The Archdruid Report - Archive

There are times when the unraveling of a civilization stands out in sharp relief, but more often that process makes itself seen only in the sort of scattered facts and figures that take a sharp eye to notice and assemble into a meaningful picture. How often, I wonder, did the prefects of imperial Rome look up from the daily business of mustering legions and collecting tribute to notice the crumbling of the foundations on which their whole society rested?

Nowadays, certainly, that broader vision is hard to find. It’s symptomatic that in the last few weeks I’ve fielded a fair number of emails insisting that the peak oil theory—of course it’s not a theory at all; it’s a hard fact that the extraction of a finite oil supply in the ground will sooner or later reach a peak and begin to decline—has been rendered obsolete by the latest flurry of enthusiastic claims about shale oil and the like. Enthusiastic claims about the latest hot new oil prospect are hardly new, and indeed they’ve been central to cornucopian rhetoric since M. King Hubbert’s time. A decade ago, it was the Caspian Sea oilfields that were being invoked as supposedly conclusive evidence that a peak in global conventional petroleum production wouldn’t arrive in our lifetimes. Compare the grand claims made for the Caspian fields back then, and the trickle of production that actually resulted from those fields, and you get a useful reality check on the equally sweeping claims now being made for the Bakken shale, but that’s not a comparison many people want to make just now.

On the other side of the energy spectrum, those who insist that we can power some equivalent of our present industrial system on sun, wind, and other diffuse renewable sources have been equally vocal, and those of us who raise reasonable doubts about that insistence can count on being castigated as “doomers.” It’s probably not accidental that this particular chorus seems to go up in volume with every ethanol refinery or solar panel manufacturer that goes broke and every study showing that the numbers put forth to back some renewable energy scheme simply don’t add up. It’s no more likely to be accidental that the rhetoric surrounding the latest fashionable fossil fuel play heats up steadily as production at the world’s supergiant fields slides remorselessly down the curve of depletion. The point of such rhetoric, as I suggested in a post a while back, isn’t to deal with the realities of our situation; it’s to pretend that those realities don’t exist, so that the party can go on and the hard choices can be postponed just a little longer.

Thus our civilization has entered what John Kenneth Galbraith called “the twilight of illusion,” the point at which the end of a historical process would be clearly visible if everybody wasn’t so busy finding reasons to look somewhere else. A decade ago, those few of us who were paying attention to peak oil were pointing out that if the peak of global conventional petroleum production arrived before any meaningful steps were taken, the price of oil would rise to previously unimagined heights, crippling the global economy and pushing political systems across the industrial world into a rising spiral of dysfunction and internal conflict. With most grades of oil above $100 a barrel, economies around the world mired in a paper “recovery” worse than most recessions, and the United States and European Union both frozen in political stalemates between regional and cultural blocs with radically irreconcilable agendas, that prophecy has turned out to be pretty much square on the money, but you won’t hear many people mention that these days.

The point that has to be grasped just now, it seems to me, is that this is what peak oil looks like. Get past the fantasies of sudden collapse on the one hand, and the fantasies of limitless progress on the other, and what you get is what we’re getting—a long ragged slope of rising energy prices, economic contraction, and political failure, punctuated with a crisis here, a local or regional catastrophe there, a war somewhere else—all against a backdrop of disintegrating infrastructure, declining living standards, decreasing access to health care and similar services, and the like, which of course has been happening here in the United States for some years already. A detached observer with an Olympian view of the country would be able to watch things unravel, as such an observer could have done up to now, but none of us have been or will be detached observers; at each point on the downward trajectory, those of us who still have jobs will be struggling to hang onto them, those who have lost their jobs will be struggling to stay fed and clothed and housed, and those crises and catastrophes and wars, not to mention the human cost of the broader background of decline, will throw enough smoke in the air to make a clear view of the situation uncommonly difficult to obtain.

Meanwhile those who do have the opportunity to get something approaching a clear view of the situation will by and large have every reason not to say a word about what they see. Politicians and the talking heads of the media will have nothing to gain from admitting the reality and pace of our national decline, and there will be a certain wry amusement to be had in watching them scramble for reasons to insist that things are actually getting better and a little patience or a change of government will bring good times back again. There will doubtless be plenty of of the sort of overt statistical dishonesty that insists, for example, that people who no longer get unemployment benefits are no longer unemployed—that’s been standard practice in the United States for decades now, you know. It’s standard for governments that can no longer shape the course of events to fixate on appearances, and try to prop up the imagery of the power and prosperity they once had, long after the substance has slipped away.

It’s no longer necessary to speculate, then, about what kind of future the end of the age of cheap abundant energy will bring to the industrial world. That package has already been delivered, and the economic rigor mortis and political gridlock that have tightened its grip on this and so many other countries in the industrial world are, depending on your choice of metaphor, either part of the package or part of the packing material, scattered across the landscape like so much bubble wrap. Now that the future is here, abstract considerations and daydreaming about might-have-beens need to take a back seat to the quest to understand what’s happening, and work out coping strategies to deal with the Long Descent now that it’s upon us.

Here again, those scattered facts and figures I mentioned back at the beginning of this week’s post are a better guide than any number of comforting assurances, and the facts I have in mind just at the moment were brought into focus by an intriguing essay by ecological economist Herman Daly.

In the murky firmament of today’s economics, Daly is one of the few genuinely bright stars. A former World Bank official as well as a tenured academic, Daly has earned a reputation as one of the very few economic thinkers to challenge the dogma of perpetual growth, arguing forcefully for a steady state economic system as the only kind capable of functioning sustainably on a finite planet. The essay of his that I cited above, which I understand is scheduled to be published in an expanded form in the journal Ecological Economics, covers quite a bit of ground, but the detail I want to use here as the starting point for an unwelcome glimpse at the constraints bearing down on our future appears in the first few paragraphs.

In his training as an economist, Daly was taught, as most budding economists are still taught today, that inadequate capital is the most common barrier to the development of the so-called "developing" (that is, nonindustrial, and never-going-to-develop) nations. His experience in the World Bank, though, taught him that this was almost universally incorrect. The World Bank had plenty of capital to lend; the problem was a shortage of "bankable projects"—that is, projects that, when funded by a World Bank loan, would produce the returns of ten per cent a year or so that would be needed to pay off the loan and and also contribute to the accumulation of capital within the country.

It takes a familiarity with the last half dozen decades of economic literature to grasp just how sharply Daly’s experience flies in the face of the conventional thinking of our time. Theories of economic development by and large assume that every nonindustrial nation will naturally follow the same trajectory of development as today’s industrial nations did in the past, building the factories, hiring the workers, providing the services, and in the process generating the same ample profits that made the industrialization of Britain, America, and other nations a self-sustaining process. Now of course Britain, America, and other nations that succeeded in industrializing each did so behind a wall of protective tariffs and predatory trade policies that sheltered industries at home against competition, a detail that gets discussed next to nowhere in the literature on development and was ignored in the World Bank’s purblind enthusiasm for free trade. Still, there’s more going on here.

In The Power of the Machine, Alf Hornborg has pointed out trenchantly that the industrial economy is at least as much a means of wealth concentration as it is one of wealth production. In the early days of the Industrial Revolution, when the hundreds of thousands of independent spinners and weavers who had been the backbone of Britain’s textile industry were driven out of business by the mills of the English Midlands, the income that used to be spread among the latter went to a few mill owners and investors instead, with a tiny fraction reserved for the mill workers who tended the new machines at starvation wages. That same pattern expanded past a continental scale as spinners and weavers across much of the world were forced out of work by Britain’s immense cloth export industry, and money that might have stayed in circulation in countries around the globe went instead into the pockets of English magnates.

Throughout the history of the industrial age, that was the pattern that drove industrialism: from 18th century Britain to post-World War II Japan, a body of wealthy men in a country with a technological edge and ample supplies of cheap labor could build factories, export products, tilt the world’s economy in their favor, and make immense profits. In the language of Daly’s essay, industrial development in such a context was a bankable project, capable of producing much more than ten per cent returns. What has tended to be misplaced in current thinking about industrial development, though, is that at least two conditions had to be met for that to happen. The first of them, as already mentioned, is exactly the sort of protective trade policies that the World Bank and the current economic consensus generally are unwilling to contemplate, or even to mention.

The second, however, cuts far closer to the heart of our current predicament. The industrial economy as it evolved from the 18th century onward depended utterly on the ability to replace relatively expensive human labor with cheap fossil fuel energy. The mills of the English Midlands mentioned above were able to destroy the livelihoods of hundreds of thousands of independent spinners and weavers because, all things considered, it was far cheaper to build a spinning jenny or a power loom and fuel it with coal than it was to pay for the skilled craftsmen and craftswomen who did the same work in an earlier day. In economic terms, in other words, industrialism is a system of arbitrage.

Those of my readers who aren’t fluent in economic jargon deserve a quick definition of that last term. Arbitrage is the fine art of profiting off the difference in price between the same good in two or more markets. The carry trade, one of the foundations of the global economic system that came apart at the seams in 2008, was a classic example of arbitrage. In the carry trade, financiers borrowed money in Japan, where they could get it at an interest rate of one or two per cent per year, and then lent it at some higher interest rate elsewhere in the world. The difference between interest paid and interest received was pure profit.

What sets industrialism apart from other arbitrage schemes was that it arbitraged the price difference between different forms of energy. Concentrated heat energy, in the form of burning fossil fuel, was cheap; mechanical energy, in the form of complex movements performed by the hands of spinners and weavers, was expensive. The steam engine and the machines it powered, such as the spinning jenny and power loom, turned concentrated heat into mechanical energy, and opened the door to what must have been the most profitable arbitrage operation of all time. The gargantuan profits yielded by this scheme provided the startup capital for further rounds of industrialization and thus made possible the immense economic transformations of the industrial age.

That arbitrage, however, depended—as all arbitrage schemes do—on the price difference between the markets in question. In the case of industrialism, the difference was always fated to be temporary, because the low price of concentrated heat was purely a function of the existence of vast, unexploited reserves of fossil fuels that could easily be accessed by human beings. For obvious reasons, the most readily accessible reserves were mined or drilled first, and so as time passed, production costs for fossil fuels—not to mention the many other natural materials needed for industrial projects, and thus necessary for the arbitrage operation to continue—went up, slowly at first, and more dramatically in the last decade or so.

I suspect that the shortage of bankable projects in the nonindustrial world that Herman Daly noted was an early symptom of that last process. Since nonindustrial nations in the 1990s were held (where necessary, at gunpoint) to the free trade dogma fashionable just then, the first condition for successful industrialization—a protected domestic market in which new industries could be sheltered from competition—was nowhere to be seen. At the same time, the systemic imbalances between rich and poor countries—themselves partly a function of industrial systems in the rich countries, which pumped wealth out of the poor countries and into corner offices in Wall Street and elsewhere—meant that human labor simply wasn’t that much more expensive than fossil fuel energy.

That was what drove the "globalization" fad of the 1990s, after all: another round of arbitrage, in which huge profits were reaped off the difference between labor costs in industrial and nonindustrial countries. Very few people seem to have noticed that globalization involved a radical reversal of the movement toward greater automation—that is, the use of fossil fuel energy to replace human labor. When the cost of hiring a sweatshop laborer became less than the cost of paying for an equivalent amount of productive capacity in mechanical form, the arbitrage shifted into reverse; only the steep differentials in wage costs between the Third World and the industrial nations, and a vast amount of very cheap transport fuel, made it possible for the arbitrage to continue.

Still, at this point the same lack of bankable projects has come home to roost. A series of lavish Fed money printing operations (the euphemism du jour is "quantitative easing") flooded the banking system in the United States with immense amounts of cheap cash, in an attempt to make up for the equally immense losses the banking system suffered in the aftermath of the 2005-2008 real estate bubble. Pundits insisted, at least at first, that the result would be a flood of new loans to buoy the economy out of its doldrums, but nothing of the kind happened. There are plenty of reasons why it didn’t happen, but a core reason was simply that there aren’t that many business propositions in the industrial world just now that are in a position to earn enough money to pay back loans.

Among the few businesses that do promise a decent return on investment are the ones involved in fossil fuel extraction, and so companies drilling for oil and natural gas in shale deposits—the latest fad in the fossil fuel field—have more capital than they know what to do with. The oil boomtowns in North Dakota and the fracking projects stirring up controversy in various corners of the Northeast are among the results. Elsewhere in the American economy, however, good investments are increasingly scarce. For decades now, profits from the financial industry and speculation have eclipsed profits from the manufacture of goods—before the 2008 crash, it bears remembering, General Motors made far more profit from its financing arm than it did from building cars—and that reshaping of the economy seems to be approaching its logical endpoint, the point at which it’s no longer profitable for the industrial economy to manufacture anything at all.

I have begun to suspect that this will turn out to be one of the most crucial downsides of the arrival of peak oil. If the industrial economy, as I’ve suggested, was basically an arbitrage scheme profiting off the difference in cost between energy from fossil fuels and energy from human laborers, the rising cost of fossil fuels and other inputs needed to run an industrial economy will sooner or later collide with the declining cost of labor in an impoverished and overcrowded society. As we get closer to that point, it seems to me that we may begin to see the entire industrial project unravel, as the profits needed to make industrialism make sense dry up. If that’s the unspoken subtext behind the widening spiral of economic dysfunction that seems to be gripping so much of the industrial world today, then what we’ve seen so far of what peak oil looks like may be a prologue to a series of wrenching economic transformations that will leave few lives untouched.