Unsustainable
October 19th, 2008 by jamWhat the hell is going on?
One minute, we’re in a resource boom and enjoying growth. The stock market is rising, house prices are going up again, unemployment is nice and low and everything is shiny. 12 months later we’re staring down the barrel of the second great depression and everyone’s too shit-scared to come out and say it.
What happened?
Apparently, some US banks were invested in some homeloans which weren’t viable. They’d lent money to people who couldn’t afford a loan to buy a house.
So what? They’ve been doing that for years. What’s was so special about late 2007?
Let me show you a graph.
(source wikipedia)
That’s the price of crude oil. The only economic fundamental that changed significantly in the last three years.
But why did that happen?
(source www.theoildrum.com)
World oil production was still growing in 2002-2005 but from 2005-2007 it was sortof flat and kinda went down a bit in 2007. Meanwhile, up until that point global economies were growing. The western world was growing. China was growing. India was growing. Mexico was growing.
Everybody was buying cars and using them.
When you get rising demand and flat production of a resource, the price goes up. If you compare the production to price graphs, you see what I mean.
You see, the real story here isn’t that some banks in the US made some loans to some people who couldn’t afford them. Those people could afford them just fine thanks.
The real story is that those people had a really marginal financial state, and the took out loans to buy houses in outer suburbia. Those people commute up to 50 miles each way to work in low paying jobs.
In late 2007 the cost of a 50 mile commute in your standard gas-guzzling american car went through the roof. But that isn’t all. Oil based fuels are behind most transport, so transport costs for everything those people consumed went up, driving up prices. Worse yet, petroleum is used to make fertilisers and pesticides too, so agriculture got suddenly much more expensive, and the price of food went up too.
Worse again in the US they’ve reached peak production on natural gas which heats homes and produces most of the electricity.
So people with expensive loans they can barely afford, in the same year saw large rises in the price of fuel, goods, food, heating and electricity. Pretty much every part of their home budget went up, except their income.
So some of those guys couldn’t afford their loans anymore.
When you can’t afford the repayments on your home loan, what happens is the bank kicks you out of your home and sells the house to recover the money they loaned you. So they started doing that.
Except when you need to sell a large number of houses suddenly to recover a loan in a climate where every major household cost is skyrocketing, you have to offer it at a bargain price. And who the hell wants to buy a house 50 miles from the city when “gas” is the most expensive it’s ever been and still going up?
So they had to sell them off at firesale prices.
Which drives the value of ALL houses down - “hey I can get one for 10% less from the bank why would I pay full price for yours?”.
But it kept going on. More and more loans were defaulted, and more and more houses were dumped onto the market, driving house prices down further.
It quickly got to the point where the banks couldn’t recover all the money they loaned in the first place. Homeowners literally owed more than their homes were worth. No matter what they do after that point, the banks simply can not get their money back.
Here’s where it hit the news. The home-loan-lending banks tended to sell the loans on to investment banks who would buy huge numbers of them, presumably on the theory that “If we do this big enough, we’ll be immune to the risks of lending money”. Let’s call that the Titanic theory for now.
These huge investment banks… went bust. Pretty much all of them either went under or were bought out or saved by federal government money.
And this led to the all banks everywhere panicking. Basically, now none of them will lend each other or anybody else any money.
And that’s contributing to a global recession.
I say contributing because the underlying reason is oil, and that’s still driving it, but if you accept the impression the media is giving it’s all about banks getting all paranoid because of some broken american homeloans.
The awful truth is that the high cost of oil began to kill everything, everywhere. Airlines started going backwards - throwing a gigantic lump of aluminium through the air at 900km/h burns a lot of petroleum. “Consumers” bought less stuff because the stuff was expensive and their other costs were going up. With consumers buying less stuff, retailers start to see their profits evaporate and eventually turn to losses. Manufacturers stop making so much stuff, and in doing so they stop buying so much raw materials. So soon enough the miners will stop mining so much. If this carries on what happens is that retailers, manufacturers and eventually miners start laying off staff.
So why don’t the oil producers just produce more oil? I mean the price hit $140/barrel you would think if you had an oil well you’d crank it up to the max right about then, right?
Here’s the kicker. They can’t.
You’ve been hearing it all your life. Oil is a non-renewable resource. Our way of life, given that it depends entirely on oil, is a non ’sustainable’ way of life. The urban sprawl, the ‘great american dream’, the ‘great Australian dream’, of the quarter acre block in the middle of nowhere and driving your car to do anything of use, is unsustainable.
Time for more graphs!
This above graph was made in 2004 by the US government and it shows all the non-OPEC countries in the world that produce oil, except Russia, and when their production peaked. Oil is a finite resource - at some point in the future we will completely run out, globally. This is a universally accepted fact. But oil in the ground doesn’t ‘run out’ the way your car runs out of fuel. What happens is that production increases from the first finds - you stick a hole in the ground and oil gushes out, through to when you’re exploiting a given oilfield to the max. That’s called “peak” production because beyond that point, there is less and less oil in the ground and you have to pump other crap down there to force it out - water, gas whatever.
It gets more and more expensive and you get less and less oil out.
This pattern is the case with a single oil field, with an oil-producing region, with an oil-producing country and eventually with the entire world. You get a “peak” and after that no matter what you do, you can’t pump out oil any faster anymore. In fact, you get less and less.
This is beginning to happen right now, globally.
Here’s this global graph again. Right at the beginning of 2008 when oil prices hit $140US/barrel it was worth doing all kinds of crazy crap to produce it, but production rose only a little nudge. You can see that between 2005 to 2008 production is basically flat. It declines very slightly between 74 and 72 million barrels per day, and then starting in 2007 when prices went from $60/barrel to $140/barrel they moved up a WHOPPING 2million barrels a day to a very unimpressive not-quite-75million barrels per day.
When the price of something more than doubles and global production goes up a mere 4%, something is horribly wrong with production.
The hilarious part here is that governments and the media have chosen to blame “speculators” for driving the price of oil up.
Let’s see here, the global daily oil market, at $140 a barrel and 74 million barrels per day is over $10billion PER DAY in sales. The kind of money you need to throw around to manipulate a market that size is just huge. You could see the pile of cash required from space. We should be sceptical of the speculator explanation for that reason - it is far more likely that a fundamental interaction of supply and demand caused the oil price hike.
Here is the real recorded production figure for all non-OPEC countries. Note - it includes Russia and other former USSR countries, and Iraq.
Here’s Russia, apparently peaking last year.
And here’s what happened in India and China to demand when the prices skyrocketed like that. The dip at the end of 2007 there right when the price of oil went bananas, that’s what economists call “demand destruction”. When the price of something is too high, only the rich can buy it. The poor, or the newly emerging almost-not-poor-anymore in this case can’t afford it. So their “Demand” is destroyed. They don’t stop wanting it, they just can’t afford to buy what the market decides the price is.
The price of oil only came back down once this ‘demand destruction’ had happened. If it was just “speculation” why did it take a massive shift in demand for the prices to begin to fall again?
And here’s what we fat westerners did - we just kept buying it and paying the price. We have finite money, so that flat-out means we began buying less of other stuff, and in some cases couldn’t afford our home loan repayments.
We need the global graph one more time.
What is likely to happen in 2009, 2010, 2011? Oil production is likely to remain fairly flat, or drop off. Once it drops off it’s unlikely to ever rise again. We are in a period of Peak Oil, with everything that entails. Whether early 2008 is the high water mark or not, only time will tell. We may get another slight peak before the great decline sets in.
The problem is that the global economy is totally tied to oil consumption and without rising oil production, growth is halted. This is exactly what we are witnessing right now. Growth halted. When production starts going down in a big way, so will the global economy. This is what we are beginning to witness right now.
This is the cold light of day, dawning on the new age. The age where we humankind begin to truly understand the awful meaning of “unsustainable”.
For we have come upon the time when we can no longer sustain our society.
And we are woefully unprepared for the changes required to go on.
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