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Peak Capital – Our Ultimate Limit?
Oct 15th
The five main elements of the world model developed in “The Limits to Growth” study according to Magne Myrtveit .
What’s happening here? The GPS system is a pinnacle of modern technology, a demonstration that the thing we call “progress” exists. If you have a car navigator, the idea of going back to clumsy printed maps just seems impossible. And that is just one of the many uses of the GPS system. How come that we left such an important system degrade? How can it be that someone forgot that satellites need to be replaced after a while?
The degradation of the GPS system may be attributed to mistakes, incompetence, bureaucracy or even conspiracies. But the problem may lie at a much deeper level. It may be a symptom of the degradation of the whole economy. But why is this happening? People mention evil banking practices, speculation, subprimes, terrorism, and what you have. But, with so many things going on at the same time, what is really the origin of the problems and what is just a consequence of other factors? To find an answer, you need to understand how the world’s economic system works. One of the first attempts to do that in a comprehensive way was the 1972 report to the Club of Rome known as “The Limits to Growth” (LTG).
The LTG study was based on a rather complex model which, however, can be summarized in terms of five main elements, as you see in the figure at the beginning of this post. The five elements are 1) population, 2) mineral resources, 3) agricultural resources, 4) pollution and 5) capital investments. This is just one of the many ways to build such a model. Other choices are possible, but the LTG model, improved over the years, is a good way to capture the essential elements of the world’s economy. Despite the persistent legend that the LTG study was “wrong”; the results of the study have been found to be remarkably accurate.
None of the five elements of the model is a problem in itself. But each one can become a problem. In that case, we speak of 1) overpopulation, 2) mineral depletion, 3) famine, 4) ecosystem collapse and 5) economic decline. Often, these five problems are considered as if they were independent from each other. People tend to attribute all what is going on to a single problem: peak oil, climate change, overpopulation, and so on. In particular, economists tend to see the economy as independent from the availability of natural resources. Of course, this cannot be true and in a “dynamic” model, such as the LTG one, all the elements of the economic system interact with each other; either reinforcing each other (positive feedback) or weakening each other (negative feedback). To understand how the economy behaves as the natural resources are exploited (and overexploited) it is important to consider the role of the “capital” parameter. The behavior of the capital stock directly affects industrial production and other parameters which are counted as part of economic indicators such as the gross domestic product (GDP).
In the LTG world model, “capital” is created by investments generated by industrial activity. Capital is assumed to decay at a rate proportional to the amount of existing capital. This is called obsolescence or, sometimes, depreciation. To keep capital growing, or at least not disappearing, investments need to be larger than, or as large as, depreciation. Since investments depend on the availability of natural resources, the buildup (or the dissipation) of the capital stock depend on the progressive depletion of these resources. In the original LTG model of 1972, there were three kinds of capital stocks considered: industrial capital (factories, machines, etc.), service capital (schools, bridges, hospitals, etc.) and agricultural capital (farms, land, machinery, etc.). In the latest version (2004), industrial capital and mining capital are considered separately, as you see in the following figure ( from the synopsis of the 30 year update of LTG). Note how the “capital” parameter (in its various forms) affects the parameters which determine the GDP.
Here is a very clear description of how capital interacts with the other elements of the world model in a synopsis written in 1972 by the authors of the LTG report:
The industrial capital stock grows to a level that requires an enormous input of resources. In the very process of that growth it depletes a large fraction of the resource reserves available. As resource prices rise and mines are depleted, more and more capital must be used for obtaining resources, leaving less to be invested for future growth. Finally investment cannot keep up with depreciation, and the industrial base collapses, taking with it the service and agricultural systems, which have become dependent on industrial inputs.
Here are the results of these interactions, expressed in graphical form as what is called the “standard run” or “base case model” of the LTG study (from the 2004 edition)
In the graph, you don’t see the “capital” parameter plotted. However, industrial capital follows the same curve of industrial production. The other forms of capital have a similar behavior. All reach a maximum level and then decline, carrying the whole economy down with them. Overall, it is “peak capital.”
When do we expect peak capital to occur? According to the “standard run” of the LTG report, it may arrive during the first two decades of the century. It may very well be that much of what we are seeing now is a symptom of peak capital approaching: airports, roads, bridges, dikes, dams, and about everything that goes under the name of “infrastructure” are decaying everywhere in the world. The whole economic system is becoming unable to maintain the level of complexity that it had reached just a few decades ago.
So, the degradation of the world’ GPS system is not something unexpected, nor it is unrelated to such problems as peak oil or the depletion of mineral resources. It is just another kind of peak: “peak capital.” Maybe GAO has been too pessimistic; maybe we’ll decide that the GPS system is so important that we can’t let it decay. But, in any case, it is a sign of the times: the fifth problem.
Moratorium Follies
Aug 19th
This week Secretary of Interior Salazar reissued the administration’s deepwater drilling moratorium, with a few new twists and a notional six month limit. This happened in spite of loud protests from the states most affected by the spill, some of their representatives in Washington, and even some skepticism from the heads of the President’s own drilling commission. The old ban is still in court, and the new one probably will be soon, but this is really all moot, because whether the Salazar moratorium is technically in force or not, the legal battle over it has created a moratorium limbo that few companies would be willing to test, given the costs involved. One irony of all this is that in addition to the obvious indirect winners in OPEC, there’s at least one direct winner in this hemisphere: Brazil, which will be quite happy to export to us their deepwater oil that we’re inadvertently helping them to develop quicker and cheaper.
When I read the Interior Department press release on the new moratorium, which was presumably crafted to satisfy the federal judge’s objections to the original deepwater drilling ban, several points stand out, aside from the redefinition of the ban to cover not water depth, but the kind of rigs that are required to drill in deep water. In the Secretary’s statement that he “remains open to modifying the new deepwater drilling suspensions based on new information”, he appears to offer greater flexibility and the prospect of case-by-case exemptions or an early termination. Yet when you read the first item on the list of reforms for which the moratorium is intended to buy time, dealing with “companies demonstrating that they have the ability to respond effectively to a potential spill in the Gulf,” the implication seems clear. If an unprecedented response to the Macondo spill using the state-of-the-art technology and techniques has been inadequate to meet the government’s implied standard–as seems self-evident–then this is a classic Catch 22. If drilling can only resume when the industry can prove it could contain a blowout like this and any oil spilled within a few days, then we could be waiting a very long time, while technology catches up to that new, higher bar.
When you parse through this document and examine the evidence that’s been made available so far concerning the causes of the Deepwater Horizon disaster and spill, it’s hard to avoid the conclusion that the main driver behind the moratorium is not technological, or even necessarily environmental, given the extremely low risks of a similar event occurring from a properly managed rig equipped with a properly-maintained blowout preventer. It seems due at least to “an abundance of caution”–that lovely phrase we have heard several times this week–if not ultimately from hard-nosed political considerations. If I were a President whose party was facing a tough mid-term election, I’d be tempted to eliminate any possible risk of another blowout between now and November 2, too.
The problem with that approach is that the administration won’t pay the short-term price for that abundance of caution. That burden falls on the economy of the region, which has already been affected by the spill, on the domestic drilling industry–a vital national asset, not just a bunch of corporations–and its employees, and eventually on the entire US, as our domestic energy supply will again begin to dwindle. According to a new study, the economic impact of the moratorium already extends well beyond the region, because offshore oil workers, who typically work two weeks on and two weeks off, live all over the country, apparently in more than two-thirds of Congressional districts. Yet while unemployed oil workers might at least be covered by the $100 million fund that BP set aside for that purpose at the administration’s request, the local businesses that employ many of them need help with more than just meeting payroll, if they are to survive until the end of the moratorium, whenever that might be. That’s not BP’s responsibility; it’s the direct responsibility of the government that has taken a calculated decision to impose a blanket moratorium on the entire industry, rather than on individual bad actors.
Meanwhile, aside from OPEC, an indirect beneficiary of the moratorium that understands very well that when you stop drilling your existing production begins to fall away, there is at least one direct beneficiary that is about to take advantage of the opportunity the ban has created. Brazil has discovered enormous offshore oil reserves in the deep waters of the Santos Basin and elsewhere along its lengthy coastline. As I’ve noted before, it’s the exploitation of these resources, rather than its effective but comparatively-small cane ethanol program, that has made Brazil energy independent and is turning it into one of the most important new oil exporters in the world, including to the US. Until recently, the companies exploring for oil off the coast of Brazil faced the same problems that Gulf Coast drillers did, of high rig rental costs and a long queue for hiring them. Our response to Deepwater Horizon is mitigating both issues. So while it might be promoting safer drilling in the Gulf, one of the unintended consequences of the suspension of drilling here is that it will simultaneously create a greater need for the US to import oil, while ensuring that countries like Brazil will have more of it to sell us, sooner than otherwise and at a bigger profit.
I expect to post over the course of the summer on ideas for what it would take to get our government and the rest of the country comfortable with resuming drilling, although some indications suggest that most of our fellow citizens are already there. This is complicated by an opportunistic PR campaign from environmental groups suggesting that this is the moment to get the US off oil entirely, rather than figuring out how to drill more safely. However desirable that might sound, for many reasons, at this point it’s about as feasible as suggesting to a hospital patient that this is the moment for him to try living without blood. For good and ill, oil is still the lifeblood of our economy. We should absolutely work on reducing our dependence on it, but we’re going to burn many billions of barrels of oil getting there, and that will require continued drilling in the US–unless we’re happier than I think to go back to our former pattern of importing more and more of it from other countries. Stay tuned.