying it back. The interesting thing is that rather than allowing the natural law of default to take place, the US and European governments in particular, have instead taken on much of it themselves in the form of bank bailouts, loans to failing European nations, and stimulating the economy either through increased spending or quantitative easing.
The aim of retaining 'stability' is understandable if for a short term, but keeping interest rates low either directly, or by artificially maintaining credit ratings, is not sustainable, and as the saying goes, if something is unsustainable, then it will not be sustained. There comes a point when the strain becomes too much. This point will soon be reached, and I predict that Greece will soon default, followed by Italy. The resulting chaos will be phenomenal, with banks either failing or, for a while, being bailed out again, but this is the natural order of things and nature has a habit of asserting itself in the end. There's going to be a lot of pain before this problem is sorted out, and debt fuelled growth is a mistake we will not wish to repeat and will not be able to repeat, as lenders will be more wary and charge higher rates in future.
Then there's the oil. Anyone who has watched oil prices over the recent past will notice how price fluctuations follow the stock market quite closely - when the general view of the world economy becomes more optimistic, stock markets around the world rise, but so does the price of oil, based on an anticipation of increased demand. The reverse happens when the pessimists hold sway. In the case of oil, however, the ups have generally outstripped the downs, with the price of Brent crude rising from under $80 a barrel two years ago to around $115 today, despite the economic outlook being no brighter.
And here lies the key to why the days of economic growth may be at an end. Peak oil is the point at which the taps can no longer be turned up to produce more oil to drive down the price, quite simply because there taps are already on full. True, Saudia Arabia is understood to have spare capacity, but, no-one knows how much (and the recognised overstating of reserves and capacity is another issue entirely), but doing so would stress its wells to the point where it would reduce the country's ability to recover future supplies.
So if the oil price is now dictated purely by anticipated demand, then as soon as the world starts to come out of recession, that price will rise sharply. Supply can't increase, and our lifestyles dictate that demand won't reduce, and so either the price continues to rise or global economies will be hit hard. In other words, economic growth drops to zero or becomes negative until it chokes off demand for oil, its price drops a bit and the roller coaster starts moving upwards again as the cycle repeats.
In this scenario, it's clear that the Keynesian solution for stimulating an economy out of the doldrums will not work but will result in simply more debt. Allowing market forces free reign is no solution either, except in encouraging energy efficiency and gradually reducing demand, which will take far too long. So what do we do?
It's clear to me that we need to change our lifestyles to become far less dependent on fossil fuels, not least because of the other impending crisis, that of climate change. If we are going to stimulate the economy, let's do it with this long term objective in mind. A national house insulation programme, huge investment in renewables research and development, public transport infrastructure and developing smaller scale economies. Let's use tax changes to encourage, repair and recycle rather than replace. The way "growth" itself is calculated, using GDP, is itself flawed, as a measure of consumption which encourages waste and unnecessary spending.
Why are the politicians not saying this? Well the Greens are, and have been for a long time now, but for the rest to admit that economic growth is not the desired target would demand a paradigm shift in political thinking. It would mean that the Keynesians on the left, the free marketeers on the right, and the corporate back-stage players who pull all their strings would be forced to admit that the game is finally up and they've been backing the wrong horse. Far better for them to borrow a few billion more, put it on the nose, and desperately hope their nag comes in.
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